Auditor-General South Africa on its role and challenges

Standing Committee on Auditor General

05 September 2014
Chairperson: Mr VG Smith (ANC)
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Meeting Summary

Auditor-General South Africa (AGSA) gave a presentation on its mandate and role according to the Constitution and Public Audit Act, as well as outlining the responsibilities of the Auditor-General and the Deputy Auditor-General. The staffing structure of the AGSA was explained, detailing the numbers of qualified accountants and staff retention levels. The meaning of a clean audit and the governance, financial reporting and service delivery responsibilities of the AGSA was explained, in addition to their specific role in ensuring municipalities and government departments comply with legislation and their predetermined objectives.

The Committee was shown the AGSA’s Strategic Plan for 2014-2015 demonstrating its key objectives. These included the quality of the AGSA messages, the visibility of the institution’s leadership, its funding, effectively implementing its mandate, strengthening its human capital and adhering to high standards of clean administration. The international role of the AGSA was also presented to the Committee in terms of its membership of the International Organization of Supreme Audit Institutions (INTOSAI).

The working relationship between AGSA and the Standing Committee was explained, with the Committee overseeing the AG on behalf of the National Assembly. This is outlined in the Public Audit Act, some of which was highlighted for the Committee. The constitutional requirements for the Committee’s relationship to the AG were also detailed. Issues that required the Committee’s immediate attention were listed, with a particular focus on the problem of audit fee debt at both national and local government level. The Integrated Annual Report and the Strategic Plan and Budget for 2015-18 were also highlighted as requiring the Committee’s consideration.

Several of the Committee’s questions related to the national and local government debt. How does the AG suggest it can be dealt with? Does the AGSA offer advice to municipalities that are struggling financially? Some municipalities are not paying suppliers but receiving clean audits - the findings should be more detailed so the Committee understands what is happening. Outstanding debt in Further Education and Training (FET) colleges was also addressed, does this fall under the AGSA mandate. Members expressed concerns about the Public Audit Act and suggested it needed several amendments. Concern was raised about placing too much focus on a clean audit as an outcome. Other concerns were: Does the AG have an adequate number of qualified staff?  Should private firms be phased out and the Office of the AG expanded? How does the AGSA manage the overlap between itself and other Chapter 9 institutions?

Members agreed that a longer meeting was needed at a later date, with the Chairperson suggesting a two-day breakaway for deeper discussion on the strategic plan, the budget and the specific role of the Committee.

Meeting report

Auditor-General South Africa (AGSA) Mandate and Method of Work
The Auditor-General (AG), Mr Kimi Makwetu, took the Committee through the mandate, role, functions, strategy plan and current focus of the AGSA, in addition to issues the AGSA believed required the Committee’s attention.

AGSA mandate, role and functions
In describing AGSA’s constitutional mandate, Mr Makwetu said that the AGSA strengthens South Africa’s democracy by enabling oversight, accountability and governance in the public sector through auditing, thereby building public confidence. The mandate is established in Chapter 9 of the Constitution. The Office of the Auditor-General must be independent and impartial in the execution of its function. This is fundamental to the AGSA’s work which has an impact in a number of places. The AGSA must audit and report on the accounts of government departments and municipalities at the end of every financial year. Section 4 of the Public Audit Act (PAA) specifically differentiates what the AGSA does, regulating the functions which inform their mandate. The AGSA’s functions are described in sections 5 and 20 of the PAA. The AG must prepare audit reports containing a conclusion on an institution’s financial statements and financial position, compliance and financial management, and adherence to predetermined objectives. A clean audit was in relation to these three key areas.

Mr Makwetu described the staff and staffing structure of the AGSA. There are offices in all nine provinces with 3 249 staff from various disciplines. There are 460 chartered accountants (CA) which is a major achievement for the AGSA in retaining people with these qualifications. There are also 57 people trained as certified information systems auditors (CISA) and 336 registered government auditors (RGA). The RGSA’s source of talent largely comes from universities and individuals go on to receive further training, but there is also a great number of experienced staff.

He outlined the responsibility of the AGSA to make sure there is proper governance and proper assurance given on the financial statements which are reported publicly. The AG’s Office also has to make a conclusion on whether service delivery reporting has been made in a manner that is reliable. There must be a source document from which the information in the annual report is coming, and the AG must check this is consistent with an institution's predetermined objectives. A clean audit requires the AG to find no material misstatement, compliance with laws and regulations and no material findings on the Performance Report. AGSA checks financial targets were achieved and reports on deviation from key legislation or institutional objectives. This drives accountability.

AGSA Strategic Plan 2014 2015
Mr Makwetu went on to highlight AGSA’s key strategic objectives. The simplicity, clarity and relevance of  AGSA messages involved maintaining the high quality of its auditing, ensuring messages reached all stakeholders and making recommendations to auditees to support effective financial management. AGSA’s leadership needed to be increasingly visible in order to establish, maintain and own stakeholder relationships and encourage clean administration. Funding should be sufficient to ensure the AG’s Office fulfills its mandate whilst maintaining independence. This mandate must be implemented economically, efficiently and effectively. By strengthening its human capital, AGSA can build a dynamic, successful workforce that has the experience and qualifications necessary for the AG’s work. It will continue to adhere to standards of excellence for clean administration and continue to improve the timeliness of AGSA reports.

The international standards adhered to by the AGSA were explained to the Committee as were its international commitments. The International Organisation of Supreme Audit Institutions (INTOSAI) is the international body of all AGs across the world. The former South African AG held presidency from 2010 until 2013, bringing South Africa into the global space in terms of the development of international AG standards. AGSA chaired the working group on the value and benefits of supreme audit institutions across the board which resulted in a resolution at the Beijing UN assembly. The AGSA intends to continue its international journey.

Standing Committee on Auditor-General (SCoAG) and AGSA working relationship
Mr Makwetu stated that the AG’s Office is accountable to the National Assembly, which the Standing Committee oversees on its behalf. AGSA’s main accountability instruments are the strategic plan / budget and the annual report on its performance. These are tabled annually in the National Assembly. The Standing Committee on the Auditor-General is the way in which the National Assembly fulfils its role according to the PAA. The AG has overall control of AGSA and is accountable for its administration as outlined in the PAA. Provision is made for  an audit board committee to be appointed by the Deputy Auditor-General (DAG), in consultation with the Auditor-General, with specific functions and governance requirements. The DAG is subject to direction from the AG, head of the administration of the AGSA and responsible for administration management.

Mr Makwetu said that the Standing Committee is required to meet to discuss the Annual Report after its tabling and the Strategic Plan and Budget, in addition to other PAA required interactions. Meetings are led by the AG or DAG depending on availability. The SCoAG’s responsibilities are outlined in the PAA. The Committee has a constitutional requirement to protect the independence, impartiality and effectiveness of the AG. It must provide advice to the National Assembly, provide an opinion on the appointment of the DAG and offer an opinion on regulations. The Committee provides general oversight in accordance with the Constitution, considering the performance of the AG’s Office including the annual report, financial statements and the audit report on these statements. It must also consider budget and audit related matters. 

Issues requiring immediate attention
Mr Makwetu presented issues requiring the Committee’s attention. These included the Integrated Annual Report, the Strategic Plan and Budget for 2015-18, the annual confirmation of the External Auditor for AGSA and the audit directive. Outstanding debt throughout the provinces was a major issue that the AG wanted to address. A lot of the municipalities do not have a strong income base but the AGSA must audit inefficiencies regardless. This will be demonstrated in the annual report. The Committee and the AGSA need to focus on this matter in order to fulfill their mandate. The analysis will be brought before the Committee at a later engagement but the figures show debt in both local and national government escalating over time. The AG would like to discuss it further with the Committee so it does not constrain their activities.

Ms N Khunou (ANC) thanked Mr Makwetu for his presentation. The organogram on the presentation was not clear and she requested a copy. The government faced challenges, including recruiting into the AGSA. How can the Committee and the AGSA encourage more black people into the industry? In many universities there are people studying accounting but progressing to the next level was a difficulty. When using external firms it is necessary to make sure the AGSA uses black companies. She asked how the AGSA assisted municipalities that struggled financially. Does the AGSA advise them on where to cut spending?

Ms Khunou reminded committee members that the Standing Committee on the Auditor-General met on Fridays. It was a working day for this committee which could pose a problem for some of the members.

Ms D Carter (COPE) referred to slide 11 of the presentation and asked if the AGSA was looking at the management letters and not only the financial statements. The predetermined objectives are linked to service delivery – one of the problems is that municipality budgets take too long to be approved and it needs to be quicker. The Committee should have on-going access to AG local government reports, not only twice a year or four times a year. She is aware of nine companies closing down having not been paid by the municipalities, but the municipalities have still received a clean audit. This is disturbing because members cannot see what is really happening. The compilation of the findings register should be more detailed and the Committee should derive systems and procedures from it.

Another member asked if the AGSA offered assistance in terms of correcting non-compliance with laws and regulations. Were there any other mechanisms that assisted the AG’s Office to avoid these outcomes in all spheres of government? The outstanding debt in the Eastern Cape is shockingly high, is there a way to get through this? And what is the definition of a registered government auditor (RGA)?

Ms S Boshielo (ANC) commented that there was a problem with financial accounting in the Further Education and Training (FET) colleges. Is addressing this part of the AG’s mandate? If it is, how is the AG going to assist them? There is student debt – the colleges do not know how to address the problem so they depend on government for funding. The FET colleges do not always do their financial statements and continue as if nothing has happened. The college of which Ms Boshielo is a council member, has not tabled its financial statements since 2011. Who is supposed to check this? They still get a budget to continue to work so she is not sure how they can be assisted, and she does not think it is the only college like this.

Ms Z Dlamini-Dubazana (ANC) requested the 2013/14 AGSA annual report if it was ready. If the Committee are to question the way the AG executes his job it means looking at the Public Audit Act. Does it cover what they are expecting from him? To date, the Public Act needs a lot of amendment. For example, one of the functions of the Deputy AG is to make sure that she collects whoever is owing the AG, but what if they do not pay? The Act does not specify. The AGSA is doing well in absorbing people from schools, colleges and universities through the internship programmes but training costs the government a lot of money. It is therefore important for staff retention to ensure they are engaged and the Committee can assist where necessary. Is 3 249 staff a capacity with which the AG is happy? If not, where does the AG need help? The Committee is overseeing an entity in government that is in charge of other people’s performance, so they must lead by example. The government entity report is based on performance achievements but between the indicators and the outcomes there is something missing. Specification is lacking about the problems of each government entity. The AG is assessing the attributes of performance. It is a problem and the standard must be looked at – there is something missing.

Another member assured the Committee that she would attend the meeting on every Friday as needed. The committee has worried her for a very long time as it is the one supposed to support the AG’s Office to be completely independent. This cannot be done in a casual manner and matters must be discussed in order to sort out the country. The AGSA oversees the performance of the economy. Problems and challenges must be faced bravely and honestly. She thanked the AG for producing 460 chartered accountants – it is difficult to train even just one. It is commendable that the AG recognizes they will not all stay inside the institution but has looked beyond his Office to the country as a whole. She congratulated the AG for flying the country’s flag high in the international space. The committee needs to focus on the funding of the AGSA – it should not fail because of funds not being available due to those responsible not paying its fees.

Mr M Ntombela (ANC) stated that he was impressed by the AG’s presentation and that the future looked bright. However, there is too much emphasis on the clean audit as an outcome. The AG and the Committee should focus on the building blocks that lead to that outcome – a clean audit will be the product when there is the capacity to make it possible. There are some municipalities that will never achieve a clean audit. For example, a municipality manager must be clear about what he wants and capacitated to run an institution through qualifications and understanding of local government. The AG has the capacity at international level but officials should be well capacitated at local and regional government level to ensure a clean audit. Mr Ntombela has personally interacted with a company appointed by the AG to present the AG’s findings and they provoked fear in him. What is it that the AG does to ensure that municipalities do not experience this? In terms of funding, can the AG find a way of assisting small municipalities that do not have the money to pay audit fees?

Mr A McLoughlin (DA) did not share Mr Ntombela’s optimism. The economy is in trouble and the government cannot borrow any more money. There is a knock on effect from debt at local level to debt at national level. Municipalities do not pay, not because they do not want to, but because they do not have the funds. This is because citizens do not have the money to pay for the services they are receiving. It is not the AG’s problem to solve, but to investigate – initially financially but following on to compliance and pre-determined objectives. It is difficult to find a solution. Is there a strategy to try and phase out the private firms the AG is using? The AG is at the mercy of private enterprise in terms of the fees they charge the AGSA for audit work. Is there a strategy to phase out these firms? Is the size of the AG’s Office going to be increased? It would be far more cost effective. When the management letter is handed to municipalities and they are informed of what the auditor has picked up, does it go any further? Is there an Inter-Government Relations (IGR) function between the AG’s Office and other finance sections of government to find a solution?

Dr M Cardo (DA) was concerned about the potentially overlapping mandates of the AG and other chapter 9 institutions. The AG stated that part of its role was to detect fraud or financial misconduct in the public sector crime. There is the potential for overlap with, for example, the Public Protector and the Special Investigating Unit (SIU). How does AGSA manage these overlapping functions?

The Chairperson stated that the input made clear the risk that the AG may not have money to capacitate the Office’s activities. It is not something the AG needed to respond to immediately but rather something that needed looking in to. Funds could be ring-fenced before revenue is given to the provinces for audit fees. It is something that needs to be discussed. The initial plan was a two-day breakaway as more than a three hour meeting is needed for in-depth discussion. This can be negotiated with the AG’s Office to find a suitable time.

Mr Makwetu thanked the Chairperson for giving him the opportunity to reinforce what he just said – some of the questions can be dealt with during a deeper engagement with more time, but he will try to deal with them broadly. One of the categories raised was around the financial risk and cost in terms of the Office which the Chairperson has reflected on. The issue will be adequately dealt with when the Committee comes to deal with the positioning of the financial circumstances of the Office. One of the major themes is the trading account – audit work does not always lead to cash in the bag.

The AGSA prefers to use a combination of private and public firms because it is more cost effective across the board term. There are other infrastructure costs such as accommodating employees for nine months. Private firms will do it under the AG’s guidance for short specified periods of time. There are many comments that the AGSA and the Committee can deal with in a more in-depth session but that was something the AG wanted to address. In terms of whether 3249 members of staff is adequate and the retention of staff, the AG’s Office will deal with those issues specifically in a deeper engagement. The issue of incapacity to the whole financial model will be dealt with under that heading.

Mr Makwetu agreed with the suggestion that at the back of the conclusions about the lack of a clean audit is the instability of administrative leadership in certain circumstances. In many of the institutions the AGSA audits, there are skills deficits. The necessary checks, controls and balances for oversight and transparency on the transactions of some institutions fail because the organizational design is weak. Where skill capacity is weakest and where social economy pressures are greatest, the AG tends to find a correlation with a bad audit. This is because the capacity of people to do that, in terms of ideal standards of performance, is not in place and then the capacity of the institution itself is not strong. This is a journey being undertaken to bring in what was not there in local government and other institutions. The AGSA is trying to gear up to the discipline of transparent reporting. However, if not properly led up front with the necessary checks and balances, some of that effort may not be realized.

Mr Makwetu stated that comments about simplicity, clarity and relevance are being dealt with. He hoped when somebody listened to the radio or television or read a newspaper, that person can relate to the general audit. It does not matter if it is not understood technically providing they can relate to it. Some individuals thought it was an investigation into someone who was alleged to have done wrong but there has been a shift, not just in those who were informed because they read about it but in those who now understand that clean audits are to do with money that has not been put where it ought to have gone. Public institutions ought to aspire to a situation where they are able to handle financial management and report on it in an environment that is properly supervised by people with the appropriate level of experience. This is so when an auditor evaluates what they have done, it does not inappropriately end up with differences of opinion because the basic disciplines of record management were not put in place in the first instance. For example, in an institution with R120 million to deliver on specific services as articulated in its strategy planning, all the auditor wants to see is that which is reported is reinforced by evidence – transparent financial management where somebody has to account for funds they were given responsibility to handle. The AG’s Office will try to elevate, drive and influence those type of issues over the next 10 years and its audits will be the main instrument that is used. When actual transparent financial management is achieved, the chances are that when someone has reported what they have done with the money, they will know what they bought with it. It is not a decision which is made every day; it is made upfront before they get the money. One municipality, for example, has been given a succession of five clean audits. The manager stated that this was only because they were diligent in finding people with the necessary skill to do the job, proper governance and introducing disciplines fundamental to an institution. These kind of strategies have been proven to work in an independent evaluation and are what can be discussed in terms of the strategy plan and how AGSA and the Committee want to progress.

The AGSA wants to ascertain the use of financial statements in respect of what that money has been used for. When it has passed the test on credibility and accuracy, the people writing it can be relied on. The AG stated that he would consolidate some of the meeting’s questions and would elevate some of the issues raised in preparation for the Committee’s future engagement.

The Chairperson asked the Committee whether they were happy to have some of the answers to their questions postponed. These included the AG’s strategy for increasing the pool of black accountants, the meaning of RGA, the lack of clean audits in FET colleges because students do not have money to pay and the overlapping mandates of Chapter 9 institutions. If the Committee wanted a comprehensive answer at a later date, the Chairperson has to get a mandate from its members.

One of the members said that she was covered, but asked if it would not be ideal to add a second chartered accountant to each of the 28 governmental departments out of the AG’s 460?

The Chairperson stated that you cannot be an auditor and consult because it would mess it up. He thought the question was about the AG’s role in capacitation. What is the AG’s contribution to South Africa in terms of capacitation?

Another member stated that some of the questions do really need time to plan, but the specific ones such as that regarding the RGA should be answered.

Mr Makwetu stated that the RGA is a Registered Government Auditor. They worked in the Office for a number of years but when it started professionalising there was a call for minimum competencies. This led to a revision of the certification. Someone who has at least a grade 12 can go through a programme to become a Registered Government Auditor which is one qualification, in addition to Chartered Accountant (CA) qualification and the Information Systems Auditor qualification - those people are a recognised group of people. The RGA qualification enables them to become auditors in government. They are trained in the different ways government works, the Constitution and roles around management of public finance. These are their core areas of competence that they train in.

The Chairperson stated that a serious subject of discussion in future engagements is the overlapping mandates of the Constitution’s Chapter 9 institutions. The Committee should consider the overlaps because it points towards affordability and the over stretching of resources. There is a clear message for a more comprehensive meeting and the Committee is looking at a two day breakaway. Parliament returns from recess on 13 October and the first two weeks are supposed to be committee weeks. Apologies would have to be put in for members attending other committee meetings during the two days off site. The programme will look at the Committee strategic plan, budget and its specific role whose recommendations must be interacted with. Further, there is no hard and fast rule about what the AG must get paid. There has been no increase in the AG’s salary for several years because he must not be seen to be greedy. This creates problems going forward as there is no clarity on the issue. It is these type of agenda items that will be sent to remind members in the run up to the next meeting. They are issues that should be raised in their party caucuses. The Committee will have to defend its decisions against every attack in South Africa so they need to be able to stand by them. They are serious political questions that members have to make decisions on.

Mr Makwetu thanked the Chairperson and stated that his Office has been looking forward to the present engagement from the day this Committee was installed. The AG and his Office are going to do what they think is necessary to carry out the work they have to do. They will make all the necessary preparations when they next come to present to the Committee. The AGSA’s work is not always smooth sailing. There are times when certain matters must be conveyed and questions must be asked in order to engage with the Committee. When dealing with such issues some people do not always take kindly to the outcomes and the findings that the AGSA make. Thus it is important that the AG engages closely with the Committee, as part of its mandate is to relate to the Office. The Office will share the audit outcomes with the Committee so members are aware of the issues they are dealing with. Members can offer support in terms of how the AGSA carries out its mandate and how they are perceived in the parliamentary domain. The oversight responsibility of the Committee means they can interact with other committees on the work the AGSA delivers. The AG is looking forward to the next engagement with the Committee and he will invite the rest of his leadership team.

The meeting is adjourned.

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