Auditing workshop on Department of Environmental Affairs: by Auditor-General South Africa

Environment, Forestry and Fisheries

23 September 2014
Chairperson: Mr J Mthembu (ANC)
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Meeting Summary

The Committee met with the Office of Auditor-General South Africa for a briefing on the role of the AGSA in enabling Parliament to effectively execute its oversight function, especially as Parliament would soon be looking at the audit reports of departments and their entities.

AGSA explained its legislative mandate, audit cycle timelines and the different types of audit opinions deriving from the audit of financial statements as well as the predetermined objectives. An outline was provided of a typical audit report along with the various tools used in the audit process. Members were taken through the Department of Environmental Affairs and its entities audit report for the 2012/13 financial year as an example.

Members asked about exemptions from the modified cash base standards, reporting instruments needed by the Committee to scrutinise the Department and the role of Parliament in filling in what the AG was not mandated to do. Members were pleased with the briefing, finding it strengthened Parliament’s role.

A short discussion was held on oversight trips within the future programme of the Committee and the priorities and objectives regarding oversight visits. The discussion would be picked up again in the new term when all Members were present.

Meeting report

Workshop with Auditor-General
The Chairperson explained this briefing was held because Parliament would be looking at the audit reports and performance of departments in the next term as audited by the Auditor-General of SA (AGSA). These audit reports would look at financial and performance matters of departments based on strategic reports. The Committee was also new in all intents and purposes so this workshop would be helpful to Members in preparing for the new term.

Ms T Stander (DA) requested that each Member got a copy of each of the tabled reports to be interrogated during recess so that they were prepared for when the new term began. She asked that this be circulated as soon as possible.

The Chairperson said the briefing would inform Members as to what instruments were needed

Mr Samed Omar, Senior Manager, AGSA, began by noting that it was the reputation and mission of the AG of SA, based on its constitutional mandate and as the Supreme Audit Institution (SAI) of SA, to exist to strengthen the country’s democracy by enabling oversight, accountability and governance in the public sector through auditing thereby building public confidence. It was also that the audit reports of departments should never be read in isolation but rather together with Annual Reports. It was the purpose of the presentation to provide Members with the necessary information/guidance on the role of AGSA to enable them to effectively execute their oversight function.

Looking at the role of oversight, the framework set out by National Treasury was briefly explained to Members. With implementation and monitoring, Members were alerted to the fact that the ideal audit outcome was unqualified with no findings. With an unqualified opinion with findings, these findings usually pertained to performance and/or compliance matters. It was vital to address if the department had action plans which spoke to audit findings and improving financial management and accountability. It was also important to establish if the department had procedures in place to identify, prevent and detect fraud because while it was not the AG’s mandate, it did pick up fraud but it was up to the auditee (the department or entity) to have the necessary procedures in place. Another question to ask was if the department had adequate governance arrangements in place and if they were effective. This point referred to internal audit units and audit committees.

Mr Omar explained the combined assurance model covered three levels, namely, management assurance, oversight assurance and independent assurance. There were also different actors taking responsibility at each level. At management assurance it was senior of the department, accounting officer/authority and the executive authority. At the oversight level it was the coordinating/monitoring institutions, e.g. Treasury, internal audit and audit committee while at the independent assurance level it was oversight body, like Parliamentary Committees and public accounts committees. Each of these actors at each level also had different roles to play which were also explained to Members.

The AG contributed to oversight by keeping an update on the progress of current year audits, sharing of audit risks and the status of key controls – this was contained in the AGs quarterly “dashboard” reports. Before the Annual Performance Plans (APPs) of departments were reviewed by Portfolio Committees, the AG met with departments/entities to discuss the findings identified from the pro-active audit of the PDOs of the departments/entities.

Looking at the AG more closely, its mandate was drawn directly, firstly, from the Constitution, particularly, Section 188 which stated the AG “must audit and report on accounts, financial statements and financial management of government institutions and report to Parliament/legislature that has a direct interest in the report”. The AG also drew its mandate from the Public Audit Act, particularly, Section 20 which stated the AG “must prepare audit report containing opinion/conclusion on (i) financial statements financial position (ii) compliance and financial management (iii) predetermined objectives”. There was also the Public Finance Management Act (PFMA) which outlined pertinent definitions:

Accounting Officer (Section 40 (1) (a) & (b)) – record keeping responsibilities by accounting officer and preparing financial statements for audit / (Section 40 (1) (c)) – submission of financial statements to AG for audit

Mr Omar said the AGSA was focused on the three Es: Economy (best resource based on need), Efficiency (best results using resources available) and Effectiveness (goal reached). This was in regard to performance auditing which focused on a specific government policy or management process. The overall aim was to ensure value for money and service delivery.

There was a clear distinction between what the AGSA did and did not in terms of the regularity audit. The AGSA did provide assurance that annual financial statements (AFS) were free from material misstatements, report on the useful and reliability of the information in the annual performance report, report on material non-compliance with relevant laws and regulations, e.g. in the PFMA and identify key internal control deficiencies to be addressed. The AGSA did not provide assurance that all applicable laws and regulations had been complied with, identify fraud (although it could come across it in the audit in which case it would be reported) and the AGS did not provide assurance that service delivery had been achieved.

In terms of the regularity audit cycle timelines, 31 March was the financial year-end where departments/entities were to submit financial statements and predetermined objectives to the AGSA. On 31 July the AGSA would be complete with audits while general reports were published in the last quarter of the financial year or first quarter of the following year. These timelines were informed by the PFMA.

Mr Omar discussed the audit of financial statements noting financial statements was the basis on which an audit opinion was formed in terms of whether the financial statements were prepare in all material aspects in accordance with the specific applicable financial reporting framework. Predetermined objectives of departments dealt with service delivery issues was audited on the basis of reliability and usefulness of performance information which included the measurement of targets as set out in the beginning of the financial year, were actually achieved. The AGSA also audited compliance with laws and regulations reporting on material non-compliance with key legislation, e.g. the PFMA.

In order for a department/entity to obtain a clean audit/good administration opinion, there needed to be no findings on the financial statements (financially unqualified/free from material misstatement), no material findings on compliance with laws and regulations and no material findings on the performance report/predetermined objectives.

There different types of audit opinions, namely:
▪ Unqualified/unmodified: financial statements gave a true and fair view (or were presented fairly, in all material respects) in accordance with the applicable financial reporting framework
▪ Unmodified with emphasis of matter: the additional of such an emphasis of matter did not affect the auditors opinion on whether the financial statements were fairly presented.
▪ Qualified: the effect of any disagreements with management regarding departures from the financial reporting framework, or limitation on scope was not so material and pervasive so an unqualified opinion could not be expressed
▪ Disclaimer: there was a lack of sufficient audit evidence or documentation to express an opinion
▪ Adverse: the auditor disagrees with the representation made by management in the financial statements to the extent of confirming that it was not a fair reflection of the financial position, performance and cash flow

Mr Omar explained the AGSA also audited predetermined objectives of departments/entities. This was an annual audit of reported actual performance against predetermined objectives, indicators and targets as contained in the annual performance report of the departments and their entities. The audit looked at compliance with regulatory requirements, usefulness and reliability.

A typical audit report began with the report on financial statements looking first at an introduction, accounting officer/authority’s responsibility, AG’s responsibility, the opinion issued to the department/entity, emphasis of matters and additional matters. Next came the report on other legal and regulatory requirements in terms of predetermined objectives and compliance with laws and regulations e.g. Treasury regulations and the PFMA. This was followed by information on the internal control (leadership, financial and performance management and governance) and other reports (investigations, performance audits and agreed up procedures).

Various tools were used in the entire auditing process, including:
▪ State of the Nation Address/Budget Speeches
▪ Estimates of National Expenditure
▪ Accounting officer and audit committee’s reports
▪ AGSA briefing notes
▪ Annual Report including audit report and performance report.

Mr Omar then looked at the Department of Environmental Affairs (DEA) and its entities audit report for the 2012/13 financial year to give Members a practical perspective on what the audit report looked like. It was important to note that this was not the current status of the Department/entities but a reflection of the past year. During the 2012/13 financial year the Department received an unqualified with findings audit opinion and this was the same for the South African National Biodiversity Institute (SANBI) and the South African Weather Services (SAWS). South African National Parks (SANParks) and iSimangaliso Wetland Park received unqualified with findings audit opinions. The audit trends for the Department and entities from 2008/09 to 2012/13 were also briefly looked at.

Discussion
The Chairperson said the briefing was important in giving the history of audit trends of the Department and its entities. This was helpful for Members when doing their work on the upcoming financial year. It also highlighted which instruments Members would need.

Mr T Hadebe (DA) thought the briefing was very informative. He asked if Members could receive the quarterly reports held between the Minister and the AG.

Ms Stander thought that the role of Members was to fill the gaps between what the AG did and did not do as highlighted in the presentation. She asked if there was a list of what matters the Committee needed to interrogate and principles to be understood in terms of the PFMA, modified cash systems and the Generally Recognised Accounting Principles (GRAP). Members needed to be advised as to what was needed so that they knew what to look for when interrogating reports. She asked if the breakdown of the Department/entities audit report was done each year or was it something to be requested. She found the breakdown quite informative. Was there some place Members could go like on the website to understand better what the AG meant by, for example, material misstatements in relation to a disclaimer audit opinion? The Committee needed to familiarise itself with such terms. She also requested the quarterly dashboard reports.

Mr Omar replied that some of the instruments needed by Members for interrogation included the PFMA and GRAP – this would form the framework for scrutinising public entities. For the Department, there was the modified cash standard. When looking at predetermined objectives, Members needed to go through the guidelines issues by National Treasury. GRAP was very technical and it took him years to study this – Members needed to bear this in mind. One could not read in the first time, understand it and apply it to department/entities.

Mr Ritesh Ramnanthan, Manager, AGSA, added that GRAP could be located on the Accounting Standards Board (ASB) website. He mentioned that Members would need to look at what was behind a department/entity not adhering to a particular standard. This required detailed interrogation and where Members could raise questions.

Ms Corne Myburgh, Business Executive, AGSA, also said that GRAP was very technical. The office of the AGSA was more than willing to present quarterly reports/dashboards if Committee’s requested them once discussion had taken place with the accounting officer and Minister of the department. These reports addressed key issues. She advised that Members not place their focus on GRAP but on identifying the underlying issues or root causes which prevented departments/entities from obtaining clean audits. In most cases, it could be put down to non-compliance with the PFMA. This was the area in which Parliament played its oversight role in relation to the audits. The audit breakdown of departments/entities was prepared annually.

The Chairperson thought it would assist Members if reference was made to the past when the AG audited financials only and not performance. This then changed and it was an important aspect to speak to. He asked if provincial and national Parliament, as institutions, was getting a handle on and understanding overseeing audit reports in relation the frameworks in place.

Mr Omar answered that, speaking from the perspective of Portfolio Committee’s, come were getting the hang of the work to be done especially when it came to addressing additional material amendments linked to root causes. It was true that the AG audited only financials before phasing in predetermined objectives. In forthcoming years there will be a separate opinion on predetermined objectives.

Ms Stander noted that in previous audit reports, the audit opinion was clear to say, for example, qualified or unqualified etc. but the example of the Department’s 2012/13 audit opinion was not so clear. Was there a change in the way the opinion of the AG was reflected?

Ms Myburgh indicated there was no change in the audit opinion paragraph of the AG’s report. The audit opinion, however, would not say “clean” in terms of specific wording. Before the audit opinion was stated in the report, there would be explanation on the basis of the opinion. In the absence of this explanation, the audit opinion would be unqualified.

Mr Omar added that throughout the report there would descriptions of the audit which would lead one to note the “clean” audit without the word “clean” being used.

Ms Stander asked on what basis an exemption of the modified cash base standard would be awarded.

Mr Ramnanthan replied that the exemption was a non-adherence to a specific part of a standard. If an exemption was applied for, reasons needed to be indicated as to why an exemption was sought. These reasons could be because of time, too many items being affected etc. The accounting officer of the Department would request the exemption from Treasury and if granted, would only last for one year – the meant the issue would need to be fixed in the year going forward.

The Chairperson thanked the Office of the AG for the helpful briefing. The Committee had learnt a lot and the information would come in handy for Members conducting work going forward. The briefing had assisted the Committee in ascertaining whether the Department had adequately used the allocated financial resources in pursuance of its strategic plans/objectives. Broadly, the Committee was looking at if the Department delivered on its promises with the financial resources allocated – this was the oversight work of the Committee. The Committee would come with a heavy stick where the AG could not. Everyone was taxed and people complained about this – it was the job of Parliament to oversee that these monies were used prudently and effectively in line with government’s plans and objectives.

Committee Business
The Committee did not form a quorum so the adoption of minutes and reports would be deferred.

The Committee Secretary took the Members through the logistics of their oversight visit to the Kruger National Park.

The Chairperson added that he had asked the South African National Parks (SANParks) to have a fly-over of the area because it was a massive park. Walking or driving around might not do the area justice. He hoped Members got to see what they wanted to, including any poached/killed rhino, poaching hotspots, the operational centre and fencing. One of the issues to have come out of the Committee’s provincial public hearings was people coming in and out of the Park without being searched. The Committee needed to see for themselves what was happening at all entry points.

Ms T Stander (DA) thanked the Committee staff for organising the oversight trip well.

The Chairperson, looking at the next oversight week between 24 and 28 November 2014, felt there was a need to also visit the air pollution hotspots. The second issue was how the Committee would take forward the rhino campaign already embarked on – the Committee had already conducted public hearings in KZN, North West and Mpumalanga and it was suggested that Limpopo be included. He would need to consult the Limpopo provincial legislature and department on this. Perhaps there was a need to engage Members of Parliament in Mozambique within the relevant portfolio committee in light of many Mozambicans being arrested for poaching. Beside this, the country also neighboured Kruger National Park so there was a need to work together. This could also be extended to MPs in Vietnam, China and other so-called “consumer countries”. There were also NGOs and Community Based Organisations (CBOs) involved in the fight against rhino poaching which the Committee could speak to look at cooperative measures to embark on. Some of the NGOs and CBOs were raising money t fight the scourge but how were these monies being used? The aim was not to investigate books but to come together to work cooperatively. The need to cooperate could be extended to business and religious leaders as everybody needed to be on board to win this war.

At some stage, the Committee would need to look at waste management and visit landfills across the country to particularly prevent illegal landfills. The Committee needed to oversee the Department in this regard. There was also a need to address costal issues and shark attacks in areas like Port St. Johns. The Committee needed to establish what government was doing in this regard. With biodiversity, the Committee needed to see what work was being done with the establishment of new botanical gardens. The Committee would also need to find time to visit iSimangaliso Wetland Park. These visits and issues would need to be prioritised. When the Committee met again and there was a quorum, the discussion could be taken further.

Ms Stander felt there definitely felt there was a need for more discussion because any oversight needed to be informed by the Committee’s objectives. For example, if the Committee’s objective was to reduce shark attacks, they did not necessarily need to visit on site. This would also save time and money. Also with rhino poaching and the objective of reducing demand, the Committee could organise Skype meetings which eliminated the need to actually go and visit consumer countries. The emphasis was on outlining the Committee’s objectives.

The Chairperson agreed that oversight did not always mean physical visits – there was more than one way to skin a cat. These however were the broad issues to address.

 The meeting was adjourned.

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