Auditor-General SA 2013/14 Annual Report: briefing by Audit Committee & Auditor-General

Standing Committee on Auditor General

23 October 2014
Chairperson: Mr V Smith (ANC)
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Meeting Summary

The Audit Committee of Auditor General South Africa explained the Public Audit Act and its provisions for the establishment of the various structures, the committee set up, as well as the internal structure of the Audit Committee. In his presentation, the Audit Committee chairperson recommended, among other things, annual meetings between the Audit Committee Chair and the Chairperson of SCOAG to discuss the Annual Report and obtain clarification about the different role players.

A key consideration of the Audit Committee was the coverage plans of the external and internal auditors and the appointment of external auditors. The use and employment of internal and external auditors for the AGSA was a topic of discussion during the presentation, with Members asking what informed the choice and selection of the external and internal audits. The Audit Committee chairperson explained that external auditors were appointed by SCOAG on recommendation of the Audit Committee; they evaluated the auditors after a tender was put out. The process was rigorous and the Audit Committee was comfortable with this.

In his presentation on the Integrated Annual Report 2013-2014, the Auditor-General restated he AGSA goals to the committee and explained how those goals were achieved:
▪ Simplicity, clarity and relevance of message: this meant enhancing the relevance of its messages and placing a high priority on optimal integration of its different types of audits. 
▪ Visibility of leadership through engagements with its stakeholders. The AGSA strived to ensure that stakeholders buy-in and were committed to the organisation’s goal of positively impacting the lives of South African citizens
▪ Strengthening human resources
▪ Leading by example
▪ Sustainability in performance review: efforts were not aimed at creating wealth for the organisation, but rather at creating wealth for the country.
▪ Funding: the AGSA strives at all times to execute its mandate economically, efficiently and effectively and focus on providing value-for-money audits to the public sector.

The Committee Chairperson raised the issue of the terms irregular/fruitless/useless/unauthorised spending.  Unauthorised did not always mean corruption, it could mean unplanned etc. Committee Members understood but the public did not and assumed that government was corrupt. He asked if there were a need to change or simplify the terminology.

Mr Makwetu asked the Standing Committee in its deliberations, for approval for retention of the current year surplus of R99 million in line with Section 38(4) of the Pubic Audit Act which states that the AGSA may, after consultation with National Treasury and by agreement with SCOAG, at the end of a financial year retain any surplus for working capital and general reserve requirements.

Meeting report

Chairperson Smith apologised that Members had not received a copy of the letter from the Minister of Finance. Not all committee members were present as the National Assembly was having a plenary session, but because it was a committee briefing there was no need for a quorum. Members could also be required to leave briefly as voting was taking place in the House.

The Committee met for the Auditor General to account to Parliament, according to legislation. Parliament was not just a watchdog of the Auditor General South Africa (AGSA), but it must assist the AG to carry out its function -  where criticism was necessary it would take place, but it was on the same side of the AGSA. The Auditor General was to report on its performance over the last 12 month and its plans for the next five years.

The Committee needed to look at what is the Auditor General’s contribution to the National Development Plan (NDP).

He critiqued the researcher's document analysing the Annual Report, saying that it must not be about the role of the AGSA. It must state what the AGSA’s target were and why it did or did not attain it. As well as how those targets help to achieve the National Development Plan (NDP) - this is what Parliament is interested in. The AGSA needs to give their assessment of this in their presentation as well as any legislative reviews they think the legislature needs to effect. The meeting will also discuss the letter from the Minister of Finance about the interpretation and use of two different pieces of legislation by the Auditor General and the Accountant General. Does the one supersede the other, or should we do something so that the two pieces of legislation talk to each other?

Committees were asking all government departments and Chapter 9 Institutions’ strategic plans the key question - what they were contributing to NDP.
Audit Committee of the Auditor General South Africa presentation
Audit Committee Chairperson, Mr Peter Moyo, said the Office of the Auditor General was established through the Constitution. The Public Audit Act  provides for the establishment of the Standing Committee of the Auditor General (SCOAG) to maintain oversight over, the independence, and protection of and assistance to the AGSA. The Public Audit Act allowed for the setting up of committees such as the Audit Committee and the Remuneration Committee. The Act also required the Auditor-General (AG) to report to the National Assembly via the oversight mechanism, SCOAG, on its budget and business plan. The Committee would, in turn, review this and make recommendations to the National Assembly and National Treasury.

The Audit Committee was set up to assist in maintaining sound financial and risk management and internal audit systems in the Office. 

Corporate government structures were defined by both the Public Audit Act and the Constitution.
Mr Moyo explained the Public Audit Act and its provisions for the establishment of the various structures, the committees set up, as well as the internal structure of the Audit Committee. He recommended annual meetings between the Audit Committee Chair and the Chairperson of SCOAG to discuss the Annual Report and clarification with the different role players, including who may make decisions and who may make recommendations.

A key consideration of the Audit Committee was the coverage plans of the external and internal auditors and the appointment of external auditors. He referred to page 93 of the of the AGSA Annual Report which included the report by the Audit Committee - including their belief that there was effective external control and pleasing reception by the AG of the recommendations made by the Audit Committee. The Audit Committee looked at the annual financial statements and recommended the AG sign them as a fair reflection of the financial statements of the AGSA. The Committee also looked at the AGSA’s internal auditing and the Office of the AGSA choice to outsource this function, supported by the Audit Committee.  The contract of the firm used had been extended until 2017 and the Audit Committee was satisfied that they were an independent firm, and were also excluded from doing work for the AGSA.

The Chairperson asked the Audit Committee Chair when he signed off on the Audit Report and Mr Moyo responded that it was in July, and other issues were finalised in August.

Ms Z Dlamini-Dubazana (ANC) asked for clarification on the way in which the Audit Committee set out its investigation and the reasons for its presentation.

Chairperson Smith stated that the purpose of the presentation was to brief and empower the Standing Committee on how to interrogate the AGSA, for example his recommendation of six meetings annually.

Ms S Sithole (ANC) responded to the recommendation relating to the frequency of meetings of the Standing Committee and the Audit committee, the Standing Committee would deliberate and respond on this matter.

Ms Z Dlamini-Dubazana asked about the auditor that the AGSA had contracted with for its internal auditing, she wanted to know how long the contract was for and if they were they doing regular or specialised auditing.

Mr Moyo responded that external auditors were appointed by SCOAG on the recommendation of the Audit Committee (AC), which evaluated the auditors after a tender process. The external auditor was not allowed to do work for the Auditor General. This was difficult because work from the AG was remunerated more than work to audit the AG, so the pool was small.  There were rules on how much they may be paid, and the AC required a firm with a minimum number of partners so it was comfortable that they were able to service the AC. The contract to audit the AGSA may not continue for more than 10 years. The current firm was called Kwinana & Associates. The process was rigorous and the AC is comfortable with that. In terms of internal auditors, the AC regularly went through a process of deciding for or against internal auditors, either decision meant the internal auditor reported to the Audit Committee. The difference between the two was that its chosen internal auditor was allowed to do contract work for the AG while its external auditor was not.

Mr A McLoughlin (DA) asked if the Audit Committee ever did ad hoc or unexpected visits to the AGSA. 

Mr Moyo responded that spot visits hardly happened but with external audits, if the AC believed there were areas of concern, they directed the auditors to do special work in those areas/regions. The AC was comfortable that the frequency of the meetings allowed for the issues to be covered. 

The Chairperson asked, on the effectiveness of control, whether the AGSA took remedial steps based on the Audit Committee’s report, and was the AC confident that the AGSA will do this? He was concerned about AGSA’s ability to collect money owed to it, which was approximately R500 million.

On the collection of debt, Mr Moyo replied that the AC should strengthen the hand of the Auditor General. There should be no way that state organs had the latitude not to pay the AG. A suggestion was to reduce the organ of state’s budget if they had not paid the AG.

Mr Smith asked the AC to comment on the annual salaries and performance bonuses of its executives. Was the AC comfortable that it was market related and helped with retention? He asked because they had a remuneration committee.

On the question of salaries, Mr Moyo said there was a need to professionalise the AGSA and a decision was made that it needed to be competitive, especially because some of the executives could easily be partners at big auditing firms, in fact they were not getting the salaries they would get at the large firms.  The effectiveness of the Office was compromised when staff members were lost. He added that the figure represented in the report included money paid to the former AG at the end of his term of employment.

Mr John Biesman-Simons, Audit Committee Member, added that there had been external audits to do specialised audits with specific targets, as explained on page 100-101 of the Annual Report. He agreed with Mr Moyo’s statement on the salaries. Large firms paid three times as much. He added that the Auditor General did not get an annual bonus, he received an amount at the conclusion of his contract.

Ms Z Dlamini- Dubazana asked how effective “independence” was as criteria for external audits. Members of Parliament needed to understand the exact nature of the criteria.

Mr Moyo responded that in the appointment of an internal auditor, the Auditor General could choose that it be a full time employee, but the external auditor could not be. This happened in many organisations. The AGSA decided for an independent internal auditor, upon the approval of the AC. The independence of internal auditor was judged on his reporting, these were submitted to the Audit Committee. They were not employed by management of the AGSA.  To ensure integrity in the process, the AC did not allow them to do any audits on the contracting-in processes of external audits. They audit everything else except this.

Mr Smith asked who agreed on the employment conditions of the internal or external auditor and what role did the AG play.

Mr Moyo answered that the entire process was done by the Audit Committee. It approved remuneration and a work plan. The Office of the AG looked at the work plan but the Audit Committee signed it off. The Office of the AGSA was used as its venue for logistical purposes.

Mr Biesman-Simons added that the Audit Committee met with internal and external auditors without the AGSA and the AC always asked if management at AGSA had applied any pressure to suppress a matter. There had never been any reports of that. The AC could direct the scope of internal audits if they wanted to know about something in particular. The AC could review the plans of the external auditor but to create independence the external auditor often chose the scope of its work- the AC could not tell it not to review a particular area the external auditor felt necessary to review.

Mr Moyo stated that it was important to note that when they referred to ‘internal work’, this did not mean doing in-house auditing, it was the auditing of external bodies, for example government bodies. It was not auditing internal issues of the AGSA.

Mr Rajesh Muhabeer, AGSA CFO, stated that the internal auditors report functionally to the Audit Committee and administratively to the AGSA.

Mr Smith asked how long the AC members had held their positions.

Mr Moyo and Mr Biesman-Simons stated that they were both appointed years ago in November 2005 and both their period of service had been extended.

The Committee Chair said that AC members could not have their role and position forever. The Standing Committee would debate the length of their period of service. He thanked the Audit Committee for their presentation and recommendations.

The Chairperson stated that given time constraints, the AGSA would present and there would be questions, whichever questions and issues were not dealt with would be discussed the following day when AGSA presented their Strategic Plan to the Standing Committee. It was the role of Parliament to see if the model used to oversee government and the taxpayers’ money was appropriate, it was the role of  AGSA to hammer departments, so it needed to be hammered by the Committee. Why must there be an AG if it were about blind compliance, and what was its role towards creating a better South Africa?

What the AGSA should do about recovering money owed to it must be discussed. There was a risk of frustrating the AGSA to not audit a government entity due to non payment.

The letter from the Finance Minister must also be discussed, even if only the following day. There seemed to be a discrepancy between the Public Finance Management Act (PFMA) and the Public Auditors Act. He wondered if people could be audited under two regimes. The letter asked for a meeting between National Treasury, the AGSA, the Minister and SCOAG to discuss this.

Auditor-General South Africa (AGSA) 2013/14 Annual Report
The Auditor-General, Mr Kimi Makwetu, said some of the issues the Chair of the Standing Committee had mentioned were included in the Strategic Plan that would be presented the following day. There were often issues of interpretation as mentioned in the letter of the Minister, and because of this the AG had regular debriefing sessions with the Accountant General, where it discussed how to accept principle based disagreements. There was a difference of opinion committee which had already discussed the matter the letter addressed and it had resolved the issue of interpretation. The date of that meeting predated the date on the letter from the Minister.

The Annual Report was the second last one to report on the progress of the five-year strategic plan decided on in 2007. Mr Makwetu explained the AGSA constitutional mandate, strategic objectives and commitments. He restated the goals and explained how they were achieved, this included:
▪ Simplicity, clarity and relevance of message: this meant enhancing the relevance of its messages and placing a high priority on optimal integration of the different types of audits. Eight performance audits on consultants were tabled and an audit on sanitation in the Department of Human Settlements was completed. The new audit software project was improving the efficiency of its audits. Insights from various specialist audits were incorporated into regularity audits.
▪ Visibility of leadership through engagements with its stakeholders: The AGSA undertook to prioritise departments with persistent undesirable outcomes for oversight interventions. There was increased participation in engagements with municipalities - it also had a door-to-door policy, which included visiting every municipality over the past five years.

▪ Strengthening human resources: 447 new trainee auditors were appointed in the organisation, which was the largest annual trainee intake in the AGSA. Its occupancy level of 88% it was comfortable with as government had periods of auditing and periods of quiet, therefore a portion of its work was outsourced, which meant AGSA did not have to carry the employment costs when there was no work. He also spoke of AGSA’s funding projects and the external bursary programme funding 118 students. AGSA had reached the training level it strived for - a number of its staff were still studying toward their Charted Accounting Qualification.

Leading by example: Of the 961 regularity audits it conducted, 900 (93%) were completed within legislative deadlines. The organisation achieved its B-BBEE targets.

Sustainability performance review: The Auditor General explained that the AGSA allocation criteria for contracting was positioned to support small firms and encourage transformation and growth in the profession (33% of the funds were allocated to small firms). It also adopted 157 schools and interacted with more than 15 000 learners, mainly in grades 10-12. It had employed 89 University of Fort Hare students.

Funding: The AGSA budget and its financial statements and discussed its debt collection strategy, which was mostly owed by municipalities.

Mr Makwetu asked the Standing Committee in its deliberations, for approval for retention of the current year surplus of R99 million in line with Section 38(4) of the Pubic Audit Act which states that the AGSA may, after consultation with the National Treasury and by agreement with SCOAG, at the end of a financial year retain any surplus for working capital and general reserve requirements.

Ms S Boshielo (ANC) asked how a new government’s policy or other changes were factored into a strategic plan that was created five years ago.

Ms Dlamini-Dubazana recommended a change to the strategic goals as AGSA moved forward, that the goals need to be measurable, with an outcome and a programme. She asked about the retention strategy of AGSA as well as what was meant by the fact that" it has reached its BB-BEE score". She wanted to know who was auditing AGSA and asked for clarification of the ‘Independence Criteria’ of external auditors.
Mr McLoughlin asked for clarification of who AGSA audits, did it include organs of state and those partly owned by the state? He asked about the length of tenure of its staff. Did the financial contribution to the University of Fort Hare and the bursary fund contributions came from AGSA’s annual budge?

Ms Sithole said that Parliament through this Committee would deliberate on the funding of the AGSA.

Ms P Bhengu (ANC) asked how AGSA planned to deal with the debt that local government owed it.

The Chairperson said that was an in-depth question to be discussed the following day.

Chairperson Smith asked about the losses and theft of notebooks and insurance indicated on page 120.

Mr Smith referred to page 121 and asked them to explain what the R8 million in actuarial gains meant.

Mr Smith asked if AGSA received donations, and, if so, how AGSA safe guarded itself against bribes.

Mr Makwetu replied that no donations are received

Mr Smith commended AGSA on their school visits and asked if these were planned as he would like Members of the Committee to be involved. He referred to the organs of state that were audited, and asked how did AGSA know that was the total number of organs using taxpayers’ money, and if some organs who utilised taxpayers’ money were not falling through the cracks.

Mr Makwetu replied that the Public Finance Management Act prescribed what should and should not be audited; those instruments required that, once the audit had taken place, the AGSA must report the outcomes to which bodies.

Mr Smith raised the issue of the terms irregular/fruitless/useless/unauthorised spending. Unauthorised spending did not always mean corruption; it could mean unplanned for example.  Members understood what it meant, but the public did not and assumed that government was corrupt. He asked if there was a need to change or to simplify the terminology.

Ms Sithole agreed that there was a need to look at the terms used in the legisation and to look at the effects of its pronouncement.

Mr Makwetu agreed that the messaging of an auditing institution is tricky and driven from technical pronouncements, then spoken to the communications department to make it easier and accessible. People who knew what it meant and what it was looking for when auditing, wrote the law. This must be looked at. 

An ANC Member asked why only the University of Fort Hare was given funding.

The Chairperson noted that all outstanding questions would be answered the following day before the presentation of the Strategic Plan.

The meeting was adjourned.

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