Auditor-General on audit outcomes for 2013/14

Meeting report

Briefing by the Auditor-General on the audit outcomes for 2013/14
Mr Kimi Makwetu, Auditor-General, set out the three categories that auditing considers: reliable financial statements; credible information and reporting on performance, and compliance with legislation. A clean audit was achieved when the entity passed on all three requirements. An unqualified audit meant that financial statements were in order, but the performance report was not properly aligned with predetermined objectives, and/or there was deviation regarding supply chain management issues. A qualified audit meant that regulations had been flouted. An adverse opinion referred to misstatements in more than one area. A disclaimer outcome was when there was no supporting evidence. In the current period, 15% of audited entities were clean; 51% were unqualified with findings, and 16% were qualified.

Challenges were related to controls not implemented, and senior management teams not responding to correct weaknesses. There were internal audit weaknesses, especially with regard to supply chain management. Leadership had to correct internal controls. Skilled people had to be brought in to improve financial and performance management. Audit committees were failing because the right controls were not in place. The quality of submitted financial statements was a risk area. HR and IT problems were caused by the slow response of management to improve key controls.

Lack of consequences was a serious challenge. There were many qualified audit outcomes among the large spending sectors like Education, Health and Public Works. Many of these qualified outcomes were due to supply chain management deficiencies. Municipalities were struggling the most. In-year monitoring had to be elevated. Unauthorised, irregular or fruitless and wasteful expenditure was discussed. There was evidence of uncompetitive bidding and corrupt contract awards, sometimes to family members.

Key areas for attention were basic controls; effective leadership; HR capability; attracting the right high level skills; the establishment of daily and monthly controls; dealing with root causes; slow managerial responses, and the instability of key positions.

Discussion
Mr R Lees (DA) expressed high regard for the good work of the AG. The issue of consequences was brought up by the Treasury and the AG. He asked if this matter could be highlighted in detail in the Annual Report of entities. He asked where such detail could be obtained. Information was needed.

Mr Makwetu responded that consequences were part of the audit process. There were incompetent financial managers, and the same problems were picked up from the same people. An absence of consequence would result in the same audit outcome as before. Accounts were not reconciled, which would result in qualification if it was not reviewed in the current year. Since there was an absence of consequences, people who had to act did not do so. Right skills and right systems had to be in place.

Mr Lees referred to the 21 outstanding audits. He asked if the AG was assured that it was mere incompetence, or whether there was a sense that it was a deliberate attempt to prevent auditing.

Mr Eugene Zungu, National Leader: Audit Services, replied that in most cases there were reasons for the outstanding audits. Entities had not been in a position to finalise, or had not been able to respond to issues. There might have been technical matters that needed intervention. It did not appear to be deliberate efforts to hide things from the AG. Qualification in a previous year could lead to technical issues being delayed.

Mr Lees noted that the number of auditees fluctuated. There was a difference between the figures cited in slide 9 and slide 20. He asked why that was so.

Mr Zungu replied that there were 21 outstanding audits that were not mentioned in slide 20. Slide 9 mentioned all 469 auditees, whereas slide 20 only mentioned the 448 without the 21 outstanding audits. There were still outstanding audits from 2011/12. Entities would catch up.

Mr Lees remarked that the management letter from AGSA to the government entity was a confidential document. He asked if the management letter played a role in moving from a qualified to an unqualified audit opinion. He asked if it would not be better for the management letter to be a public document. There had to be transparency about what had led to qualification. It seemed that the AG staff at times made an unqualified audit opinion possible. The question was how an entity was managed if the AG had to fix things at the end of the year.

Mr Makwetu replied that the management letter contained the final outcomes of the audit at the end. Errors were identified at every step and brought to the attention of management. It was the responsibility of the AG to report errors, which went back to the writer of the financial statement. If errors were corrected, there would be an unqualified audit opinion. If not, it would be qualified. Financial statements had to be representative. Entities were not granted a reprieve, only a chance to fix things.

Mr Lees noted that irregular expenditure was the result of rules not being followed, and did not necessarily refer to fraud and corruption. More efficient spending was needed. Projects were delayed because certain processes had to be followed. He asked if too many rules could lead to inefficiency.

Mr Makwetu replied that the intent of the person was not tested, with regard to irregular expenditure. Different disciplines were needed for that. In an environment with a history of weak controls, it could be genuine or not so genuine error. Financial losses were not merely due to administrative error. The AG highlighted irregular expenditure, and the entity had to look, and launch investigations. When internal controls were weak, highlighting was a red flag, and there had to be follow up. The Public Finance Management Act (PFMA) required that responses to emergencies had to be highlighted. But it was easy for things to become emergencies.

Mr Lees asked if effective leadership was not in essence political. He asked what SCOPA could do in that regard.

Mr Makwetu replied that there had to be administrative people to supervise and monitor if spending was achieving objectives. The Accounting Officer (AO) was responsible for key programmes.

Mr M Booi (ANC) referred to the assessment of SCOPA for assurance. If SCOPA could not offer assurance, the question was who would take responsibility. The AG expected SCOPA to play a role. The Committee had to reflect among themselves what that role had to be.

Mr Makwetu replied that there was a combined assurance model. The oversight focus of SCOPA had to be on matters related to turnaround, not an issues that did not have much impact. The AG could provide insights in that regard.

Mr Booi referred to vacancies. He asked how big the problem was. The report by the Public Service Commission also reflected the problem.

Mr Makwetu replied that the focus had to be in terms of finance, particularly the CFOs; the supply chain management roles, and the head of strategy.

Mr Booi asked if it was in fact the DGs who controlled departments, and not their personal assistants. He asked if managers were not performing, and if it was possible that assistants were responsible for environments where there was no proper control.

Mr Makwetu replied that the AG did not look at personal assistants.

Mr Booi referred to unauthorised expenditure. There were entities where it had been occurring for years. He asked if it was possible to disclose which departments. There had to be assistance to recover revenue. He asked how big the problem of contracts awarded to family members was.

Mr Makwetu replied that every year there was expenditure against items not budgeted for. Details would be given about contracts awarded to family members.

Mr Booi asked how the AG defined fruitless expenditure. It sometimes referred to unnecessary spending on parties and functions, but the AG seemed to have a different approach. He asked if the AG approach was the same as that of the Treasury.

Mr Makwetu replied that it was spending without requisite value or benefit. It could also occur when things were bought and not used, or when penalties had to be paid because of delays. It was driven by inefficiencies. SCOPA had to provide assurance. The level of rigour had to be enhanced. When people were called to account they had to come up with an improvement plan. Change was slow because there were capacity challenges on the ground.

Mr M Hlengwa (IFP) expressed appreciation for the briefing. He referred to assurance from SCOPA. There had been an audit the previous year of Fourth Parliament assurance levels. SCOPA had to delve deeper. There had to be 100% assurance levels from Parliament. There had to be introspection. The AG could help with that.

Mr Hlengwa referred to money used for compilation of municipal financial statements by consultants. There had to be high usage for in-year monitoring.

Mr Zungu replied that the PFMA provided for the use of consultants. Unqualified audit outcomes had been facilitated by the use of consultants.

Mr Hlengwa asked if the figures for supply chain management in slide 21 referred to compliance or non-compliance.

Mr Hlengwa noted that new entities were factored in as improvements. He asked what changes were expected when audits were submitted, and when it would be possible to get the final picture.

Mr Makwetu replied that new entities had been created in the provinces, but they were small and negligible. There were 21 out of 469 audits outstanding. Everybody had two months to prepare from the year end of 31 March to the end of May. If there were no financial statements by the end of May, the entity could no longer achieve an unqualified audit. There were delays because preparation was not good. The longer the delay, the smaller the chances of an unqualified audit. Timely submission was related to the audit outcome.

Ms N Khunou (ANC) remarked that there was cause for concern. There had not been much improvement. She asked what the real challenges to departments and municipalities were. The AG had stressed that there was lack of capacity and overloaded systems. She asked what happened to the accounting officer when there was no response to AG recommendations. People were not doing what they were supposed to be doing. She asked what could be done to make people accountable, and to make them adhere to systems.

Mr Makwetu replied that the key control intervention for the AG was regular engagement. The AG had to point out problems before they became perennial. The provinces had to start compiling quarterly reports for themselves. The AG did not audit and walk away. Entities were asked how far commitment to control had progressed.

Mr T Brauteseth (DA) remarked that percentages could be manipulated. In slides 6 and 7, there was effectively no improvement. It was a percentage issue. Massive changes were needed when the AG had to assist with basic accounting functions. There were major capacity problems on the ground, if people could not be brought to book. There had to be recommendations for massive capacity building. He asked if the Committee could get information on who had to be brought to book. There was malfeasance and ineffective leadership. People had to be called to explain. People could not be left to do things independently. He asked if the AG could identify key people to be called to account.

Mr Makwetu responded that it was not possible to highlight weaknesses in the absence of assets recorded. Resources had to be set aside for the compilation of an asset register. But there were people who had failed to compile an asset register for four years with no consequences. There was nothing to push them. If there was no competence in that area someone had to be found to deal with it. Where there was no regular oversight, right actions were not taken. Capacity on the ground was indeed a challenge. If there was no CFO by year end, things were left suspended. Departments had to get external people in to make sense of the information. Skill enhancement had to be continuous. There had to be consequences for non-performance and deviation from controls.

Mr E Kekana (ANC) referred to the diagnosis of root causes. Slow responses by management was an important issue. He asked about capacity in department.

Mr Booi asked that the Committee be informed of what basic skills were lacking. Not complying with legislation was not about skills. Unauthorised expenditure was a problem because management could not comply. The law was ignored. He was not happy about supply chain management.

Mr Makwetu replied that leadership had to fix non-compliance by senior management. Leadership had to establish controls to create a secure environment for objectives. Leadership had to find the skills to do the job. Management could have the skills, but not the will to comply. Leadership had to take responsibility when there was no action. Skills had to do with tactical maneuvering. But leadership had to see to the driving of internal controls. Leadership had to have the power and authority to enforce. People were making the same mistakes for years. The AG did not have the power to act.

Mr Booi noted that there was a symbol for 'stagnation or little progress' in the Annual Report, but it was not clear how long it had been that way. He pointed to the improvement in uncompetitive/unfair procurement processes on page 22. He asked what the figures 71 and 152 meant. He commented that stagnation was when movement from year to year was less than 10%.

Mr Makwetu replied that its history on uncompetitive procurement processes and unauthorised expenditure went back five to ten years. There were unforeseen emergencies like floods where proper procurement processes could not be followed. However, if it was persistent over several years, it was concluded that no controls had been put in place. The figures, 71 and 152, were not a year on year comparison. Rather it meant there were 71 entities with findings and 152 entities with material findings.

Mr Lees referred to year-on-year lack of consequences. He asked where he could find detail about it. It was not in the Annual Report, which was why he asked about the management letter, which might contain details. It was not possible to have hearings for auditees, as there were too many of them. It was necessary to home in on lack of consequences, not to fire people but to fix the problems. He asked if the detail he sought would be in the management letter.

Mr Makwetu replied with reference to the number of auditees, that the schedule excluded the provincial departments. Detail about consequences did not appear in the management letter. The management letter contained items that management had to fix. The audit report did not require a high level of detail. Areas of consequence could be extracted if there was a need for oversight. But it was not mandatory. There was a slow response by management to the diagnosis of root causes. Management could be spoken to in the management letter. Management would be asked why there had not been action when commitments had been made. Basic disciplines of administration and internal control had to improve.

Ms K Litchfield-Tshabalala (EFF) asked if interventions could improve capacity.

Mr Makwetu replied that intervention was part of the audit process. If things were not corrected, they got worse. Corrections had to be responded to so as to build capacity on the ground.

The Chairperson remarked that only 15% of audit outcomes were clean, which meant that only 15% of the budget was properly accounted for at all times. The other 85% was a grey area. Controls were not up to standard in the big spending Departments of Education, Health and Public Works. 50% of the R1.1 billion unauthorised expenditure was discovered through the audit process. The auditees had not disclosed it. Irregular expenditure had grown over the preceding three years from R26 billion to R62 billion. The law had not been followed. SCOPA wanted to see a decrease in non-compliance. There were procedures and processes to follow. Senior management liked shortcuts. He was shocked to see how much consultants were still relied upon. He had thought it would be restricted to municipalities, but it was still at the level of national and provinces. Capacity was needed.

The Chairperson referred to correction of misstatements. When there was a lack of reliable information there was little the AG could do. The Annual Report talked about human resources at the end. There was detail about disciplinary cases, absenteeism and theft. The audit committee and internal control had to deal with slow responses from management.

The Chairperson stressed the importance of stable leadership and proper organisational culture. The Committee had to see for itself what strategic issues were raised with regards to consequences. Sustained focus could have a ripple effect. SCOPA was committed to do the work it had to do, and to improve the weight and extent of it. Answers had to be found to how public funds could best be managed in the interests of the people. Value for money had to result from compliance.

The Chairperson asked about the difference between the colours yellow and red.

Mr Zungu replied that yellow referred to findings that would not appear in the report. It meant that actions had been taken, but it did not change audit outcomes. The red referred to significant issues that would be elevated to the audit report.

Mr Booi asked if the 15% for clean audits referred to government as a whole, including the provinces. He remarked that he would have liked to see more on governance.

Mr Booi asked about slide 11.

Mr Makwetu replied that slide 11 referred to outcomes about compliance with the PFMA, and the extent to which it had improved since 2012/13. The clean audits were looked at to see how much money they handled.

The Chairperson concluded that the approach and focus of SCOPA had to be synergised.

Meeting adjourned.