Public Audit Act proposed amendments: Auditor-General briefing

Standing Committee on Auditor General

17 March 2017
Chairperson: Mr V Smith (ANC)
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Meeting Summary

The Auditor General (AG) presented its review of the Public Audit Act (PAA) and highlighted the issues affecting the quality of the financial statements of government entities and departments, which continued to remain a challenge. 58% of the auditees with adverse and/or disclaimed opinions had had similar opinions for the past five years. Audit opinions would have been significantly worse if auditors had not identified misstatements for correction – only 44% would have been unqualified in 2014-15 -- and the root cause was persistent weakness in financial management controls.

Fruitless and wasteful expenditure, irregular expenditure and unauthorised expenditure were a persistent challenge and problem. In the 2014/15 financial year, fruitless and wasteful expenditure had amounted to R2.2 billion, unauthorised expenditure was sitting at R17.3 billion, and irregular expenditure at R45.5 billion.

The strengthening of the powers of the AG had come to the fore, and AGSA was continuously searching for solutions to address the lack of consequence management in the public sector. As a result, the amendment of the PAA to strengthen those powers was something with which the Committee would agree. The Chief State Law Adviser (CSLA) had confirmed the constitutionality of the amended powers. The CSLA had recommended the inclusion of the power to refer undesirable audit outcomes for investigation under the current section 5(1) of the PAA, and a broad formulation to accommodate future changes. Details should be included in other statutory instruments, such as regulations or the audit directive. Some of the proposed amendments included the mandate for the AG to conduct performance audits; a mandate to conduct investigations; a mandate to conduct international audits; and the collection of fees.

Section 23 of the PAA mandated the AG to charge and recover fees for audits and related services. The bulk of the institution’s revenue consisted of fees, and other income was earned on investments, but fee recovery remained a challenge, especially in the local government sphere. As at 31 January 2017, debtors overall amounted to R765 million, with R356 million due by the National Treasury (NT) in respect of 1% of auditees. AGSA had proposed the amendment of section 36 to create a special account in which the NT should retain local government audit fees for the benefit of the AGSA.

Members asked questions about the AG’s perspective on the South African Social Security Agency (SASSA) debacle; whether too much responsibility was going to be placed on the AG when the proposed amendments were implemented; whether the AG used the same audit samples all the time; and whether there was an unwritten convention that management reports could not be made available publicly to a committee. 

Meeting report

Briefing by the Auditor-General
Mr Kimi Makwetu, Auditor General, took the Members through the presentation, highlighting the benefits of external auditing, saying that it adds credibility to the information provided, assists in giving momentum to the process of transformation of financial management in the public sector, and assists in the strengthening of oversight, accountability and governance in the South African democracy. It thus made a difference to the lives of the citizens.

In light of the implementation of recommendations, the Auditor General of South Africa (AGSA) had come up with several initiatives to ensure implementation of recommendations, which included:

  • Management reports that detailed not only the findings, but also the root cause (what caused the finding) and simple, clear and relevant recommendations to address the root cause;
  • A quarterly engagement programme with accounting officers and executive authorities to share the status of controls;
  • Supporting the oversight process through briefings to the public accounts committees and portfolio committees;
  • Working closely with the National Treasury, Accounting Standards Board, the Departments of Public Service and Administration, Performance Monitoring and Evaluation, and Cooperative Governance to find solutions towards improved financial and performance management.

With regards to audit outcomes for both the Public Finance Management Act (PFMA) and the Municipal Finance Management Act (MFMA), the quality of the financial statements remained a challenge in many entities and departments. 58% of the auditees with adverse and/ or disclaimed opinions had had similar opinions for the past five years. Audit opinions would have been significantly worse if auditors had not identified misstatements for correction – only 44% would have been unqualified in 2014-15 -- and the root cause was persistent weaknesses in financial management controls. Unauthorised, irregular and fruitless and wasteful expenditure continued to increase – PFMA and MFMA combined. In the 2014/15 financial year, fruitless and wasteful expenditure had amounted to R2.2 billion, unauthorised expenditure was sitting at R17.3 billion and irregular expenditure R45.5 billion. The irregular expenditure for 2013-14 included the once-off occurrence of irregular expenditure by the Property Management Trading Entity (PMTE) amounting to R30.9 billion.

Inadequate consequences and indicators of fraud and corruption not being investigated in local government (MFMA only) and material findings on non-compliance with legislation on consequence management, included not investigating or correctly dealing with unauthorised, irregular, fruitless and wasteful (UIFW) expenditure, financial misconduct and fraud. The supply chain management (SCM) findings on employees and councillors with interest in suppliers was a concern, as well as missing documentation for audit purposes.

Some of the challenges that still prevented good audit outcomes included:

  • Slow response to improve internal controls and address risk areas;
  • Inadequate consequences for poor performance and transgressions;
  • Instability or vacancies in key positions, or key officials lacking appropriate competencies.


The basic controls that should receive special attention included:

  • Effective leadership (political and administrative);
  • Audit action plans;
  • Proper record keeping;
  • Daily and monthly controls;
  • Reviewing and monitoring compliance;
  • Human resource management controls;
  • Information technology controls.

With regard to the review of the powers of the AGSA by the Chief Justice, AGSA was continuously searching for solutions to address the lack of consequence management in the public sector. Built on the International Standards for Supreme Audit Institutions (ISSAI 7), the AG needed appropriate mechanisms to follow up on audit recommendations to be effective, and should not expect implementation of his recommendations if the ones who must implement were the authors of whatever must be fixed through the AG’s recommendations. Parliamentarians’ role was to maintain oversight, but one should not expect of them to ensure implementation of all the AG’s recommendations. They were differently skilled. The best solution was that the AG was best skilled to ensure that his recommendations were implemented to his satisfaction. The AG must therefore supplement the role of the legislatures and strengthen their hands to fulfil their duties. Public resources would be managed responsibly and audit outcomes would improve, only if failure to implement the AG’s recommendations attracted serious legal consequences. Alternative solutions to implement recommendations were available, but these must eventually culminate in a statutory provision that would be difficult to challenge. The AGSA should carefully consider its resource requirements, should the AG’s powers be augmented.

With regard to the amendment of the Public Audit Act (PAA), this was to employ alternative solutions to give credibility to the AG’s powers. The Office of the Chief State Law Adviser (CSLA) had been engaged to facilitate the amendment of the AG’s powers, as well as other administrative matters that needed revision. The CSLA confirmed constitutionality of the amended powers. The CSLA recommended the inclusion of the power to refer undesirable audit outcomes for investigation under the current section 5(1) of the PAA, and a broad formulation to accommodate future changes. Detail should be included in other statutory instruments, such as regulations or the audit directive. Some of the proposed amendments for the AG included the mandate to conduct performance audits; a mandate to conduct investigations; a mandate to conduct international audits; and the collection of fees.

Regarding the recovery of audit fees, Section 23 of the PAA mandated the AG to charge and recover fees for audits and related services. The bulk of the institution’s revenue consisted of fees, and other income was earned on investments (section 36), but fee recovery remained a challenge, especially in the local government sphere. As at 31 January 2017, debtors overall amounted to R765 million, with R356 million due by the National Treasury (NT) in respect of 1% of auditees. AGSA proposed an amendment of section 36 to create a special account in which the NT would retain local government audit fees for the benefit of the AGSA. However, the senior law adviser (SLA) advised against the proposed amendment to create an account of this nature. This matter must be accommodated in a money bill passed in accordance with section 77 of the Constitution.

It was important that the powers of the Auditor-General were strengthened before the current administration came to its end in two years’ time. There needed to be a sense of urgency in the matter, otherwise the way things persisted would continue being an albatross on the organisation.

Discussion
Ms D Carter (COPE) said there was so much going wrong in many departments in state-owned enterprises that one needed to ask if the issues were being flagged well in advance, and what the proper follow up mechanisms to avoid surprises were. The Committee could not be a rubber stamp committee, and it should be more active. It seemed like the risk management reports only went to the Committee when issues had not been dealt with. The Committee should receive a risk management report of all the audits that were done right in the beginning, when it was actually issued, not when the department discussed it. It was important that the AG was strengthened and given the powers to deal with all of these issues. Perhaps the AG could comment on the South African Social Security Agency (SASSA) issue -- the warning signs, and why it had come all of a sudden as a surprise. If there was consequence management and follow ups on risk management, this situation would not have arisen.

Mr A McLoughlin (DA) said that broadly speaking what the AG had proposed was a viable solution. It must be frustrating that time after time things did not change in departments, so he fully supported the AG’s proposal. He was concerned about the fee collection. For instance, when Treasury stopped funding the municipalities because they did not pay Eskom, and Eskom stopped the supply of electricity, the consumer ended up being the victim of the circumstance rather than the person or entities that were causing the problem. Therefore, he would not advocate for the same situation regarding the audit fees, because it was ultimately the ratepayer that was going to suffer. Although he supported the fee collection proposal, he cautioned that it should not be at the expense of the ratepayer when it was the municipality that created the problem. He proposed that the Committee move as quickly as possible to propose an amended bill to mitigate the problem, and draft what was necessary to effect to the changes.

Ms Z Dlamini-Dubazana (ANC) agreed with the AG about the proposed strengthening of its powers, so something needed to be done and the legislation must soon be up and running. Some of the things that were being requested by the AG were actually in the constitution. However, if one used Section 20 of the PAA and tried to effect what the AG had presented – should a particular entity receive a disclaimer repetitively, the AG was empowered to take remedial action -- Section 4 of the PAA would delay things, if we explore Section 20 of the PAA, which does not need a two-thirds majority.

Mr N Singh (IFP) also agreed that there needed to be harsher consequences for those departments that were transgressing. The Chief Justice had suggested that there should be a constitutional amendment and statutory amendment to deal with the issues. A lot of departments have been manoeuvring the system year in and year out, and not complying. Was too much responsibility not being placed on the office of the AG – to make a finding, follow the finding, to police the finding, etc? Even the Public Protector’s findings were almost always taken on review by people within the system. One did not want departments who were found to be wanting in terms of financial management to be doing that if the AG was given full authority. He advised that the office of the AG should play the role of investigator -- investigate issues that were going wrong and then make a finding. It was Parliament’s responsibility to take the appropriate action. He asked if Parliament was they not abrogating its responsibilities of oversight by letting some of these things go through. Even in the case of the SASSA debacle, in court it had been said that the Portfolio Committee had failed in its duty to exercise its oversight role. The biggest issue was where that responsibility should lie -- was it in the office of the AG, or Parliament working together with the office of the AG?

Mr M Maswanganyi (ANC) said he understood the request to mean that the mandate of the AG should be extended in order to be able to follow up on issues of risk and consequence management. He asked if the AG had the capacity to do so, and whether other organs of the state could not be utilised instead. The desire was certainly there, but one did not want to see unintended consequences. The proposed amendment had been there for about five years now, so the AG should go back to the State Law Advisers and put together a document for the Committee to engage with it. The proposed amendment would have a big effect on the office of the AG in terms of personnel. Regarding the implementation of recommendations, he asked who would be the “key Ministers” involved. If the Chief Justice doubted Parliament’s capacity or skills to play their oversight role, that conclusion was certainly misplaced. Lastly, the issue of clean audit opinions had been discussed in the Committee before, and he wanted to know if this was an internationally agreed standard and where it was derived from.

The Chairperson said that consequences for irregular expenditure were different to those for fruitless expenditure. Perhaps the AG might have to look at the PFMA to reassess irregular expenditure, because it had been over-used by many departments, and they continued to get away with it. Therefore, the definition of irregular expenditure in the PFMA needed to be reviewed. Secondly, if a serial offender was picked up and taken to the law enforcement agency, Parliament would feel that it was going to be left out. A public engagement with stakeholders was certainly needed on the matter. The sense of urgency was certainly there, and there was an agreement in principle that the process needed to be taken forward.

Mr Singh said that the Act allowed the outsourcing of the work by the office of the AG, and this was becoming a problem moving forward. Could the AG carry out an exercise in terms of what human and financial resources would be required for the office of the AG to be able to conduct all audits, and compare that to the amount of money it spends for outsourcing. Of course, there would be a need to outsource for special issues. With regard to the clean audits mentioned earlier, there was no such thing as a clean audit -- it was just a term that had come up with a former Minister of Local Government from the Eastern Cape. One found qualified and unqualified audits everywhere. He asked how the office of the AG could make provision for the whistle blower aspect going forward, to make sure that they were protected. Lastly, regarding the accessibility of management reports, he asked if there was an unwritten convention that management reports could not be made available publicly to a committee because those reports included a number of the problems within a department.

Mr Makwetu replied that as it was compiling the presentation, it anticipated that there would be a need to put together a document for the proposed amendments, and the AG would come back with the document to present it to the Committee. There were engagements currently under way between the AG and the office of the State Law Adviser regarding what options and sections would be relevant, what could be done and what was preferred. If one looked at some of these issues in terms of the mandate, the law did provide for that mandate. What would be arising from an amendment point of view would be a response to some of the recommendations in the Kader Asmal report – that there was not enough clarity as to that particular mandate for international work -- so AGSA was trying to propose an amendment to provide more clarity.

The move to performance audits was a difficult area to enter quickly, and most countries had been on that journey for many years. AGSA had initiated engagements on this, not only in respect of the type of audits that it did, but also the type of people that it utilised or employed. In a performance audit, it was a systematic approach of targeting the people who were well trained in areas that could be identified. It was not an easy audit to propose to somebody and get immediate acceptance for it to be done. It was not a “must do”, and AGSA needed to devise systems on how it could innovatively lift the game as far as performance audits were concerned.

With regards to the responsibility for the oversight, the overall accountability mechanism ought to stop with the people who had gone ahead to request the funding to be made available. It was not AGSA’s role to take over that responsibility, but to recognise the limitations of a statutory audit because of issues of sampling, issues of risks associated with certain transactions, limitations of the internal control environment, and the objective of an audit, which was to express an opinion on the fair presentation of the annual financial statements. If AGSA finds transactions that were defective or not recorded according to the prescripts, it reports on those transactions and the occurrence of the deviation. The AG’s mandate does not allow it to go beyond the deviation, but to audit and report. Now it was trying to facilitate this issue so that those that were supposed to act, who were still in the chain, could act and exercise their oversight and not grapple where the deviation stemmed from, because as a result of the amendments, the AG would have gone beyond just auditing and reporting.

If AGSA came to a conclusion that a particular entity was disclaimed, one of the reasons for the disclaimer would be that it could not get adequate information, or a proper supply of documentation, and then had to continue getting a history of transactions that had been entered into, where no one knows why the documentation could not be provided. To prevent this from becoming a  recurrent issue, a disclaimer should trigger an immediate investigation to get to the bottom of why this documentation was not being made available, and that would provide transparency in financial reporting. AGSA was trying to enable the system to establish why there was a disclaimer. If left uninvestigated, a situation that encouraged that type of behaviour would be created.

The key Ministers were not being classified. AGSA did not interact with all the Ministers, so that reference was to Ministers that were key to the office of the AG and the work that it does. The word ‘key’ was used in that context.

The clean audit did not come from any standard. When AGSA interpreted its mandate and looked at the different categories of audit outcomes, it reduced its responsibility to the three areas that it was reporting on. One of them was the financial management discipline -- whether it had reported accurately on the performance and compliance with laws and regulations. Clean audit was therefore a term that had come to the fore to assist the public in understanding the issues of importance in simple language, instead of using technical language.

The meeting was adjourned.

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