Review of Public Audit Act: further discussion with Auditor-General

Meeting report

The Chairperson said that the review of the Public Audit Act was due to what this Committee and the Standing Committee on Public Accounts had been lamenting about “malicious compliance” by Departments and the non-action from institutions when the Auditor-General South Africa (AGSA) has expressed an adverse opinion on their audits. The Committee would receive a presentation from the Auditor-General and would then decide whether to amend or not.

Review of the Auditor-General powers
Mr Kimi Makwetu, Auditor-General, said AGSA performed national and provincial audits under the Public Finance Management Act (PFMA) with a March year-end and local government audits under the Municipal Finance Management Act (MFMA) with a June year-end. Over these two cycles AGSA audited about 900 institutions. He discussed the proposed amendments that AGSA would like to see in the Public Audit Amendment Bill.

Define undesirable audit outcomes
He said that if an entity continued to achieve disclaimers after two/three consecutive years that would be classified as an undesirable audit outcome since a perpetuation of an adverse audit outcome up to the third year of reporting would be indicative of factors likely to cause financial loss and would need to be subjected to a referral mechanism for investigation. To date when AGSA presented audited financial statements it relied on the goodwill of those who had signed up to the value of doing good. However from experience, AGSA had found disclaimers perpetuated themselves until the entity's ability to continue as a going concern becomes an issue.

Criteria for referral of undesirable audit outcomes for further investigation
AGSA would consider that when an accounting officer continued using the same reason for why he/she could not account for revenue accurately due to various events taking place at the institution; or the accounting for certain expenditures continued to be qualified as there was no proper accounting and transparency for those transactions; this should be flagged for investigation if the occurrence was repeated.

AGSA would however analyze whether the matter was a deficiency arising from lack of budget. For example, when looking at heritage assets, some institutions would tell AGSA that they were not prepared to spend the money required to create an environment where the assets could be valued. AGSA would continue qualifying such auditees but the qualification would be a technical qualification needing no investigation.

Qualitative Factors
AGSA could find a prevalence of people who were found to have inappropriate contractual relationships with relatives who were doing supply chain management (SCM) transactions. This was a material breach of SCM regulations which increased the risk accompanied by conflict of interest. Such issues would arise from accumulated evidence over the life time of an audit.

The focus of AGSA was financial management discipline in financial statements; compliance with laws and regulations on financial management; and accuracy of reporting on performance information. When auditees knew that during the audit they would be allowed to correct their financial statement, sometimes they were not bothered about keeping accurate reports on what they had done with monies. In such cases AGSA asked why an auditee was able to report accurately on debits and credits but the required discipline to keep tabs on what had been done with that expenditure had been absent.
Include disallowance and surcharge
Mr Makwetu said that section 5(1D) of the Public Audit Amendment Bill (PAAB) would indicate upfront to an accounting individual that if they entered into inappropriate transactions, they were expected to take action to prevent that transaction from continuing. If they allowed the transaction to continue, having fallen foul of items requiring referral for investigation, that accounting individual would be billed a surcharge in their personal capacity as they would have been responsible for that inappropriate transaction.

The Ghanaian AG had been provided with similar provisions by that country which had a similar legislative environment for auditing. However, that AG was already empowered to issue a certificate of surcharge. Section 5(1F)(e)(i) dealt with a person surcharged that was employed by the private sector. That is, if it was found that an individual had issued an invoice without having produced anything for value, then there would be a right to set-off monies owing to that entity based on that surcharge.

Mr Makwetu referred the Committee to the Ghanaian AG address on unlawful expenditure.

Discretion to opt out of low risk, mandatory audits
Mr Makwetu said that AGSA recommended that for entities not being appropriated significant amounts of money and low risk on financial matters due to size and level of activity, AGSA should have the discretion to do a high level review of their individual financial statements in year one and two and only in year three do a full blown audit as it would have kept an eye on such entities. Examples of such entities were water and hospital boards. AGSA was developing a categorization to classify their audits from low risk upwards.

Investigations
AGSA often found itself receiving requests to investigate and sometimes based on audits AGSA would have been involved with. It was difficult once one had pronounced on an audit which had had a different scope, since it was about expressing fair representation of financial statements; and then AGSA would return to the same institution to pronounce at the detailed level of an investigation. One would end-up second guessing oneself. People forget that one is dealing with a different scope because an investigation could be 10-18 months whereas an audit is only 60 days and its approach is not to look at all transactions or even certain accounts as an auditor would look at possibly four transactions for a particular year to determine on a test basis whether there is fair representation of financial performance.

Performance audit
Performance audits were a focus that would grow in the auditing environment and would require more funding. The chances were that if AGSA requested the accounting authority of the institution to be audited on performance which was not mandatory, that authority could possibly refuse as it could bring forth issues in the delivery of projects which would cause that authority serious angst.

Discussion
The Chairperson asked Mr Makwetu whether it would be problematic if in the PAAB the provision “from the person against whom the surcharge is made” could be replaced by the surcharge being raised against an accounting authority instead of ‘the person’ in the public sector. He asked AGSA to rationalise why it had chosen ‘the person’ instead of the accounting authority.

Mr M Ntombela (ANC) asked about the empowerment of AGSA to make regulations for guiding AGSA in deciding on investigations. How far reaching would the regulations be? He was concerned that conferring too many powers on Chapter Nine institutions had the potential to create conflict within government. Repeat technical deficiencies and modification for three consecutive years were cumulative in nature. What measures did AGSA have to monitor this which would prevent it from growing into a problem that would be insurmountable after three years?

Ms S Dlamini-Dubazana (ANC) proposed changes to the PAAB preamble that would read: to provide for the Auditor-General to refer undesirable audit outcomes arising from audits performed under this Act and body for an investigation by an appropriate body. Further, it would read “to empower the Auditor-General to make regulations and criteria for the referral of undesirable audit outcomes for further investigation”. The Amendment Bill also had to include a definition of the National and the Provincial Revenue Funds.

She said that the use of ‘may’ was not forceful enough in the suggested amendment of section 5(c) of the principal Act. She also suggested an insertion of ‘independent directors’ in subsection (bA) about the remuneration committee appointed by the Auditor-General.

Ms N Mente (EFF) was concerned that accounting officers moved around a lot as the public sector had not been professionalised yet. She was not satisfied with the formulation that ‘a person’ would be accountable for undesirable outcomes. The previous accounting officer of a department or state entity could have moved on by the time of the audit and the individual which would have come into office would have to account for the historical mismanagement of the public purse. She said three years was a long time and for AGSA to act only in the third year because accounting officers moved around and that had the potential to hinder or undermine the remedial action AGSA was proposing. How about the period be reduced to two years where repeat non-compliance findings emerged after audits?

Ms Mente said there were three ways of thieving from government under the current administration. There was cost escalation through dodging procurement due to qualitative factors. She asked AGSA to clarify if that had been included in the proposed criteria. For example, the Department of Water and Sanitation (DWS) had drilled boreholes for at least R2.5 million each, which was incredulous to her. There was also the splitting of the tender budget so that it could accommodate quotation invoices instead of the tender being put out to bid. Had this also been included? There were also departments returned funding to the Revenue Fund due to incapacity such as when school children were not being bought stationery.

Mr A Mcloughlin (DA) asked if AGSA had no shorter way of getting through the three-year workflow chart as the three years for AGSA to eventually refer repeat adverse audit findings seemed too long.

He said the only way that AGSA would be able to do the proposed section 5(e)(i) amendment would be to get a court order against the person surcharged. He had expected that the PAAB state that a person surcharged should not inhibit the state from charging the person with criminal activity even if the person would be paying the surcharge. Was there not a way to recover the surcharge and the cost incurred by AGSA for discovering the purposeful misuse of public funds?

Would the definition of undesirable audit outcomes also include bona fide and genuine errors? Could those not be excluded from the definition?

Mr N Singh (IFP) said he appreciated that the Auditor-General had brought with him his most senior officials and that showed the seriousness with which Parliament and government wanted to deal with consequence management. He had an issue with the use of the term ‘remedial action’ because although he understood what the Committee desired AGSA to do, he suggested another term be found as he did not want AGSA to mirror the terminology of another Chapter 9 institution.

Would AGSA only start counting the three years of undesirable audit outcomes from the date of promulgation of the PAAB? There was a possibility that AGSA would be log jammed with capacity deficiencies to deal with the many government institutions that would suddenly be referred for investigation. Why could AGSA not act within a year of promulgation of the PAAB? Secondly, what about the contestation of undesirable audit outcomes by departments such as the Department of Home Affairs? Who would be the final arbiter in such instances? He was concerned that the Executive was not being included as part of the people responsible or liable for the surcharge.

Of all the AGSA proposals, where there none that belonged to National Treasury? A surcharge certification could be a long drawn out process; how could the process of surcharge be circumvented so that people would desist from unlawfully using the public purse.

Ms D Carter (COPE) believed that AGSA had to work similar to the private sector. If something was discovered that was fraudulent, almost immediately within that same year a work plan would be devised and executed so that there would be no repeat occurrence.

She was concerned that there was room for political interference when reaching step 10 of the workflow chart where a Head of Department (HoD) or a Minister were supposed to institute a civil process.

She asked if a state employee that had been surcharged was allowed to remain in the employ of the State, even though the monies were to be recovered from the individual’s salary.

Response
Mr Kimi Makwetu, Auditor-General, responded that AGSA would not count three years going forward from the PAAB promulgation date. AGSA was planning to retrospectively count the years if that would be allowed. The reason for having more than one year as a benchmark was that in financial management environments were internal controls were supposed to be the primary consideration for protection of finances in any institution, it was easier to make a decision when you have evaluated a trend rather a single year. Therefore AGSA was giving itself time to understand if a repeat occurrence was typical or an aberration. If PAAB was enacted in 2018 AGSA had no problems with starting with the 2015/16 and 2016/17 audit outcomes as a two-year basis for assessing if findings needed to be referred for investigation.

AGSA could go only as far as PAAB allowed it to establish protection of public funds. The regulations AGSA needed were those that would enable it to propose measures to protect and prevent abuse of the public purse.

The role of Treasury was to define the national framework within which finances were distributed and used whereas AGSA was there to evaluate and assess whether that framework had been adhered to.

AGSA would consider the proposals by Ms Dlamini-Dubazana because what had been a major challenge in its work was that there were no consequences even after repeat adverse findings by AGSA. The amendments had to be considered as something apart from seeking to duplicate what other Chapter 9 institutions were doing. The amendments were to address the specific challenges that AGSA had always bemoaned about being toothless. Certainly it would help to include Ms Dlamini-Dubazana suggestions to highlight that AGSA was not going to duplicate functions of other state institutions.

On an accounting officer who would have moved jobs by the third year of reporting, AGSA said that if matters arose during the investigation that were attached to decisions made by a former accounting officer, the Auditor-General would make it a point to ensure that this was clarified in its regulations.

On escalation of costs for delivery of certain projects, if one looked at the underlying matters as reported in the AGSA area of focus on SCM, AGSA reported on the prevalence of escalation of costs. In the analysis after the sign-off of the financial statement, AGSA would look at repeat technical deficiencies and modifications for three consecutive years. To what extent had the extra money from an initial budget of R75 million been spent without going back to a SCM process and where someone simply printed out a document and asked for authorisation of escalations? If SCM transparency rules had not been followed, that would trigger a need for that transaction to be investigated. If the issuer of the contract had a shareholding interest in a company it traded with, that would be a qualitative factor attracting attention of an auditor for considering investigation.

If the policy of an institution was to advertise a tender for all transactions of R500 000 and above, and an accounting officer bought something for R580 000 breaking it down into two transactions of R290 000, the system of testing SCM did pick this up through the frequency of transactions made to a one supplier where it was the same order but there were three different suborders to deflect SCM regulations. SCM and management of assets were the biggest risks in government expenditure because people alienated state assets and used them for personal gain.

Mr Makwetu then gave the example of signing off the financial statements of Mpumalanga, the North West and one national Department in terms of the workflow chart that AGSA had presented. All of those different audit units had to report to AGSA by 31 July annually. AGSA’s instruction to its audit teams was that no longer would they end where the financial statements were signed-off. There had to be a concluding memorandum for all of the entities which had been subjected to an audit team’s audit. Over the duration of an audit the teams were accumulating audit evidence so that by the end of the audit each of the different sites all over SA already had a schedule which they were transmitting to central base. The schedule would detail that of the 28 audits conducted there were three cases that the auditors believed warranted investigation. The Evaluation Committee immediately would begin assessing and evaluating the cases in August and still within August it would conclude on those cases; therefore the actual work happened within a short space of time. The systemic process was predetermined and was a not an instantaneous unforeseen response because AGSA told its auditors that a signed set of financial statements was expected but AGSA wanted not just a silent schedule. AGSA wanted to know that if matters arose afterwards where referral should have taken place, it would fall upon that team of auditors following internal processes. That dealt with the risk of allowing people to suppress certain things.

Mr Makwetu said that it would not take more than 90 days after the statements were signed-off and that guaranteed the matters were still fresh in the minds of people as they related to the fiscal commitments of each year under review. If documents which were supposed to be handed over during an audit were absent, the people accountable had to be part of the referral for investigation.

AGSA would consider the proposal of a court order to strengthen the PAAB as well as the other suggestions from Mr Mcloughlin.

On bona fide errors, after evaluation the referral would go through a validation process as per the workflow chart. The transaction would be assessed in relation to the regulations governing it. There were two things that potentially compromised an internal control environment: ill-intent and people that genuinely did not know what was right. Currently, if one sees the consolidated figure of R46 billion irregular expenditure, one would think of how many hospitals, schools and libraries could have been built with that amount, without understanding that elements of that amount are an accumulation of errors because of lack of supervision. Such errors have to be reported even if there would be no investigation. Real errors would be separated but they also came with responsibilities as far as consequences were concerned because an accumulation of a repeat error gave an opportunity to those who were smarter to manipulate the system whilst the other one was making all the errors. Genuine errors had to be managed such that something had to be said to those accountable at a particular institution that they had to be careful because they probably thought they had a Chief Financial Officer (CFO) but the litany of errors indicated a lack of understanding of financial discipline and was creating an opportunity within that institution for those that knew better to play around.

An example was when an electronic fund transfer (EFT) was not properly controlled through information technology controls. That meant that someone inside the institution who knew how to beat the password system could go into the EFT system and set up a payment into his/her own bank account.

AGSA had not yet reflected on the recovery of costs from surcharged persons and that an investigation would have been launched before surcharged persons where found out. AGSA would take direction from the Committee about that. The point taken was that as much as the surcharged person would be returning the money, AGSA would have had to chase that person in the first place.

On contestation of undesirable audit outcomes, Mr Makwetu replied that undesirable audit outcomes were being contested and therefore that was not new to AGSA. It had a mechanism where it followed an independent arbitration process. However, the process was costly. AGSA recently had to pay independent senior counsel for a legal opinion on what the DHA was contesting. Over and above that, such contestation was evaluated by the AGSA Quality Control Assessment Committee on which the Independent Regulatory Board Of Auditors (IRBA) also sat.

In the hierarchy of governance, AGSA understood the different levels of accountability including the Executive, and appreciated the proposal to tie the accountability at those levels as AGSA felt that was the right direction to go. Section 38 of the PFMA articulated areas of financial misconduct quite well in terms of who was responsible and for what. Similarly in the MFMA, section 62 dealt extensively with such matters. He said that the handover process over time had proven ineffective. He did not recall a situation, except for isolated instances where a major effort similar to what AGSA was attempting with the PAAB, addressed the challenges arising within audits. In the last 20 years there would have been isolated instances of an official appearing in the commercial crimes court for fiddling with cash.

Therefore, AGSA felt the referral proposal it was putting forward would work better than the current regime it worked under. However, it would require the same Executive Authority to act as it was not AGSA which was given power to act but rather AGSA was mandated to close the gap, which had many times frustrated those that had the authority to act. Certainly the PAAB could be an opportunity to elevate the role of those charged with governance and executive authority.

AGSA’s view was that it had not seen what it was proposing being done elsewhere in government, let alone being written down somewhere. AGSA’s hope was that having it written would enable it to do what it had written down, and then activation of other instruments already established by law could occur.

Mr Makwetu said the review and the PAAB was to prevent misuse of the public purse because it was expensive to rely on detection, investigation and recovery afterwards. Those processes were eventually littered with legal bottlenecks so people did not have to pay back the money. People would only stay away from abusing the public purse if they knew the risk of being caught was high and there would be a severe penalty of personal economic recovery.

Adv Marissa Bezuidenhout, AGSA Senior Manager: Legal Services, said that AGSA had considered possible amendments to the Magistrates or High Court Acts as there would be implications and a requirement that the Rules Board would have to consider a process whereby the moment there was a surcharge certificate, that would be prima facie evidence of a debt due to the state. There could be a mechanism in the Registrar’s Office to issue a judgement for the surcharge value as well as an execution order.

On whether surcharged persons were allowed to remain in government employ, AGSA had researched this future employment within government. In several supreme audit institutions, either their constitutions or their enabling laws had provisions that if one had been found guilty of financial misconduct within government that would prevent one from being employed by government for 5-10 years. In SA it was worthwhile thinking about this having considered what the constitutional implications would be.

The Chairperson said that the Committee would be meeting with the parliamentary legal advisors soon to raise the matters the Committee had discussed with AGSA. Ultimately the deciders on the review of AGSA powers and if the PAAB would be passed were the politicians.

Mr Makwetu thanked the Committee for allowing AGSA to brief it on the review and the PAAB.

Mr Singh asked if the Committee would discuss the PAAB in a future meeting or would Legal Services do a briefing on the Bill for the Committee.

The Chairperson replied that he thought there would be a discussion but Legal Services would have to give input on the processing of the PAAB and what other consideration there would have to be for the Bill to be taken to the National Assembly.

The Chairperson said if the Committee was serious about finalising the review of AGSA powers and the PAAB, it had to be done before December 2017 as he could foresee very little room or appetite to deal with those processes thereafter.

Committee minutes
Ms Dlamini-Dubazana wanted a substantive amendment in minutes of the 9 June 2017 because she did not recall the Committee discussing the recent revelations of the capture of state institutions.

The Chairperson proposed the committee staff find different wording for the sentence.

Ms Carter disputed this saying that what happened during Committee meetings had to be captured accordingly, and that items could not be edited out because they offended some members.

The Chairperson said the transcript would be reviewed to ensure what had occurred had been captured accurately. He asked for the minutes to be adopted with the proviso he had proposed and the Committee accepted the minutes. The meeting was then adjourned.