KPMG & Deloitte investigations: IRBA progress report; JSE transformation; National Treasury Annual Report, with Auditor-General input; with Deputy Minister

Meeting report

Independent Regulatory Board of Auditors (IRBA) presentation
Mr Bernard Agulhas, CEO, IRBA, explained that the IRBA could not divulge specific information regarding the KPMG investigation as it could prejudice the case, but gave the assurance that it will be fast-tracked. On the investigation process, the final decision on matters can be one of the following three options: matter is not prosecuted (dismissed); prosecuted via Consent Order (fine); or referred for a disciplinary hearing to the disciplinary committee. He underscored the importance to adhere to the Promotion of Administrative Justice Act.
On June 30 2017, IRBA announced that it would launch an investigation into the 2014 KPMG audit of Linkway Trading. Investigating letters were issued to respondents on the same date and an initial response was received from respondents on 28 July 2017. IRBA was currently reviewing responses and initiating follow up requests for additional information and evidence. IRBA representatives held a meeting with KPMG International Chair Bill Thomas and KPMG SA CEO Nhlamu Dlomu on 27 September to discuss the way forward on the investigation, during which the regulator requested additional information. IRBA was fast-tracking the investigation while respecting the prescribed process in terms of the Auditing Profession Act and Disciplinary Rules. The regulator recognised the need to: manage risk of loss of confidence in the audit profession; take appropriate regulatory action; get to the right outcome; and engage with other international bodies in capacity building and sharing. The South African Institute of Chartered Accountants (SAICA) was also investigating KPMG for possible misconduct and the regulator would therefore engage with the Institute to make sure there were no overlaps in the investigative processes. He admitted that IRBA had to make considerable effort to “calm the markets”, after the “noise” about what had happened in the auditing environment. IRBA had sent out messages to calm down the markets and urged all role players to take decisions based on facts.

Status of African Bank Investigation
Mr Agulhas outlined the status of the African Bank probe. The matter was opened in December 2014, with the Myburgh Commission of Inquiry report into the collapse of African Bank being released in May 2016. In June 2016, the IRBA investigation mandate was then extended to incorporate the Myburgh Commission findings. Draft allegations were tabled before the IRBA Investigating committee and approved for issuing to the respondent in December 2016. An initial response was received from the respondent in June 2017 and IRBA was consulting with experts and legal counsel to change draft charge sheets. The charge sheets were to be tabled before IRBA investigating committee for recommendations during the month of October 2017. At this stage, the decision to be taken by investigating committee could not be predetermined.


Discussions
Mr D Maynier (DA) asked if IRBA would also investigate KPMG’s report on the South African Revenue Service (SARS) 'rogue unit', and not only the Linkway matter. Was KPMG South Africa sufficiently cooperating with IRBA on the investigations? How long did IRBA expect the KPMG investigations to take? Assuming that IRBA finds issue, what was the maximum sanction that it could impose on KPMG? Also, did IRBA have all the necessary resources to complete this particular investigation and other high profile cases as well? If not, what resources did it require?
Mr Agulhas replied that IRBA was likely to investigate the conduct of the individual auditor who signed off on the forensic investigation into the 'rogue unit' at SARS. IRBA would investigate whether the auditor exercised due care and complied with the applicable standards. However, the report as a whole could not be investigated, as it was of a forensic nature and therefore did not fall within the mandate of IRBA. In the beginning of the KPMG investigation, IRBA did not get all the necessary documentation from the auditing firm and it was fed “bits and pieces” of information. He admitted that the auditing firm did not initially give its full cooperation. 
The Chairperson insisted that KPMG should cooperate and cautioned against presuming it was guilty given that the audit firm was not present and had no right of reply.

Mr A Lees (DA) asked for feedback on the South African Airways (SAA) audit investigations. He expressed concern about the SAA 2015/16 audit report in relation to the going concern assumption.

Mr F Shivambu (EFF) said it seemed as if auditors can do as they wish. They were collaborators in huge financial crimes in most instances. What had IRBA, as the regulator, ever done? Had it ever withdraw an auditing firm’s accreditation? It was beyond doubt that KPMG’s conduct required their termination of accreditation in the interest of the public. Had there been any action on the part of IRBA to take auditing firms involved to task? They were accomplices in criminal activities and there was adequate evidence to put into effect the Auditing Professions Act. Members wanted action.
The Chairperson asked if IRBA had been subjected to any form of pressure or undue interference. If that was the case, how could Parliament possibly assist? He urged SAICA to explore the possibility of taking IRBA findings into account before issuing its report to prevent confusion in the public domain.

Ms T Tobias (ANC) felt that in as much as SAICA’s investigations on KPMG were welcome, the buck stopped with IRBA as an independent regulatory body. The investigations had to be expedited as this was a public interest matter.

Mr Agulhas, in response, said it was difficult to give a tentative date of completion as the investigations were complex. The maximum sanction that IRBA could apply was to withdraw the licence of an auditing firm – something the body had not done to date. IRBA had so far only revoked the licences of individual auditors. he added that SAA’s inadequate going concern disclosure investigations should be put on the investigation committee agenda this month.
The Chairperson was adamant a licence withdrawal was not enough when state money is involved, suggesting 'referring matters to the police and National Prosecuting Authority where necessary'. If IRBA investigations found individuals in the wrong, the regulator had to refer the matter to law enforcement agents for possible prosecution.

Mr Agulhas added that IRBA was in the process of drafting an amendment Bill which would be tabled soon, that would adjust fines upwards. IRBA shared the concerns raised by Mr Shivambu that stern action be taken against firms complicit in illicit flows. There had not been any pressure from outside seeking to influence the regulator's work at this stage. However, IRBA would inform the Committee in the event of any undue interference. The regulator would continue to engage with other investigators to ensure there were no overlaps. He emphasised that while IRBA recognised the need to fast-track the process, it had to be credible and effective.

Mr Shivambu added that a strong message had to be sent through the KPMG investigations- wrongdoing should be uprooted decisively. Lawlessness must not be condoned.

Johannesburg Stock Exchange (JSE) presentation
Ms Nicky Newton-King, CEO: Johannesburg Stock Exchange took the Committee through a presentation on transformation of financial services. Compared to 2013, the number of listed companies had gone down from 389 to 375. However, the market cap increased from R10.6 trillion to R15 trillion. Measurable market cap on the South African register stood at R5.2 trillion (48.6%); with foreign registers at R3.6 trillion (34.1%); and cross holdings and Treasury shares at R602.5 billion (5.7%). Companies outside the top 100 had R498 billion (4.7%) of the stake.

Listing requirements were the primary source of mainstreaming transformation within JSE. Companies were expected to publish gender representivity policies at board level as well as annual disclosures of progress against policy. As of 2018, companies would be expected to publish their Broad-Based Black Economic Empowerment (B-BBEE) policy and scorecards annually. The JSE empowerment segment enabled black individual investors to trade their B-BBEE shares. Also, the JSE was running an enterprise development programme which supports the sustainable development of its black stockbroking firms; and provided financial assistance through credits to be used in developing their firms. Currently, 14 black stockbrokers out of a total of 62 equity trading members were part of the programme.

Discussions
Ms Tobias asked if JSE was in a position to lobby small and medium businesses to take part in public listing. There had to be penetration by new and emerging players into the JSE.

Mr Lees asked if listed companies were able to influence or determine ownership of their traded securities to achieve a particular predetermined ideological outcome.

Mr Shivambu asked about the ownership of JSE the company. What was the degree of transformation- black and female participation in the JSE board? He believed JSE should prescribe that the boards of all listed companies must be 50% black and female, to reflect the demographics of the country. Listing requirements must redress the imbalances of the past in terms of ownership and control. Parliament should give guidance on the mechanisms to ensure more black participation in the JSE.

Ms Newton-King reiterated that listing requirements were the primary source of ensuring transformation. However, JSE could not be in a position to prescribe the constitution of the boards of listed companies. Such quotas could only be set by Parliament. She pointed out that various empowerment schemes and development programmes were being underutilised. The JSE was on a drive of identifying entrepreneurs to operate in the public space with an expectation that the system would be radically changed in this manner. JSE spent time engaging potential investors and lobbying for diversity. However, buy-in was a challenge. On ownership of the measurable market cap, of the 24% direct ownership, 10% was by black-owned and was 14% white-owned. Also, the Public Investment Corporation (PIC) owned nearly 12% of JSE.

The Chairperson pointed out the need for more compulsion on the part of Parliament as charters on transformation were not being adhered to. Members would have to apply their minds on how transformation could be effectively brought about within the space.
Auditor-General’s Office (AGSA) presentation
Ms Narisha Poonsamy, Senior Manager, AGSA, presented the 2016/17 audit outcomes for entities under the Committee’s oversight ambit. Audit outcomes of the finance portfolio were outlined as follows: 36% fof the audits were unqualified without findings, these being for the Office of the Ombud for Financial Services Providers, Financial Services Board, Independent Regulatory Board of Auditors, the Pension Fund Adjudicator and the Public Investment Corporation. 50% (seven) were unqualified audits with findings, the entities being: Cooperative Bank Development Agency, Financial and Fiscal Commission, Financial Intelligence Centre, the Government Pensions Administration Agency, Land Bank and National Treasury.

SAA and SARS audits were outstanding. The SARS audit was still not finalised owing to matters still under dispute and consultations. In the case of SAA, the Office had not received financial statements yet for audit due to SAA not meeting going concern requirements in terms of IFRS. AGSA was auditing SAA based on draft financial statements that were not formally submitted.

Most common findings on supply chain management were: preference point system not being applied or incorrectly applied (27%); three written quotations which were not invited as well as competitive bidding not invited (9%). There was no expenditure not in accordance with the budget vote/ overspending of budget or programme identified. However, R70 million worth of expenditure was incurred in vain and could have been avoided if reasonable steps had been taken. R140 million was incurred in contravention of key legislation, with goods delivered but prescribed processes not followed. On fraud and consequence management, one auditee had findings on non-compliance with legislation on consequence management. However, no allegations of financial and/or fraud and supply chain management misconduct had been made in 2016/17. Slow response to improving key controls and addressing risk areas owed to management and the political leadership not responding with the required urgency to the Auditor-General’s messages about addressing risks and improving internal controls.

Key areas AGSA suggested the Committee look into were outlined as follows: engagements with the Department and entities on the action plans to ensure that the audit outcomes of all entities within the finance portfolio in respect of financial information improve, performance information and compliance with legislation; the way forward regarding the Integrated Financial Management System (IFMS) project and what the Department will be doing differently to ensure that this critical project was delivered timely; request input from the Department, Office of the Chief Procurement Officer (OCPO), in respect of the strategic procurement framework developed for government, tailored for the needs of different forms of procurement. Consideration should also be given to the effective date of implementation of Twin Peaks.

Key focus areas for the Committee to probe in review of annual reports prior to final approval of budget of portfolio were: reasons for non-achievement of targets; what programme spending was being used for if targets had not been achieved; contract management – extensions /variation in contracts resulting in “evergreen” contracts; consequence management for staff that permit the recurrence of irregular, fruitless and wasteful expenditure, and recovery mechanisms. Also, the Committee had to look into IT contracts (system development) within the finance portfolio; procurement – to ensure full compliance with applicable legislation and testing market prior to contract extensions; detailed approved project plan with set milestones and due dates for IFMS accompanied by an approved yearly budget for each significant deliverable.

Discussion
Mr Lees was pleased that AGSA was undertaking the SAA audit. However, why was the SAA going concern status delaying the audit report? Was it the only reason for the delay?

Ms Tobias expressed concern about the progress of IFMS. She sought clarity on whether spends on IFMS should be labelled as irregular or fruitless expenditure. Irregular expenditure by Treasury set a bad precedent and had to be corrected. Also, the tendency by SAA to delay submitting its financial statements for auditing was problematic- it could be tied in with mismanagement. She asked for a comment from AGSA.

Mr Shivambu asked about the nature of the dispute with SARS which led to delays in its audit outcomes. He asked for a comment from AGSA on Treasury’s recent SAA bailout. Also, what informed AGSA’s decision to retain the services of KPMG when there was prima facie evidence of wrongdoing on the part of the auditing firm?

The Chairperson asked about contract management. What was the status of evergreen contracts? He indicated that IFMS was not under the Committee’s purview and was being dealt with by the Portfolio Committee on Appropriations. However, did AGSA pickup any form of corruption within the IFMS realm?

Mr Solomon Segooa, Corporate Executive, AGSA replied that SAAs audit could not be finalised as the airliner had not submitted any financial statements for auditing- the Public Finance Management Act (PFMA) explicitly states the day for submission of financial statements for auditing. Also, the AGSA was not in a position to determine if a company was a going concern. SAA management, in preparing its financial statements, had to make the assessment. The nature of the negotiations with SARS on audit findings could not be divulged at this stage but were in relation to disputes on the audit outcomes. The Committee would be briefed on the matter in due course. The audit committee was fully informed about the issues.

On the R140 million identified as irregular expenditure, R28 million of the sum was in relation to Treasury’s payment for technical support services without receiving the services. The services were said to be coming into effect in 2021.

Mr Segooa pointed out that there were a lot of contracts being extended and becoming evergreen; auditees were not following supply chain management processes to the book. Also, no corruption had been identified as AGSA’s methodology was not able to detect corruption. Once the outcome of the KPMG investigations were out, AGSA would take a position. However, AGSA had taken a decision to review KPMG more often; annually rather than every two years as per the norm.

The Chairperson said it was abominable that an entity gets a clean audit and then cases of wholesale corruption are detected thereafter. AGSA should explore the possibility of sprucing up its auditing methodology to detect corruption.

Mr Shivambu asked what details AGSA was waiting for before it expressed an opinion on the SAA bailout. AGSA was observing illegal activities taking place and not taking a position on same. Also, could AGSA be trusted given its continued association with KPMG when the auditing firm had publicly admitted to wrongdoing. What were the implications of late submission of financial statements by SAA? Did it mean that the SAA annual general meeting (AGM) was going to be postponed and Ms Dudu Myeni’s (SAA board chair) contract be further extended?

Ms Tobias expressed concern that SAA had not furnished AGSA with its financial statements for auditing. It could not be related to issues of going concern as it was not the first instance.

Ms Poonsamy commented on fruitless and wasteful expenditure. R47 million was paid to Oracle for a software licence in 2015/16. However, the system had not yet been implemented, meaning Treasury was still paying for services not yet rendered. On AGSA’s opinion in relation to SAA bailout, the emergency fund injection matter did not necessarily sit with Treasury but the National Revenue Fund (NRF). NRF would be audited in October 2017 and AGSA would express an opinion accordingly. Also, steps had been taken in relation to KPMG and AGSA would take a firm decision once the ongoing processes were brought to finality.

Remarks by Deputy Minister
Mr Sfiso Buthelezi, Deputy Minister of Finance, said Treasury was working on dealing with the challenges identified by AGSA. These were challenging times for the South African economy, having entered a recession following several years of low growth. Lower than expected growth this year could mean further strain on the fiscal framework, and make reducing poverty, creating employment and addressing inequality all the more difficult. South Africa was rising to these challenges, with stakeholders engaging in various developmental partnerships involving government, business and labour around specific economic issues and growth areas, in order to drive a common and focused agenda.

The test of Treasury’s work was whether, and to what extent it could positively impact growth and transformation to the greatest extent possible. Towards this end Government and Treasury, in respect of the financial environment, were working hard to provide policy certainty. Such reforms included the ongoing work with regional counterparts to advance free trade areas, improve regional transport infrastructure and reduce border delays. The modernisation of the public procurement regime will not only deliver on its economic transformation mandate but will enhance the efficiency of the public sector and deliver on the value for money imperative. Public procurement will further maximise the developmental impact of public spend by targeting and increasing access for black, women and youth owned businesses, township entrepreneurs and others.

National Treasury Annual Report presentation
Mr Dondo Mogajane, Director-General: National Treasury, presented Treasury’s annual report. The economy experienced a retraction and a technical recession during the reporting period with growth projections revised down. However, procurement reforms continued to drive sustainable improvement in effectiveness of public spending. Significant progress was made towards regulatory reform with the Twin peaks system and savings and retirement reform and providing market conduct practices in the industry to ensure more appropriate service provisioning. Jobs fund since inception has a portfolio of 125 approved employment-generating initiatives resulting in: 96 831 new permanent jobs created of which 60% have gone to women and youth candidates; 53 459 unemployed persons matched and placed; 195 902 beneficiaries of work reediness and technical training interventions.

Total Treasury adjusted appropriation was R28.5 billion and the actual expenditure outcome was R28.2 billion. This translated to 99% spend on ten programmes for 2016/17. On performance by total number of indicators, 75% of the indicators had been achieved. On programme two: Economic Policy, Tax, Financial Regulation and Research; the objective was the enactment and implementation of legislation to establish Twin Peaks regulatory system. Progress was made but not completed with the Financial Sector Regulation Bill passed in the National Assembly on 6 December 2016. Underperformance was attributed to the National Council of Provinces going beyond its initial indication to pass the Bill after the March 2017 hearings due to technical reasons.
Treasury had set targets to publish local government budgets and expenditure reviews as part of its public finance and budget management programme. Underperformance in this target was attributed to budget constraints and not securing technical support for the analysis of the chapters. Also, the process for IFMS 2 had been recently approved as a hybrid solution and under the purview of joint Ministries of Finance, and Public Enterprises. The target on monitoring and analysis of public expenditure and service delivery through reports produced on review and implementation of the cost-of-living adjustment (COLA) costing model was not fully achieved. Under-performance was attributed to challenges relating largely to data accessibility and limited resource availability. It was expected that this target will be achieved early in the financial year
2017/18

On asset liability management, Treasury extended Eskom’s guarantee allowing the remaining portion to complete the utility’s current capital expenditure programme to 2023, issued SAA an additional going concern guarantee as well as Land Bank to lengthen the maturity of its debt; and was able to switch R36.8 billion in seven switch auctions across four bonds maturing in the next five year.

On Treasury’s human capital structure, a vacancy rate of 1.1% had been achieved. With a total staff compliment of 1168 of which 86% were black and 56% female; 77% black and 47% females were senior officials and managers 0.94% of the NT total staff compliment are persons with disabilities. Also, at the end of the 2016/17 financial year, 61% of employees participated in skills development and leadership programmes.

Mr Mogajane stated that remedial action was being taken on findings raised by AGSA. The fruitless and wasteful expenditure matter relating to Oracle was under investigation and the necessary corrective steps will be taken once the investigation was concluded. The rental of premises for the new BRICS Bank was being assessed for adequacy in order to implement appropriate corrective steps. On irregular expenditure, the required work was performed as expected and value for money was achieved. However, assessments were in progress and corrective steps would be recommended for approval. A dedicated committee had been established which will oversee and strengthen the implementation process of the Audit Action Plan in order to ensure timely resolution of the findings.

Discussion
Mr Shivambu asked about the number of staff members the Minister had appointed since his assumption of duty. It should not be taken lightly when a Minister ‘constitutes a rally to run a Ministry’. Also, how will Treasury marry its transformation initiatives espoused in its transformation charter and summit vis-à-vis Parliament’s efforts on same? Was the SAA AGM going to take place on 3 November as per the previous commitment given that SAA had not been audited? What was the justification of the recent SAA bailout using emergency funds when there was enough time for a proper appropriation process?

Mr Lees was curious about the payment of monthly rental of premises in Sandton for the New Development Bank, identified as fruitless and wasteful expenditure by AGSA. He failed to understand why it had been labelled as fruitless.

Mr Mogajane replied that the consequences would have been catastrophic had Treasury not invoked section 16. Treasury chose the route as a default on SAA’s side would have had a domino effect. Had SAA defaulted, R16.9 billion of state guarantees would have kicked in. The option of tabling a special appropriations Bill fell by the wayside due to time constraints. On when the AGM would be held; the position as stated during prior engagements had not changed. On the New Development Bank, the audit process took place before the bank was operational. It was agreed that the African regional offices be headquartered in South Africa- the bank was currently up and running and the leases had been taken over by the BRICS. It was an interim expenditure. He requested that the question on ministerial appointments be directed to the Minister during parliamentary question time.

Mr Shivambu said Treasury’s conduct in relation to SAA was mind boggling. Lenders were of the view that the board chair should be removed and crucial appointments be made. However, Treasury was insisting on maintaining the status quo and injecting money into SAA. Parliament would have to refuse to give a go ahead on the special appropriations Bill before stability and ‘sanity prevails’.

Mr D Hanekom (ANC) expressed dissatisfaction in the Treasury’s response on ministerial appointments. It was not a difficult question and the Minister had not gotten back to the Committee as he had previously committed.

The Chairperson suggested that the SAA bailout discussion be postponed until the Committee receives legal advice from the Parliamentary Legal Advisor. The Committee was to obtain a legal opinion about the legality of Treasury’s recent decision to invoke section 16 of the Public Finance Management Act to bailout SAA. The Committee received a letter from the DA requesting that the Committee get legal advice on whether the Minister’s decision was legitimate or not. The DA argued that the Minister and the executive should have foreseen as early as 24 August that SAA would have to get a cash payment and he could have tabled a special Appropriations Bill and for Parliament to consider such a Bill.

The meeting was adjourned.