The Parliamentary legal team came before the Committee to brief Members on the proposed amendments to the Public Audit Act. The team took the Members through the various proposed amendments, but no substantive changes were effected after consideration and discussion of the relevant sections of the Bill. The Auditor General of South Africa (AGSA), along with its Audit Committee, was also present. The Audit Committee presented its report on the entity, while the Auditor General gave Members a brief overview of the annual report, confining his presentation to the implementation of AGSA’s strategic values, due to time constraints.
The Audit Committee reported on the resignation of the Chairperson, Mr Peter Moyo, and his replacement by Mr John Biesman-Simons with effect from 1 November 2017. The Audit Committee was satisfied that the AG’s resources and financial expertise were adequate and effective; the systems of internal controls over the financial reporting were adequate and could be relied upon for the consideration of the annual financial statements; and that risk management processes were adequate and operated effectively. It was also satisfied that AGSA would maintain the ability to trade as a going concern for the next financial year. Although there were external factors impacting on the cash inflows, management assured the Committee that they were employing appropriate risk mitigation strategies to manage. The Committee was satisfied with the adequacy and effectiveness of the risk management, internal controls and governance processes.
Regarding the external auditor, the contract between Kwinana and AGSA had expired and would not be renewed because Kwinana did not have enough partners to meet one of the conditions that had been set by the Standing Committee on the Auditor General. The Audit Committee had decided to give the firm an extension to acquire the required number of partners, but the firm had confirmed that it would not meet this requirement. An appointment had to be made by the end of November 2017 to enable the new audit firm to commence work. However, the Audit Committee requested the Standing Committee to defer the decision, as it was still in the process of determining a recommendation. The reason it was difficult for the AG to find an auditor was because most of the audit firms already did a lot of work on behalf of the AG, and the Audit Committee would prefer an external auditor that did not do any work on behalf of the AG.
Members wanted to know about the stance of the Audit Committee on KPMG; whether there was anything to prohibit the Audit Committee from head-hunting for auditors; whether there was a plan to reduce the number of the outsourced firms and ensure that the AG was more capacitated; how the Audit Committee reconciled that the AG was a going concern; the litigation regarding debt recovery, the number of cases, and how much money the AG would recover; whether the Audit Committee had done a study comparing the AG’s fees to auditors in the private sector.
Members also asked the AG about its recruitment programme for higher school learners; the quality controls in relation to its audits; and whether it was not more costly to outsource than to utilise internal auditing capacity.
The Auditor General was allocated another day to present its annual report owing to time constraints, so the Committee resolved to invite the Deputy AG to brief the Committee in detail and engage with the Members thereafter.
Public Audit Act amendments: Briefing
Ms Fatima Ibrahim, Parliamentary Legal Advisor, took the Committee through the problematic areas and concerns that had been raised, saying that the legal services had worked closely with the Auditor General of South Africa (AGSA).
Section 1(a) – accounting authority and accounting officer as “debtors”
Ms Ibrahim said that the reason for this was that some institutions did not have an accounting officer, so one would be able to recover funds from the board – all members of the board.
Mr T Godi (APC) said that “debtor,” as it related to the accounting officer, was fine because there was always one accounting officer, but he asked for an explanation in terms of the “accounting authority” as it related to the collective members of the board – basically, how would this be interpreted? Was it now an individual responsibility or a collective responsibility? In this case, it appeared that in the case of the board, one person would be picked out to be held responsible.
Ms Z Dlamini-Dubazane (ANC) also asked for a clarification of the roles, particularly regarding the executive authority in a situation where it was broken down to local government. How would this be explained? The authority part of it was quite vague in that context.
Mr A McLoughlin (DA) welcomed the changes to the definitions, because they were clearer for both the accounting officer and authority. The accounting officer at the municipal level was always the manager. The accounting authority was going to be a member of the authority identified in the certificate, so it would always be a specific person. It was intended to be punitive, and would point out the person that had made a mistake.
The Chairperson said that the board was a collective, and all resolutions were taken by virtue of board resolutions. The accounting authority was the board. In that context, he asked whether the intention was to refer to the individual members of the board, or if it was to pick out the individual. He suggested that “individual” must be taken out of the definition (for “accounting authority”) and replace it with “collective”.
Ms Ibrahim responded that the accounting authority was the board, and all board members would be held liable as the accounting authority – what was often referred to as “joint and severally liable”. However, when a recovery process took place, the AG would be free to act against one person or the collective, even though when the certificate was issued, it would name all the board members. Then, when the AG went to court to recover the money, it could choose the individual with the strongest financial position on the board, but that person in turn would have a civil right to claim from the other board members. She proposed that in the definition of the “debtor,” the word “collective” should could be added.
Mr Godi asked whether this procedure had been legally tested. If not, it may be problematic. If there was no precedent around this procedure, it would really be problematic.
The Chairperson reminded the Members that any proposals to the amendments would not be changed today. However, they would be finalised no later than 17 November.
Subsection 5(1) (aB) -- to empower the AG to conduct international audits
Conducting international audits was a normal practise for the AGSA, as it had been auditing the United Nations and other international bodies for 12 years. This new subsection was basically borne by the reinforcement of what was contained in the Kader Asmal Report on Chapter Nine institutions that came out in 2006, to provide the clarity that was sought in that report.
Section 4(4) – new insertion of subsection (1A)
Ms Ibrahim said that the insertion of subsection (1A) gave effect to empowering the AG to refer undesirable audit outcomes to an appropriate body for investigation, and after referral for investigation, the AG must be kept appraised of progress and the outcome.
Mr Godi said that this was the crux that brought about the substantive change that was sought to be made. He recalled that the last time he was here, it had explicitly been the Hawks and the Public Protector who were the appropriate institutions to conduct the investigations relating to undesirable audit outcomes of various department or entities of the State. This impacted on other pieces of legislation, and this was the one area that needed to be pumped up. The most appropriate institution out of all of the others was the Special Investigating Unit (SIU) because of how it worked. It investigated the instances of maladministration and was able to bring forth information for purposes of disciplinary action and serve as witnesses, and was able to identify and isolate criminal incidents and directly refer tem to the National Prosecuting Authority (NPA) for prosecution. If the SIU was the primary organ that would deal with this, it would be more appropriate than the Public Protector and the Hawks.
Mr McLoughlin did not agree with Mr Godi, on the basis that the SIU was doing investigations only on the instructions of the President. This defeated the object of the exercise, because if the AG referred investigative work to the SIU, the President would have to give the go ahead.
Ms N Mente-Nqweniso (EFF) said that there were too many matters that were involved in the SIU investigations, as well as signatures that were required. There were matters that fell outside of it. Therefore the term “relevant body” was appropriate, because it would give the AG more room to choose which body should take on the task.
Mr Godi said that he was suggesting that the SIU be the primary structure that dealt with the distinction of whether the case was a criminal or a civil case. This would impact on the existing legislation, but he was saying that the Act of the SIU should then be amended so that the investigations that stemmed from the AG did not require the President’s instruction. He stressed that he was well aware of the procedures of the SIU, but those procedures could be eliminated by amending the SIU Act to ensure that all the other processes that must be adhered to prior to an investigation were eliminated when it came to investigations that were referred to by the AG.
Mr M Booi (ANC) said that Mr Godi’s proposal did not allow for dynamism within the law, but stuck to only one institution. If the SIU became the primary body, this would limit the scope of the AG to engage with other institutions, so “relevant body” was actually more acceptable.
The Chairperson said that Mr Godi was merely suggesting that the primary body must be the SIU, without excluding the other ones.
Section 5(1) – new subsection, 5(1)(B)
Ms Ibrahim advised that this was aimed to recover losses from Accounting Officers (AOs) or Accounting Authorities, and the procedure for recovery was:
- Recover losses from AOs or Accounting Authorities, not officials as per previous version.
- Losses were defined as any irregular, unauthorised, fruitless and wasteful expenditure or any loss suffered by the auditee due to failure to collect monies due to the State or recover monies improperly paid.
- AO/Accounting Authority was provided with an opportunity to explain failure to recover.
- In the absence of a satisfactory explanation, the AG would issue a certificate for recovery.
- Names the debtor and states the debt, and serves as prima facie proof of debt.
- The debtor must pay within 180 days, failing which AG may institute civil recovery process in court.
- The debtor may make payment arrangements to extend the payment deadline and permit the AG to claim from their employer or other state organ that owed the debtor money (e.g SARS).
- The debtor may alternatively review AG’s decision in terms of the Promotion of Administrative Justice Act (PAJA).
- Monies collected must be deposited into the National or Provincial Revenue Fund, depending on thesource.
- AG may not withdraw a certificate except with prior approval of the NA.
Even if people had left the organisation or the institution, the AG could still make a claim from that individual, so transgressors who resigned would not be off the hook.
The Chairperson said that from (1B)(a), it was indicated that the AG must recover from “an” accounting officer or the accounting authority. Why not insert “the” instead of “an,” because there would always be accounting officers in departments, even though the transgressing AO may have resigned? An incumbent would always be occupying that office.
From a practical point of view, what happened if the accounting officer said that the Minister had forced the accounting officer to process an irregular expenditure transaction? Should the accounting officer then say he/she would pay -- would they claim it back from the Minister? In some instances, Ministers were implicated, but how would that be dealt with? So the political authority should also be held liable.
Mr Booi said that in terms of the Constitution, this type of power would be challenged, because people had rights even if they were wrong, so there would always be the question of what processes were followed for that individual to agree that they had transgressed. The process could not be just clear cut, to allow the AG to claim without making provision for the alleged transgressor to respond to it.
Mr Godi said that when the AG issued a certificate, the person had the right to state whether they were under duress or not and then attach the relevant documentation that would serve as proof to support their response. The AG would then decide whether to consider that, which would inform the subsequent action by the AG. Secondly, when a person had left the position of accounting officer, he was not sure whether the recovery from the accounting officer or the accounting authority appropriately took care of the new person who now occupied the position in question.
The Chairperson wanted to know what happened in a situation where tenders were awarded on the basis of nepotism. Did the AG have a role to play in those instances? He suggested that there should be consequences where people did not follow supply chain management processes. He also asked whether the Act covered that aspect. If it did, where was it covered in the Act?
The AG responded that the intention was to address the lack of consequences. It was not just about getting the money back, but also identifying a person who sat in the chief financial officer (CFO) position year-to-year and financial management processes were neglected or not followed, or the institution continued to receive undesirable audit outcomes. The point was that if the outcome of the investigation confirmed that the person had been sitting in that position for years, there could be a recommendation that had nothing to do with recovering money. There were also instances where some institutions may not be able to come out of a disclaimer due to other issues, such as the lack of an appropriation in order to be able to come out of the disclaimer. This suggested that there may be root causes that prevented certain institutions from achieving clean audits, so in those instances the recovery of money was irrelevant. Basically, different audit outcomes may trigger different subsequent actions, even if it was an irregular expenditure.
The Chairperson said that the Committee was comfortable with the financial recovery, but it would have to consider the other parts outlined by the AG and look at them very closely.
Section 5(2) – new subsection (bA)
Ms Ibrahim said this new subsection 5(bA) provided for the establishment of a remuneration committee, and set out the composition of the committee, the requirements of membership and the appointment of a chairperson.
Section 7(1) – new subsection 7(1A)
This subsection compelled the Independent Commission to consider the recommendations of the Remuneration Committee. It mandated the committee to make recommendations on salary/benefits of the AG to the Independent Commission and of staff to the AG, and the Independent Commission must consider the recommendations of the Remuneration Committee when determining salary and benefits of the AG. The Commission must now consider the recommendation of other bodies.
The new subsection 10(1)(cA) and (cB) provided that the AG must also report on performance audits, international audits, matters referred for investigation and debt certificates issued. The AG reported annually to Parliament, and the amendments sought to extend the reporting requirements to cover the additional powers of the AG and ensure that Parliament was fully appraised of all work conducted by the AG.
The section revised the content of the audit report in relation to financial statements. When the AG prepared an audit report of any auditee, it must reflect an opinion, conclusion or findings on the financial statements of the auditee in accordance with the applicable financial reporting framework and legislation. This subsection was aimed at moving away from “reasonable assurance engagements” on all audits, to “limited assurance engagements”.
The AG said that this amendment clarified the opinions that were expressed on the audit report, and covered the broad non-financial elements of reporting.
Ms Ibrahim advised that this inserted an additional requirement that the AG, when determining remuneration/benefits of staff, must consider the recommendations of the Remuneration Committee. This meant the AG was now legislatively compelled to take into consideration any recommendations made by the Remuneration Committee, thus formalising the role of the committee.
This outlined the substitution of “Deputy Auditor-General” with “Auditor General.” Basically, it provided that the AG, rather than the Deputy AG, as per the principal Act, must establish and appoint the members of the Audit Committee.
This section outlined the insertion of a new 1(a)(b)(c) and 1(A), which provides for a list of regulations that the AG may make and must make. The AG may regulate on criteria for discretionary audits, nature and category of matters in which it would consider conducting an investigation or special audit if it was requested to, or if it was in the public interest. Secondly, the AG must regulate on matters relating to the recovery of losses from AOs or Accounting Authorities. These included the manner and timeframes within which a satisfactory explanation must be provided, the format of the certificate and the process and timeframes within which money recovered must be deposited into the national or provincial Revenue Fund.
The Chairperson said that the Committee would take this away and tighten it up, and then take it to the National Assembly. This was the last opportunity with the AG and the legal team to deal with these matters, and if the members were comfortable with the amendments, then the Committee would deal with the Bill on its own.
Mr Godi said that the relevant body or primary body to undertake the investigations referred to by the AG, needed to be looked into very seriously.
The Chairperson said that in the two weeks the Committee had lamented on departments taking the AG to court, there should be a prescribed period in which departments could challenge the AG’s opinion. The current 18 months was too long. Was this covered in the Act, or could it be covered elsewhere? The AG had correctly identified that it did not have sufficient “teeth,” therefore the AG needed to take advantage of this process and be a nuisance if need be, to ensure that all the relevant issues that the institution had been facing over the years were taken care of, and all the gaps closed.
The AG agreed that there was something that needed to be done. As for the amendments proposed, he thought that they were adequate enough, if the Department knew that Parliament would not tolerate push-backs and the non-submission of their annual financial statements (AFS). There were many cases currently where the AG had not signed off on the AFS and the audit report due to disagreements with the entities, and some of them resisted and tried to push the AG to change its opinion.
The Chairperson said there were no substantive amendments that had been effected. On Monday, Ms Ibrahim would go to Parliament and communicate that the AG’s Act was being amended. Normally, permission was often sought first, but apologies would be furnished for cutting through the process, because the Committee had not sought permission before the process commenced. He asked the AG to produce the report of the push-backs by 17 November. The Committee would peruse the report and come up with a way forward.
Ms Ibrahim said that the only issue was the need for a consultation process with the National Treasury over the costs, because it would not bear the costs of R35 million. In addition, Parliament may not grant the permission outside the scope of the current amendments. However, if the Members were happy with the proposed amendments, then it should not be a problem.
The Chairperson said if the Committee sought to make this Bill law by the next financial year, the process needed to be speeded up.
Ms Dlamini-Dubazane was concerned that if the Parliament gave the go-ahead, it would be based only on the current amendments.
Mr Godi said that SCOPA was very apprehensive about the amendments, and maintained its stance on the SIU being the primary body that worked closely with the AG in terms of the referrals and investigations.
AGSA Audit Committee Briefing
Mr Peter Moyo, Chairperson: AGSA Audit Committee, took the Members through the report, and said that the Audit Committee was comfortable with the way that the AG’s office was functioning. He highlighted that he had resigned as an Audit Committee member, effective 31 October 2017, and that the current member, Mr John Biesman-Simons had been appointed as Chairperson, effective 1 November. In addition, Mr Sathie Gounden had resigned as a member of the Committee and a new member, and Ms Grathel Motau had been appointed in June 2017 to replace Mr Gounden.
Over the period under consideration, the Committee had received and interrogated information from management and independent assurance providers, in terms of assurance. Based on that information, the Committee was satisfied that the organisation’s resources and financial expertise were adequate and effective; the systems of internal controls over the financial reporting were adequate and could be relied upon for the consideration of the annual financial statements; and that risk management processes were adequate and operated effectively. Regarding the effectiveness of the internal controls, the Committee was able to conclude that the systems of internal controls could be relied on for the integrity and reliability of the financial statements; the safeguarding, verification and maintenance of the organisation’s assets; the detection of fraud; and compliance with legislation. The Committee was also satisfied that AGSA would maintain the ability to trade as a going concern for the next financial year. However, there were external factors impacting on the cash inflows, but management had assured the Committee that they were employing appropriate risk mitigation strategies to manage – although this had been raised as the most concerning issue by management.
Regarding internal audit work, the Committee was satisfied with the adequacy and effectiveness of the risk management, internal controls and governance processes. In addition, it was satisfied that the external auditor was independent after considering the representation by the external auditors, and the quantum of the work undertaken by the external auditor for the AG. It had approved the external auditor plan including fees, and reviewed the external auditor and the quality of their processes.
Lastly, on the external auditor appointment, the contract between Kwinana and AGSA had expired and it would not be renewed, because they did not meet one of the conditions that had been set by the Standing Committee – the firm did not have enough partners. The Audit Committee had decided to give the firm an extension to acquire the required number of partners, but the firm had confirmed that it would not meet the required number of partners. After having gone through the processes of advertising and requesting bids for the impending vacancy, no bids had been received on time, with one bid being late. The tender was then re-advertised and the Committee had received one bid. With that being said, the Audit Committee wished to advise the Standing Committee on the Auditor General that an appointment had to be made by the end of November 2017 to enable the new audit firm to commence work. However, it requested the Standing Committee to defer the decision, as the Audit Committee was still in the process of determining a recommendation to the Standing Committee. The reason it was difficult for the AG to find an auditor was because most of the audit firms already did a lot of work on behalf of the AG, so the Audit Committee would prefer an external auditor that did not do any work on behalf of the AG.
Ms Dlamini-Dubazane understood the Kwinana issue regarding the number of partners required by the AG, but she was worried that if Kwinana’s services were terminated in March, it was almost November already and the AG had not secured an audit firm. She asked for an update on the securing of an auditor. She asked whether there was anything prohibiting the Audit Committee from head-hunting for auditors.
Ms Mente said that notwithstanding the fact that the presentation indicated that the resources and financial expertise of the AG were adequate and effective, she believed that the resources were not effective and adequate given the fact that the AG outsourced work from some of the audit firms to do audits on its behalf in various departments. She asked whether there was a plan to reduce the number of the outsourced firms and ensure that the AG was more capacitated.
The Chairperson said that it had been indicated in the presentation that the AG was a going concern and so forth, but it had a huge debtor’s book, so unless that was addressed the AG would be in trouble. How did the Audit Committee reconcile that the AG was a going concern? Secondly, the Audit Committee should regard the SCOPA/Committee as the shareholder of the AG, and it was no secret that KPMG had raised a lot of interest, to the extent that Parliament had terminated its contract with the firm. When all this had happened, the AG had said it would keep KPMG on its books, so could the Audit Committee comment on the wisdom or otherwise in relation to that statement, and what the view of the Audit Committee was on this.
Mr Moyo responded that the issue around Kwinana was not a performance matter. Parts of the terms of the re-appointment were based on the firm’s number of minimum partners, which was a requirement of five, because that would provide assurance that Kwinana would have the capacity to conduct the vast audit of the AG. The firm had been given time to recruit partners to meet the requirement, but it had come back and indicated that it would not be able to meet the requirement. It was important to indicate that the Audit Committee was comfortable with the firm’s work.
As for head-hunting, the committee had thought of approaching the Independent Regulatory Board for Auditors (IRBA) to recommend a list of firms, and currently this was being considered. As for the resources not being adequate, two things needed to be separated - the office and the performance of the office. The Auditor General chooses whether to outsource or not, given what his office needs to be capacitated to conduct the required work. In fact, over the years, the number of outsourced firms has been declining. The presentation was referring to the financial management of the AG and the people running the effectiveness of the financial management. It was on that basis the Audit Committee was of the opinion that the resources were adequate – basically how well the financial management office was managed.
As for the huge debtor’s book, there were a few things that needed to be looked at regarding the going concern. Firstly, there was solvency -- assets versus the liability -- and based on this test, the office was solvent because the assets were more than the liabilities. Secondly, there was liquidity -- the ability to pay the debts as they arose. After its analysis, the Audit Committee was comfortable with that fact that looking within a year, the AG was still in a good standing. The issue of departments and other state organs not paying their audit fees needed to come to a halt, because this would eventually affect the liquidity of the AG. This was one of the areas that needed a special and intense focus.
As for KPMG, his own view was that the way KPMG conducted itself certainly did not accord to the values that they would like to see from a professional audit firm. As the CEO of Old Mutual Emerging Markets (OMEM), he could report that Old Mutual had insisted that KPMG went through an independent review, and that the report should go to the international body, not the local operation, which it did. Old Mutual was comfortable with the action taken, but some of the aspects had been difficult to swallow. The independent review now involved the South African Institute of Chartered Accountants (SAICA), which was something that Old Mutual had said must be done in order to look very deeply into the organisation, and if the problem was deeper than the people involved, businesses could not continue to work with it. However, if it was certain individuals within the organisation that were the problem, then KPMG should be allowed to do business with its clients. One could assess the situation only after the independent review. He worried when he thought that if the organisational problems were what would lead to it being shut down, a lot of people would lose their jobs. He would definitely support the AG to continue working with KPMG in the event that it was only certain individuals within that organisation who were problematic.
Ms Motau referred to the issue of AGSA as a going concern, and said the Deputy AG had presented the statement on this matter to the Audit Committee, which had then interrogated it. Two things had come up which were very important. Firstly, the AG had cash of R553 million as at March 2017, and it was now projected to be at about R435 million. The Deputy AG was satisfied with the improvements in the collection methods, engagements with the National Treasury, litigation processes and other relevant procedures that had been implemented to recoup the audit fees. Secondly, the cost-optimisation, including the new audit methodology that had been implemented, was reflected in the financial statements, and it would assist in ensuring that the processes going forward would be improved, hence the opinion of the going concern.
The Chairperson asked about the litigation regarding debt recovery -- how many cases were being talked about? The Committee, as shareholder, was interested in the quantum, and if the AG would win those cases, how much money would be recovered? Most of the respondents were government departments, so it would appear that the state was fighting against itself. It could not be an ideal situation -- it was almost like the state was charging itself. Secondly, who were the top five litigants? If the Committee knew of the serial disclaimers, it could come up with a way forward. If this information was not currently available, the Audit Committee could provide this information by 17 November.
Mr Moyo responded that this situation was very bad, and slightly worse than a brother taking another to litigation. It was like one arm of government taking another arm of government to court. Litigation was always the last resort considered by the AG, and based on the number of letters that had been sent out by lawyers, the number was sitting about 79 litigants. The litigation process referred to was basically lawyers sending out letters of demand to the litigants, not actual court litigation. So when one ended up sending a letter of demand to another arm of government, it was more like sending a letter to onesself.
Mr McLoughlin asked if the Audit Committee had done a study to compare the AG’s fees to those charged by auditors in the private sector, as well as what Audit Committee charged for its work for the AG.
Mr Moyo responded that the Audit Committee fees were way lower than what most private firms audit committees charged. For instance, for the Audit Committee to come to Parliament, it had decided not to charge more than four hours of travel time, bearing in mind that the Audit Committee had arrived the previous day. The AG charged departments lower rates compared to commercial companies -- it charged a standard rate for its audits.
The Chairperson said that due to time constraints, the Committee would have to find another time, although it understood that the AG’s time was money, and his availability was always very limited. However, he would not want the Committee to go through the AG’s report maliciously, as just a matter of compliance. It would be a disservice to the AG and the Members who had actually gone through the report and had questions to ask. He asked the AG to comment on his proposal.
The AG said that due to the comprehensive report that Members had already received from the Audit Committee, that report was already part of the annual financial statement (AFS) and the annual report (AR). He therefore suggested that he could provide an overview of the annual report in ten minutes, and the discussion could ensue after the Deputy AG had presented the annual report at a later stage.
The Deputy AG was happy with the proposal, as well as the Members.
AGSA Overview on the Annual Report
The AG gave a short briefing around the implementation of the 4V strategy (year two), and said the key things contained in the cumulative effect of the implementation over the past two years was that AGSA was still pursuing a journey to influence the development of robust financial and performance management systems in government; be part of strengthening oversight and accountability over financial and performance management systems; and to drive and to communicate the importance of commitment and ethical behaviour for all. Many of these goals were still on course, and the previous discussion regarding the powers of the AG would assist in making a change in a number of these areas.
These areas were:
- Value-adding auditing;
- Visibility for impact;
- Viability; and
- Vision and values driven.
The annual report on value adding would provide an insight into how the AG was expanding the focus of the audit effort and some of the things that were coming out of the audits in the three spheres of government. There were also issues that were flagged on reporting on performance. For visibility for impact, this was about the issue of the AG’s interaction on an on-going basis with the Standing Committee (SCOPA) and other instruments in the executive and legislative side. Among other initiatives, in addition to the audit work in order to sign the audit reports, the AG also conducted the quarterly key control engagements, so that it could identify the issues that led to financial loss and other issues in government entities.
On viability, this was basically the part where the AG focused on the perspective of its work to ensure that there were necessary resources available, including empowering and building up the staff, as well as making sure that there was access to needed resources, both human and financial. Building an on-going culture in the institution also spoke to the viability of the institution. Lastly, vision and values driven spoke to the entity’s work and behaviour, with the aim of leading by example and continually demonstrating that clean administration and transformation were achievable. The AG had tried to bring the message across to all the entities that it audited, and had been interacting with its staff in the office to alert them of the new environment that the staff would be working in.
Ms Dlamin-Dubazane asked whether the Committee was giving the Audit Committee to go ahead with its heading-hunting for an external auditor.
The Chairperson responded that that was the situation, and the Audit Committee would come to present its outcome on 17 November. The Committee would comment on the outcome then.
The Chairperson asked whether the AG should not take a step back from encouraging learners to be auditors, because it seemed that encouraging university students did not bear much fruit. The AG could perhaps consider encouraging grade 11 and 12 learners. He asked what the quality control audit was saying to the institution – was the AG’s office comfortable, or was there an area that it could improve on? Many people who were now in government departments had benefited from the AG, so did that not pose a risk? Lastly, he asked the AG to respond to the KPMG situation.
Ms Mente asked about the AG’s outsourcing. The Audit Committee had said it was the AG’s call. When the AG looks at the costs of the external auditors in comparison to the internal capacity (when the AG employed a permanent person, was it higher when external auditors were employed or otherwise?
The AG responded that the university programme was an addition to the school programme, and it ran nationally. There were certain scheduled engagements that took place at that level to provide the necessary support to encourage them to pursue the accounting and auditing profession. This information was also contained in the annual report. Regarding quality control, every year the AG subjected its audit to a quality control process after the audits had been signed. For the past four years, the AG had been hovering at around 87%.
As for outsourcing, recruitment and retention of people, outsourcing was done intentionally in that they retained people who wanted to remain in the office, but the AG also assessed people who had been with the institution over the years to ensure that they still maintained the level of independence and objectivity that was required. There was often an outcry that the people sent out to conduct audits were young, but the value that came out of the audit was that if there were sufficient people at the supervisory level, that became less of an issue because the final evaluation and conclusion of evidence gathered in an audit was that of the supervisor. There were many internal checks that were employed, and the AG also adhered to the International Standard on Quality Control (ISQC1) regarding quality control. The level review that was done by the Independent Regulatory Board for Auditors (IRBA) on the AG regarding the training of personnel, quality controls and other relevant matters, were things that were in place at AGSA.
Regarding the cost side of outsourcing, the bulk of the AG’s work included auditing at the national, provincial and local level. National and provincial governments had a March year end, while the local financial year ended in June. About ten years ago, AGSA had done a study that reflected that there would never be a day where the office had sufficient staff to do all the required work. The risk was that it might go out to recruit and double the staff size, but their level of productivity would be much lower over time because there were only two periods to which to respond. Based on past experience, about 20% to 25% of the work would be done by external firms, because those firms needed only to send a team of people to conduct the work, and there were no overhead costs involved. It was just a direct cost, compared to the AG having to pay the salaries as well as the necessary overhead costs. It was cheaper for the AG to outsource, and it would make it cheaper for government to do it this way and ensure that the outsourced firms charged at a lower rate.
As for KPMG, a report had been issued by KPMG International pointing out all sorts of things that had been found wrong at KPMG SA. Once the AG saw that, it had requested an interaction with the leadership of the firm. The AG had met them and wanted to know if the report was revealing that the consideration of independence and professional competence were intact or not, based on the report. However, that answer could come only from the independent investigation which was being done by the IRBA, SAICA and KPMG International, and that question would not be answered until those investigations were completed. Instead of allocating this over two years, as was the practice with other firms as well, the AG had therefore shortened the period in which the KPMG work was allocated to one year, so that the AG could have a quick turnaround in respect of the issues outlined. The AG was still waiting for the outcome of those investigations, so it would not take away the audit but it would put KPMG on terms that would ensure that they were responsive to the issues that were part of the investigation. The next cycle of audits that would be done with KPMG would be in March 2018, and the AG hoped that by that time the outcome of the investigations would have came out so that the AG could make its conclusion. The AG had taken what it considered to be reasonable steps regarding the matter.
Ms S Khunou (ANC) said that the experience of SCOPA was that when one looked at audit outcomes from private firms, they were worse off, because the private firms told the auditees what they wanted to hear because they wanted to be appointed again. Therefore, if the continuation of this behaviour persisted then the existing problems were not going to be solved.
The Chairperson thanked the members and the AG.
The meeting was adjourned.
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