Review of Public Audit Act: National Treasury on proposed amendments + Auditor General response

Meeting report

Briefing by National Treasury

Ms Karen Maree, Chief Director: Accounting Policy, National Treasury (NT), said that the Treasury had already provided proposed amendments to the Public Audit Act, although it was still busy with other additional amendments. The presentation would be limited to only six of the 23 proposed amendments. The Treasury was also looking at engaging with the Auditor-General (AG).

There had been a number of consultations undertaken and the Treasury was well aware of the financial pressure not only on the AG but also on most of the public sector entities that collected fees within the community of the public sector. There had been consultation on debt collection strategies and how to collect the fees from various entities and municipalities. The Treasury believed that it must be the priority of the Minister to ensure that the Chapter Nine institutions were appropriately funded. The Chapter Nine institutions should be enhanced, and not have their powers or mandates taken away.

It was important to note that section 23 said the variance in the calculation of the audit fees was being determined by the Committee, in consultation with Treasury. In terms of section 23.6, the Treasury wanted to ensure that the section was able to include public entities, local municipalities and municipal entities, as they were excluded in section 23.6.

Ms Maree said that the Minister of Finance had asked the Treasury to engage with the Committee in regard to the calculation of audit fees to be charged, as this was an administrative burden for the Treasury on agreeing upfront as to which entities qualified, and the amount to be settled. The term “financial difficulty” was not explicit in the Act, as determining the status of financial difficulty could be subjective. The Auditor General’s (AG’s) audit fees had been increasing and the budgets of the public entities were not always increasing as much as the percentage of the audit fees.

The main challenge for Treasury on a yearly basis was that the portion above 1% got larger and larger, and this grew the portion that the Treasury was responsible for. The Treasury, like any other department, had to budget every year and could do adjustments where required, and it should know the amount to go towards the AG for audit fees. There should be an agreement upfront on the amount to go towards audit fees every year. There was a challenge with some municipalities and public entities failing to pay for audit fees, due to financial strains. Budget reductions had been implemented, including those from the Treasury, and therefore there were challenges with the budget allocation. 

Ms Maree said that the Treasury was indirectly part of a legal challenge in regard to audit fees. The litigation was still in progress, but this had created reputational damage for the Treasury. The Act did not stipulate any maximum for audit fees, and it was anything above 1%. This meant that the amount could be anything above 1% without a cap in place, and the Treasury was concerned about having that open-ended contingent liability. Stipulation of a maximum amount to be paid for audit fees was prudent in the current economic climate.

The legal division of Treasury had proposed that an amendment to section 23.6 should be explicit on the amount to be charged on those entities or auditees under financial difficulties so that Treasury would know exactly on the amount to be budgeted for. This would certainly reduce the administrative burden in terms of perusing invoices and also provide certainty to all parties on the amount to be budgeted for. The Treasury wanted to ensure that all the proposed amendments were in line with its constitutional obligations, including the Public Finance Management Act (PFMA) and the Municipal Financial Management Act (MFMA).        

Discussion

The Chairperson asked if there had been consultation between the Treasury and the AG in order to determine the costs to be incurred on the amendment of the Act. The AG was charging audit fees per hour, and this was something that the Committee should take into consideration. The cash-strapped entities were in that situation because of lack of financial management, to a large extent.  The AG should provide comment on the proposals that had been made by Treasury. It was unclear whether the AG and the Treasury had convened before and discussed the proposals that were being made today.

Mr Kimi Makwethu, Auditor-General: Auditor-General of South Africa (AGSA); said the AG had had an opportunity to reflect on the proposals that had been made, but this interaction was on a personal level. There was a scheduled meeting next week where the focus would be on discussing the proposals that were being made by the Treasury. There was a potential risk that the scope of work of auditing could be impacted by its proposals. It was always important to allow the auditors to conduct their work without being restricted. There must be a consensus and agreement on what constituted those municipalities that were struggling in terms of budget and operation. There must also be an agreement on what to do with those entities who received limited funding, as this had a potential risk for the assets of that entity.

Mr N Singh (IFP) supported the engagement between the AG and Treasury, as this was critically important. When was the Committee expected to get further comments from the Treasury on the Act? The additional proposals by the Treasury should be incorporated before the Committee called for public comments on the Act. It was dangerous to allow an open-ended system, where there was no agreement on the amount to be charged to the auditees. There were rural municipalities that did not have funds because of mismanagement of their funds, and therefore could not afford audit fees because of their poor management. The Act should come up with ways to deal specifically with those municipalities. One should not empathise with those municipalities just because they were in rural areas.

The Chairperson asked about the timeframe for the provision of further comments on the Bill, as this was not indicated. It was the role of Parliament to defend the AG, as it was a constitutional obligation to do so. There were many government institutions that were taking the AG to court because they did not like the AG’s findings, and the Committee should come to the defence of the AG in those situations. There was a lot of pressure on the AG, and 2018 was the election year and therefore there was a need to send further proposals on the Act to the Committee. 

Adv Ailwei Mulaudzi, Director: Fiscal and Intergovernmental Legislation, NT, said that there would be meeting arranged between the AG and Treasury to discuss the proposals that had been made. The further proposals would then form part of the meeting between the two entities, and the Treasury would have holistic proposals ready to be provided to the Committee.

Mr Makwethu confirmed that the meeting would be on 23 November.

The Chairperson requested the Committee to be provided with all the proposed amendments in writing by 30 November, as this was the same week in which Parliament would be going to recess.

Briefing by AGSA

Mr Makwethu said that the AGSA had intensified public discourse on corruption, poor governance and lack of consequences. There had been a spotlight on the performance of the state-owned entities (SOEs). There had been noticeable pushbacks by auditees, with most of them not happy with the audit results. There was a slow pace of transformation in the country and the professions, including a slow growth of skills levels. There had been increased interest on improving the lives of people, expressed in national priorities and sustainable development goals. AGSA would focus on fast-tracking the use of technology and integrating technological changes while noting the associated risks. 

Ms Tsakani Ratsela, Deputy Auditor-General: AGSA, said that for value-adding auditing, the focus remained on auditing areas that mattered, and influencing all role players in the public sector to take action for improvement. AGSA would persist with detecting and exposing practices that ultimately resulted in wasting public money. There would be a concerted effort to establish a direct line of sight from the detection of breaches to the implementation of consequence management.

AGSA would continue to implement various measures to maintain and, where possible, increase adherence to audit quality standards. There would be support for reporting on the achievement of the Sustainable Development Goals (SDGs) through the information contained in its reports. There was a target of 80%-100% on the implementation of actions to improve its stakeholders’ perception. There was also a target of 80%-90% on adherence to quality standards in audit engagements. AGSA would annually review the audit portfolio to ensure its relevance. There would be the development of models for low-risk and small-to-medium audits in the new audit methodology. There would be preparation of the organisation for an alignment to the amendments of the PAA, once assented to. It would continue its strict oversight over the governance of section 4(3) audits.

Ms Ratsela said that for visibility of impact, the strategic objectives were to achieve impact through visibility programmes and engage actively with citizens. AGSA would explore better and innovative ways of communicating what mattered to stakeholders. There would be a focus on the implementation of a well-structured status of records and commitment reviews, to provide depth to discussions on key controls. AGSA would drive continual improvements to its engagement tools and build capacity for impactful stakeholder interactions.

AGSA aimed to contribute significantly to the advancement of the professionalisation of auditors worldwide, with a specific focus on the African continent. There was a target of 80%-100% on the implementation of actions to improve stakeholders’ perceptions. There was also a target of 80%-100% on the rollout of the status of records reviews. There would be implementation of an external thought leadership programme, and then increasing the reach and impact of the engagement on its mandate and role. AGSA would provide effective support to the African Organisation of English-speaking Supreme Audit Institutions (AFROSAI-E), and collaborate with African Supreme Audit Institutions (ASAIs) and other members of the International Organisation of Supreme Audit Institution (INTOSAI). 

Ms Ratsela said the strategic objectives were to maintain financial viability and legal independence, attract, develop and retain great talent and then increase operational efficiencies. Financial viability remained AGSA’s utmost priority for the preservation of its independence. It would engage all relevant stakeholders with the aim of securing full payment of audit fees. There would be a focus on the management of physical infrastructure, improving its operational processes and maintaining information technology in order to be the best positioned to execute its mandate.

There was a target of a 1% to 4% surplus, and a three to four months safety, or cash, margin. The AGSA pursued effective debt collection by continuing to implement ring-fencing and litigation processes, and then quantifying and monitoring efficiencies realised from the implementation of the revised audit methodology. AGSA would regularly review available legal instruments to support the execution of its mandate and to promote consequence management in the public sector.

The funding model had been revised in 2008, and allowed the generation of a surplus. A big part of the surplus had not translated into cash, due to the inability of auditees -- mostly the financially distressed ones -- to settle their audit fees. As a result, the cash cover had declined from 2.5 months in the last few years to around 1.8 months currently. Budgetary constraints at the auditees, manifested through unbillable audit hours, were beginning to exert pressure on the revenue line.
 
Budget revenue for 2018/19 was expected to grow by 3%, or below the consumer price index (CPIX), driven mainly by AGSA’s continuous commitment to affordable fees and the auditees’ budgetary constraints. Furthermore, revenue would be reduced by R67 million arising from the implementation of the new International Financial Reporting Standard (IFRS), which prohibited recognition of revenue that could not be collected. Though overheads were growing by 9.6%, the organisation had implemented cost containment tactics which translated into savings, evidenced by the reduction in head count by 54. However other items, such as learning and development, had increased due to investment in the Thuthuka graduate programme in line with the new strategy to improve the intake of trainee auditors with Cumulative Translation Adjustment (CTA), and other people-related investment costs.
 
Discussion

The Chairperson appreciated the presentation that had been made. The Committee should be briefed on the areas of defiance by auditees. What were the core challenges? The Committee should be provided with the names of the institutions that were taking the AG to court, and the nature of the court challenges. It was unclear how the AG would be able to fund the R15 million deficit. Was there an overdraft for 30 days?

Mr Singh asked about the number of contestations and the impact these contestations had on the organisation. Regarding performance audits, were there any other performance audits in the pipeline moving forward? The Committee was not serving in those committees where the performance audits were being tabled. Therefore it would be prudent for the performance audits to be tabled also to this Committee, so that it was abreast with the issues that were being dealt with in those committees -- like in the pharmaceutical industry. It would be important to ascertain whether there was a way of assigning the portion of other work to the external auditors so that the AG could specifically focus on auditing the SOEs.  Was there any working relationship with KPMG?

Mr Singh said that with regard to active work and engagement with citizens, there was a need to work with people in order to explain key concepts like fruitless expenditure, qualified and unqualified audits, as these terms were used in auditing. What was a category 3 complaint? What was the nature of the complaints received? The meeting between the AG and Treasury became important in dealing with the issue of financial viability, as it was clear that the AG was being underpaid in terms of audit fees. Who were the serial offenders with the lack of payment of audit fees? What was to be done to deal with serial offenders? It would unacceptable to just ignore those auditees that were unable to pay the audit fees.

Ms P Bhengu-Kombe (ANC) wanted to know if there was a political will at municipalities to make payments for audit fees. How would one ensure the enforcement of payment of these audit fees, especially by rural municipalities?

The Chairperson asked if there were any discussions on the funding model that was currently being used by the AG. The reliance on audit fees as a funding model was risky, especially in cases where there was a potential of defaulting municipalities. Was this something that was being looked into?

Mr Makwethu said that the AG would forward a written response on the contestations, including the main issues that were being contested. The tabling of the strategic plan would explain further the issue of the performance audit. He welcomed the suggestion of sharing the reports on performance audits with the Committee. There was a level at which the AG would need to “dish out” work to other auditing firms, as there were 101 auditing firms that AGSA was working with to reduce the number of personnel doing large amounts of work.

There were a number of entities that were not being audited by AG, and these included the SA Bureau of Standards (SABS), the South African Forestry Company Limited (SAFCOL), SA Airways (SAA) and SA Express. It was a lot of work conducting audits at those SOEs, and this was especially the case with the monitoring of these audits.

The AG had reduced the amount of work allocated to KPMG to a one-year contract instead of two years. This had been done while waiting for the conclusion of the investigations surrounding the firm.

He said the AG continued to engage actively with citizens. It had looked at the AG of Sierra Leone on ways to simplify the auditing language. It was working with the communication team in order to to encourage active engagement with municipalities.

Mr Makwethu said complaints usually arose where a team was not happy with the audit findings because of ulterior motives, and there were investigations taking place on the complaints. The issue of financial viability was related to debts that had not been settled. There was a concentration of risks at the provincial level, and it had been like this for very long time. The non-recovery of costs was a problem that the AG needed to address.

The last review of the AG funding model had been in 2008, and the caution at that time was that the AG should stick to the current funding model and then strengthen capacity in order to collect fees from municipalities. He was not aware whether there was a political will or not to make payment for audit fees in struggling municipalities. There was certainly a problem where there was lack of discipline in the management of the allocated budget.

Ms D Carter (COPE) wanted to know if there was a possibility for the AG to operate like the private sector, where there was no signing-off of the audit before the payment was made. The budget revenue of 3% was extremely low, and the Committee should be briefed on the reason for this.

The Chairperson expressed concern about the 14 cases that had been identified. It would be important for the Committee to know if any AG staff were complicit in these identified cases. What were the sanctions that were being implemented if anyone was complicit with wrongdoing? Was there any assurance that there would be no complicity or bribery -- or even corruption -- from AG staff? Who was trying to bribe the AG staff? Was there any policy in place to address and prevent bribery?

Mr Makwethu replied that the risk management process looked at the issue of ethics and the promotion of professional conduct in the interface. There were cases where there were attempts to accept bribes, and the AG was mostly dependent on whistleblowers to report these cases. There was no mechanism in place to prevent the acceptance of bribes, but there was always an advocate for professional conduct. There were declarations of interest every year, and the AG had full compliance in this regard. The AG was avoiding the situation where staff had business interests, as this had the potential to create conflict of interests.

The Chairperson said that the proposal by Ms Carter should be discussed with Treasury, particularly on the refusal to sign-off the audits before any payment was made.

Mr Singh said that the strategic plan for 2018/21 was following the same trajectory as the previous strategic plan. Was there anything that was being envisioned on the capital expenditure for 2018/21?

The Chairperson asked how the organisation was improving in efficiency and productivity, considering there had been a reduction of 54 people in the staff headcount. Was there any reason for the increase in the headcount for every financial year, as reflected in the presentation?

Ms Ratsela responded that the staff headcount was not increasing every year, as the percentage of headcount would be increasing relative to income. There was efficiency in auditing in order to have quality auditing. The AG had managed to contain growth in the office, and there was consideration whether to replace those who had retired or to utilise the existing staff.  There was no point in hiring a person and then retrenching that individual later on, as that was costly to the organisation. The reduction in headcount had been done without compromising the organisation and its investment in people, and the mandated work of the AG.

On the capital expenditure side, the focus for 2018/19 was about maintaining the capex costs, especially for IT infrastructure, but there was nothing major being drastically reduced.

Mr Makwethu said that for every R100 that was generated to revenue, the direct cost of generating that revenue must be between R67-R70, and this was the outcome of the funding model of 2008.

The Chairperson wanted to know the age-group spread of the organization, to ascertain whether this was an ageing or youthful organisation. Was there any possibility of expanding the footprint to SOEs? What could this mean in terms of the staff complement? Were there any real resources and necessary skills in place to specifically focus AGSA’s attention on the SOEs?

Mr A McLoughlin (DA) wanted to know about the estimated surplus for 2018. What was to be done to prevent a negative surplus? It was unclear if the projection of a surplus was in any way tied to the Public Audit Act.

Ms Carter asked about strategies in place to improve on the collection of fees, as this was a matter of concern for the AG.

Ms Bhengu-Khombe expressed concern about the high vacancies within the organization, as this needed to be addressed. The Committee should be briefed on the employment of people with disabilities. The employment of people with disabilities was a sensitive issue, with most government departments failing to reach even the 2% target. It looked as if the AG was doing well in the employment of people with disabilities, but what about the facilities in place to accommodate the disabled people?

Mr Makwethu welcomed the suggestion of focusing specifically on auditing SOEs and attending audit committees. There had been an evaluation on the readiness of AGSA to do the auditing of SOEs. There was no unit focusing specifically on auditing the entities. There were currently more than 600 trained chartered accountants within AGSA. It was looking at ways to utilise technology to improve its efficiency.

Ms Ratsela said that 64% of the staff were in the age group of 25-35 years, therefore this was a youthful organisation. 36% of the staff were older than 35. Young people should be equipped with technical competence, and the AG paid a lot of money to the Thuthuka bursary fund to ensure that young people were able to study towards obtaining their qualifications. The organisation also benefited from those employees who were able to graduate and become chartered accountants.

The allocated budget was tight, and this was putting a lot of pressure on the organisation to prioritise efficiency. AGSA  was also looking at the leases and cost of accommodation, and finding ways to reduce these costs by negotiating with landlords. There was a plan to improve facilities appropriately for people with disabilities.

The Chairperson said that the Committee would meet next week to adopt the report on the strategic plan of AGSA, and then deal with the issue of audit committees. The next time the Committee would be seeing the AG would be after Christmas. The AG did not necessarily have attend next week, as what the Committee would be doing was internal business.

The meeting was adjourned.