Public Audit Act Amendment Draft Bill: public hearings day 2

Meeting report

Presentations by municipalities

Steve Tshwete Local Municipality

This municipality did not make it to the meeting, although they were scheduled to present.

Overstrand Municipality

Mr Andre Olivier, Legal Adviser: Overstrand Municipality, referred to section 3, subsection 1(B) (a) of the Bill. He argued that the word ‘opinion’ was subjective, and posed a question: what constituted as a satisfactory opinion or explanation here? What may be satisfactory to one person could be unsatisfactory to another. On this issue, Mr Olivier suggested that an investigation should be done, and thereafter a certificate would be issued and the proof ought to be prima facie. This would help prevent strict liability. He added that the MFMA (Municipal Finance Management Act) and the Systems Act were stringent.  For example, sections 60 and 74 were stringent about the functions of an accounting officer. What was the purpose of the Bill, if the MFMA and the Systems Act were so strict?

Ethekwini Municiality

Representatives of the Ethekwini Municipality acknowledged that the Constitution was the supreme law of the country. The institution of the Auditor-General (AG), as founded under chapter 9 of the Constitution, provided under paragraph 188(1)(b) that the AG had the authority to audit and report on the accounts, financial statements and financial management of all municipalities. This authority did not extend beyond an audit function. They argued that, the role of the AG did not entail any form of debt collection or recovery processes, as proposed under 5(1B), and to do so would result in the unconstitutional and unlawful usurping of the executive function of a municipal council. They were unsettled by how the proposed amendment proposed that recovered municipal funds be paid into the National Revenue Fund or the Provincial Revenue Fund.  They felt this was constitutionally unsound, and instead the funds should be returned to municipal coffers. They suggested that the focus should be placed on the recommendations made in the Kader Asmal Report regarding how Chapter 9 institutions should be working together.

Drakenstein Municipality

Ms Swasthi Anirudhra, Legal Adviser, Drakenstein Municipality, said it was important to note and acknowledge that there were municipalities that had clean audits and successive clean audits. Local government was already regulated by adding more regulations. Were we hindering decision making for those in local government? More regulation could impact peoples’ ability to do their work well.

Section 176 (1) of the MFMA stated that “no municipality or any of its political structures, political office-bearers or officials, no municipal entity or its board of directors or any of its directors or officials, and no other organ of state or person exercising a power or performing a function in terms of this Act, was liable in respect of any loss or damage resulting from the exercise of that power or the performance of that function in good faith.” There needed to be clarity of what was meant by “good faith.”

Discussion

Mr N Singh (IFP) noted that billions were being stolen at all levels of government. From his knowledge, argued Singh, he could not think of instances where Directors General, as accounting officers, were held accountable for mismanagement of funds. He would appreciate it if any of the municipalities could provide South Africans with some sort of comfort that an administrative officer or a clerk had been arrested and paid back the money that he/she had stolen. Municipalities did have powers, as stated for example in the MFMA, but how did they use their powers? What was the impact of their powers? Did impact resolutions get taken to Council? After they were adopted at Council, were they acted upon? As far as debt collection was concerned, there was a thin line between what the Bill was proposing and what had been said. The legislation sought to assist accounting officers at every level to be able to recover money that had been stolen.

Mr Singh asked municipalities how they interpreted 188(4) of the Constitution. The powers and functions of the office of the AG were derived from the Public Audit Act. The Act was a piece of legislation that was enacted by the National Assembly, and the Standing Committee on the AG had an oversight function over the Office of the Auditor-General. Section 188 (3) of the Constitution stated that the AG must submit audit reports to any legislature that had a direct interest in the audit, and to any other authority prescribed by national legislation. All reports must be made public. Section 188 (4) of the Constitution stated that the AG had the additional powers and functions prescribed by national legislation. This was the framework provided.

He argued that the objective was to bring amendments to the Public Audit Act in order to help municipalities recover stolen funds. He found it difficult to understand and appreciate that the AG would be subjective in issuing the certificate. He stressed that the office of the AG and the Accounting Officer were there to assist in proper financial management and to assist in the recovery of money. Was the Committee overreaching, usurping or contravening 151(4)? He did not think so. He argued that the Committee was complementing action that may be needed. However, this was not being done illegally or by force.

Lastly, a question to the municipalities was posed: “Tell us how you have enforced the current legislation. Talk to us about 188 (4). Talk to us about whether we are overreaching or not and give us a few examples about how you have recovered money, and who has been arrested. “

Mr A McLoughlin (DA) referred to the issue of strict liability and argued that if one acted in good faith, one would not be held liable. He suggested that perhaps there ought to be an expansion or rephrasing of this concept so that it was better understood. He agreed that the proof should be prima facie. Moving to the topic of ‘satisfactory explanation,’ he said an auditor’s opinion was subjective because of the nature of the auditor’s job. For example, they looked at things and came up with an opinion. When they picked up something, a query, they went to the relevant powers and sought an explanation. When they got an explanation, if they were happy with it, they signed off on that. If they got an unsatisfactory explanation, they noted that in auditing terms. The decision made by the auditor was subjective in nature.

The Bill did not intend to take anything away from the municipalities, but it allowed the AG the opportunity or right to come in when a municipality was not doing things the right way. South Africa had massive amounts of irregular expenditure every year. Most municipalities were not doing their job. When the AG stepped in and issued a certificate, the aim was to resolve the issue of corruption. He agreed that the AG would not be doing the collecting. The AG would state that there was an amount due that should be collected and from then on, he could instruct an attorney, a state attorney or whatever means he was going to use, but his office would not be doing the collection.

The Chairperson said that the AG’s work was always open to review, but people argued that this was costly. He said that one could not have one’s cake and eat it -- “if you were saying the Auditor-General could not be trusted to be objective, then take it on review to the Supreme Court or wherever, and pay the price.”

He went on to add: “If your boss asks you to do something illegal, do not agree. Refuse to carry out an illegal instruction. In fact, ask your boss to put down his request in writing. If you agree to carry out illegal instructions, I would arrest you. Allow me to be frank with you.”  He went on to provide an example. The City of Johannesburg had given somebody R50 million to build a power station in Ennerdale. Mayor Mashaba had gone there and found no power station. Perhaps, if one went to the municipal manager or regional manager, he would say that he had given the task to contractor x ‘in good faith’. Good faith must come with responsibilities, however.

Responses

Drakenstein Municipality said it agreed with the Committee’s views to a certain extent. On the topic of good faith, though, where the accounting officer acted in good faith but the public officials did something wrong, the officials should be held liable. In terms of overreaching, section 188 1,2 and 3 sets out the functions and duties of the AG, so subsection (4) must be interpreted in light of those functions attributed to the AG. Was bestowing other powers and other functions on the AG constitutional?

Overstrand Municipality asked whether the intention of the Bill and the Office of the Auditor-General was to assist. They felt the wording sounded punitive. The suggestion, therefore, was to soften the impact, as there were many accounting officers whose hackles had been raised.

Ethekwini Municipality highlighted that when irregular expenditure had been identified in the organisation, it was reported to the Accounting Officer. Thereafter, an investigation was conducted by the Internal Investigations Committee. Once the investigations were done, they came up with three or four recommendations. One of the recommendations would be disciplining the official who committed the wrongdoing. Another recommendation would be to recover any money lost by the municipality. The third possible recommendation would be to lay criminal charges with the South African Police Service (SAPS), and the last would be to improve controls going forward. The legal section would assist in ensuring the recovery of money lost.

The Chairperson encouraged everyone to kill this “beast” called corruption. The hope was that the Bill would assist in winning the fight. Everyone had a role to play. He argued that corruption, and state capture at the national, provincial and local level, had to be condemned. He advised everyone to contact the Committee if there was anything else they would like to add.

Institute for Local Government Management

The Institute for Local Government appreciated the tone of the House and the efforts to get the country moving. As an Institute, they represented section 56 and 57 of the Local Government: Municipal Systems Act. The Institute argued that there seemed to be no clear process of appeal in the Bill, and that the Municipal Finance Management Act seemed to make adequate provision for the recovery of losses. Perhaps a way to strengthen safeguards here and there, in order to make it possible for municipal managers to perform, should be prioritised.

Discussion

Mr Singh argued that accounting officers needed to acknowledge the responsibilities that came with their title, as theirs was a highly paid job. However, the Bill did not say that it was the accounting officer who would held solely responsible for any financial mismanagement in terms of paying back the money. The money must be paid by the individual who committed the crime.

Mr McLoughlin agreed with Mr Singh.

The Chairperson said that the best arbitrator was the court. He asked who the arbitrator should be -- somebody from the municipality? Should accounting officers set up this arbitration body? Objectivity was an issue. If one insisted on having an arbitration body, what mechanisms should be used?

A representative from the Institute for Local Government Management agreed to take this question to fellow colleagues to come up with an answer. He added that municipal managers needed to be protected, as there were some may want to ‘eliminate’ them for doing things the right way.

The Chairperson asked it was so hard for people to comply. Was it because their hands were in the ‘cookie jar’? One should not just look at the symptoms and fail to deal with the cause of the issue.  Some people were just plain corrupt, but what was missing? People would see these corrupt dealings and turn a blind eye in order to keep their job. However, the other side of the coin was that they would have to ‘carry the can’ for corrupt people.

Accounting Standards Board

Ms Erna Swart, Chief Executive Officer: Accounting Standards Board (ASB), pointed out that with increased responsibility must come increased accountability. She suggested that the AG should be using public sector accounting standards, whether they were the international public sector accounting standards or the South African version of them. The AG was part of the public sector. New Zealand, for example, used the international public sector accounting standards. She encouraged the AG to consider this recommendation, especially since there were these added responsibilities that were being proposed. She ended the presentation by stressing the importance of leading by example.

Discussion

Mr Mcloughlin acknowledged that the ASB was making a fair point. He suggested that the AG should explain why he used the accounting standards that he did.

Ms P Bhengu (ANC) said that at the end, the representative from ASB had agreed that one needed to lead by example, and asked what it was doing to aid municipalities.

The Chairperson asked whether it was constitutional for the Auditor General to audit an international body.

Responses

The AG responded that the generally recognised accounting practice, which the PFMA assigns as a responsibility to the ASB, originated from projects that were given by the National Public Sector Accounting Standards Board. South Africa takes from those international standards and localises them according to its own needs here. The Office of the Auditor General was involved in the whole process when those standards were developed for use in the public sector. However, he noted the point that had been made. He added that the Office of the AG audits international bodies like the United Nations, the African Union (AU) and the Southern African Development Community (SADC). This was done in partnership with other auditing associates across the continent. When the Kader Asmal Report was reviewed, the issue that was highlighted was that it was not very clear as to what the oversight role of the Standing Committee on the Auditor General was, when decisions were being made for international work.

Ms Swart said that people lacked the courage to hold others accountable. It was a question of moral fibre and a willingness to stand up and call out corrupt people, and risk being fired or isolated. She added that people did not want to take decisions because they were afraid of the consequences. They hoped someone would do something -- but not them.

Chartered Institute of Government Finance, Audit and Risk Officers

Mr S Mofokeng, Vice President: Chartered Institute of Government Finance, Audit and Risk Officers (CIGFARO) explained that their views were largely informed by practice as auditors in the public sector, and were influenced by the realities that they faced on the ground. He argued that auditors and lawyers approached things differently. Lawyers were moved by the law. Auditors were influenced by norms, standards and practices. Regarding auditors, CIGFARO believed that they had to maintain their independence. The MFMA required that an accounting officer establish internal measures of control regarding the management of funds. This was a legal instruction. Therefore, one could not cry foul later.

Section 131 of the MFMA requires that a municipality must address any issue raised by the AG in an audit report. The mayor of a municipality must ensure compliance by the municipality with this subsection. Secondly, the MEC for local government in the province must:

• assess all annual financial statements of municipalities in the province, the audit reports on such statements and any responses of municipalities to such audit reports, and determine whether municipalities have adequately addressed any issues raised by the Auditor-General in audit reports; and
• report to the provincial legislature any omission by a municipality to adequately address those issues within 60 days.

However, in reality, this was not done. This was the problem. It did not require only the accounting officer to act, but the mayor of a municipality and the Member of the Executive Council (MEC) for Local Government have a responsibility too.

Discussion

Mr Singh suggested that training workshops should be held to assist people understand and appreciate their roles and functions.

South African Institute of Chartered Accountants (SAICA)

Ms Natashia Soopal, Project Director: Public Sector, SAICA commented on four sections of the bill:

Firstly, Section 1(g) stated that “undesirable audit outcome means any act or omission identified from an audit performed under this Act that causes, or was likely to cause, a loss of public resources or which resulted in or was likely to result in public resources not being used for its lawful purpose."

She argued that this was likely to create confusion since ‘undesirable audit outcome’ could be understood to refer to any outcome that was not a “clean audit”. However, audit outcomes also referred to the result of aggregated misstatements or disagreements based on samples selected. Therefore, a more appropriate term that clearly articulated the type of matters referred to should be considered. Reference could be made to the “Reportable Irregularity” model of the Independent Regulatory Board for Auditors (IRBA), where a reportable irregularity was defined as:

“Any unlawful act or omission committed by any person responsible for the management of an entity, which:

(a) had caused or was likely to cause material financial loss to the entity or to any partner, member, shareholder, creditor or investor of the entity in respect of his, her or its dealings with that entity; or

(b) was fraudulent or amounted to theft; or

(c) Represented a material breach of any fiduciary duty owed by such person to the entity or any partner, member, shareholder, creditor or investor of the entity under any law applying to the entity or the conduct or management thereof.”

A “Guide for Registered Auditors” developed by the IRBA could be used as a basis for developing a similar model that the amendments intended to address in the public sector.

Secondly, Section 5(1A) states that "the Auditor-General may refer any undesirable audit outcome to an appropriate body for investigation, and the relevant body must keep the Auditor-General informed of progress and the final outcome of the investigation.”

SAICA recommended that there be a provision for where the investigating bodies did not have the capacity or resources to handle matters referred for investigation. There should be a provision of guidance for instances where appropriate investigating bodies did not have capacity to investigate or reject the referral as not being within its mandate. Consideration could be given to giving the Auditor General powers and the capacity to conduct investigations internally or via independent bodies.

Thirdly, Section 5(1B) states that “the Auditor-General must recover from the responsible accounting officer, accounting officers, accounting authority or accounting authorities, as the case may be, any loss resulting from unauthorised, irregular, fruitless and wasteful expenditure, as defined in any applicable legislation relevant to the auditee, and any other losses suffered by the auditee, including:

(i) Money due to the state, which had not been collected; or

(ii) money which had been improperly paid, if, in his or her opinion, a satisfactory explanation for the failure to recover the loss was not furnished, within the prescribed period, by the relevant accounting officer or accounting authority.”

The proposed amendment, according to SAICA, created issues. For example:

• Duplication of effort – the AG would be getting involved in activities that were within the mandate of other state institutions, such as the National Prosecuting Authority’s (NPA’s) Asset Forfeiture Unit
• Independence -- the involvement of the AG in collections against accounting officers and authorities would most likely lead to an intimidation threat to the independence of the AG.
• Capacity – the AGSA may be unable to trace former accounting authorities or accounting officers, as they may be outside state entities at the time the loss was discovered.

Responsibility would be better placed in an institution with authority to prosecute and recover assets on behalf of the state.

Finally, Section 20 states that “Section 20 of the principal Act is hereby amended by the substitution for subsection (2) of the following subsection:

(2) An audit report must reflect such opinions and statements as may be required by any legislation applicable to the auditee which was the subject of the audit, but must reflect [at least] an opinion, [or] conclusion or findings on—

(a) [whether] the [annual] financial statements of the auditee [fairly present, in all material respects, the financial position at a specific date and results of its operations and cash flow for the period which ended on that date] in accordance with the applicable financial reporting framework and legislation;”

SAICA suggests that the reference to “audit” in section 20(2) should be changed to “engagement,” to allow for inclusion of other types of outcomes, as an audit could not produce findings or conclusions, so that the sentence reads as follows:

“An engagement report must reflect such opinions and statements as may be required by any legislation applicable to the auditee which is the subject of the engagement, but must reflect [at least] an opinion, [or] conclusion or findings…”

SAICA’s understanding of Section 20 was that it allowed for limited assurance engagements as opposed to reasonable assurance engagement, and cyclical audits and reviews over more than one financial year for low risk auditees. Limited assurance engagements were more cost effective.

SAICA supported the amendment, provided that there were proper criteria to determine the type and frequency of engagements to ensure that the AGSA was still able to discharge its constitutional mandate.

Discussion

Mr Singh (IFP) appreciated everyone’s input, saying it was great that the Committee was seated with lawyers, accountants, auditors and a number of regulatory bodies. He added that recently a number of prominent organisations had been named as being involved in corrupt activities, and asked what their opinion on these revelations was.

Ms Soopal said SAICA was unable to comment on the question as there was an inquiry going on and SAICA had attended those inquiries. As a result, she was unable to comment.

Institute of Internal Auditors

A delegate from the Institute of Internal Auditors (IIA) said that dealing with issues of implementation in totality was something South Africa needed to resolve. There was a role that internal auditors could play. On the issue of corruption, he said the internal auditor of a municipality had contacted him because was being pressured by the auditing committee and the municipal manager to remove findings that had been outstanding for three years. He had told the auditor not to do that. This example highlighted how having a law on paper was not enough -- adequate implementation was important. Getting to the root cause of issues was important.

In conclusion, the Institute of Internal Auditors supported the Bill and saw it as an opportunity to bring about accountability.

Discussion

Mr Singh asked the IIA’s opinion on municipalities appointing consultants to do the job of internal auditors.

Mr McLoughlin wanted to know what the correlation between internal auditors, external auditors and the AG was.

Ms P Bhengu (ANC) asked the representative to expand further on the training of internal auditors.

The Chairperson asked whether there was a minimum requirement for one to be an internal auditor.

Response

The IIA responded that there were two qualifications in the field of internal auditor -- internal auditor technician, and manager of internal audit. That was the formal structure. Unfortunately, there was no legislation that forced internal auditors to be registered, which was the issue. In addition, some municipalities did not have the funding to appoint people. As a result, they ended up appointing people who were not qualified to do the job of internal auditing, and the IIA had no control over that. The organisation normally worked with the Treasury, AGSA and SAICA. A connection with the AG had not been adequately formed.

The Chairperson asked whether all the regulatory bodies present were trying to address the same thing. The general response was that that was a debate for another day.

South African Institute of Government Auditors (SAIGA)

Mr Manfred Moses, Chief Executive Officer: SAIGA, said the Institute specialised in public sector external audits. In principle, it supported the Bill, but had some comments. He argued that the Bill was that the ramifications and implications of the Bill were not clear enough. It appeared to be quite broad and seemed to do things that were outside of its mandate. He suggested that the appeal process should use a framework similar to the South African Revenue Service (SARS), which had a tax court. In this context, it would perhaps be an accountability court. He said that a process via an accountability court would be quicker than following the normal procedure of the courts. He added that the suggestion could help in recovering money lost and in holding people accountable.

Discussion

The Chairperson stated that the Accounting Officers had to assist in tracking those who broke the law. He commented that if a specialised court, and thinking out of the box, would help in fighting corruption, then so be it. He highlighted the importance of having something of great quality before taking it to Parliament.

Association for the Advancement of Black Accountants of South Africa (ABASA)

Mr Mbusiswa Ngcobo, President: ABASA, suggested that the Bill should make changes to further advance the objectives of the Broad-based Black Economic Empowerment (BBBEE) Act, through the Auditor General. Section 13G (1) of the BBBEE Act stated that “all spheres of government, public entities and organs of state must report on their compliance with broad-based black economic empowerment in their audited annual financial statements and annual reports required under the Public Management Act, 1999.” ABASA proposed that the AG look at the compliance with BEE by municipalities and the public sector. The Association suggested an enhancement feature where the AG could report on the matter. He said that if one picked up a latest financial report, one did not see what the public entity plan for advancing BBBEE was, nor performance information.

Discussion

The Chairperson countered that if this suggestion was added to the Bill, somebody else could come and say that the AG must report on disability compliance, women’s compliance, and all sorts of compliances that were government objectives. Also, if this was allowed, others may argue that the AG was over-reaching.

Mr Singh agreed, and suggested that Treasury should assist in ensuring that departments reported on BBBEE compliance.

Mr McLoughlin favoured the idea, but argued that the burden should not be put on the AG.

Ms Bhengu asked whether all of these institutions were willing to work with the AG to report some of the fraudulent activities that were happening, to assist the AG in doing what he was supposed to do.

The Audit General commented that there were specialised units who had the skills to do the kind of work that was being suggested, as it pertained to BBBEE issues.  He added that whenever there was a word that involved ‘audit’, people immediately thought of the Auditor General. He stressed that the Office of the AG had limitations. It was aware of things it could and could not do, even if those things carried the word ‘audit’. Indeed, most things were auditable, but they required different people and different skills to do them. However, the Office would play some role to assist where it could.

Response

Mr Ngcobo agreed with the scope issue, and that perhaps Treasury should be involved. He proceeded to put forth a challenge before the Committee. He stated that reports may indicate that there was compliance regarding BBBEE, but one found that in reality this was not the case. How could this issue be resolved? He stressed the importance of having a mechanism that would address BBBEE compliance. He acknowledged that he was lobbying, but he was also addressing the “big elephant in the room.”

The Chairperson thanked the participants for their commitment and robust engagement. He said that on Tuesday, the Committee would be seeing National Treasury, where the issues raised at this meeting would be presented. The Committee would start deliberating on the Bill on Friday. He reminded the attendees that they had until the end of next week to influence the Committee.

The meeting was adjourned.