Draft Public Audit Act Amendment Bill: National Treasury briefing

Standing Committee on Auditor General

13 March 2018
Chairperson: Mr V Smith (ANC)
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Meeting Summary

The National Treasury (NT) argued that the proposed power for the Auditor-General of South Africa (AGSA) to refer undesirable audit outcomes for investigation, posed a risk to AGSA independence. It could result in duplication of the roles of Accounting Officers and Accounting Authorities. There could be duplication of investigations by the affected entity itself, or by external bodies. Additional functions with respect to investigations and recovery of losses could draw resources away from the AGSA auditing mandate. A debt recovery role could undermine AGSA’s primary function.

NT proposals were, inter alia, that referral of investigations had to be limited to organs of State, and not to private bodies; that AGSA was only to step in for recovery of losses if the PFMA or MFMA were not followed by Accounting Officers/Authorities; that if AGSA issued a certificate of recovery, it had to be done by relevant institutions in terms of applicable legislation and institutional policies; that the AGSA and relevant State organs participate in the Anti-Corruption Task team in the Presidency; and that the framework be strengthened that held Accounting Officers/Authorities responsible for the failure to recover money, through additional measures such as PFMA and MFMA regulations.

In discussion, there was agreement with the NT that the AGSA had to retain its independence, but some of the arguments and proposals were contested, chiefly because there was a sense of urgency among the ANC and EFF that the AGSA had to be empowered towards assisting with speedier and more effective recovery of State funds lost through irregular expenditure. The Chairperson made it very clear that the Standing Committee wanted to see things done differently, and the EFF provided strong backing for that when it told the NT that its proposals could be put in effect once the Integrated Financial Management System (IFMS) was in place, but the crisis of State funds lost had to be dealt with in the present, and the AGSA had a crucial role to play in that. The NT also came in for criticism as a department, for non-compliance and not fulfilling its role effectively. An ANC Member commented that the NT was not to see itself as equal partner to the AGSA. There were question marks around the amount spent on the IFMS. The DA did not take up a strong position, preferring to point to the lack of utilisation of existing systems and legislation for recovery of losses. A matter that was discussed at some length was that of instructions and outsourcing by the Executive Authority, and the possibility of recovering money from Ministers. There were remarks and questions about constitutionality, the Presidential Anti-Corruption Task Team, and recovery of losses at the provincial and local level.

Meeting report

The Chairperson said it was the beginning of the last mile of the road for the Bill. The AGSA would be heard on the following day, and then Members would incorporate all inputs and present the Bill to the National Assembly (NA). Over the previous two months, the NT and the AGSA were asked to do behind the scenes work. The engagement of the day would be robust, but it was not to be seen as adverserial. When the Bill was presented to the NA, it had to stand up to constitutional mustering. It also had to stand the test of time. Much ground had been covered. He asked the NT to proceed with its presentation.

National Treasury on the draft Public Accounts Amendment Bill

Ms Zanele Mxunyelwa, Acting DDG, Office of the Accountant-General. The proposed power for the AGSA to refer undesirable audit outcomes for investigation posed a risk to AGSA independence. It could result in a duplication of the roles of accounting officers and accounting authorities, as set out in the PFMA and MFMA. There could be duplication of investigations by the affected entity itself or external bodies. Additional functions with respect to investigations and recovery of losses could draw resources away from the AGSA auditing mandate. A debt recovery role could undermine AGSA’s primary function. NT proposals were, inter alia, that referral of investigations had to be limited to organs of State, and not to private bodies; that AGSA was only to step in for recovery of losses if PFMA and MFMA policies were not followed by Accounting Officers/Accounting Authorities; that if the AGSA issued a certificate of recovery, it had to be done by relevant institutions in terms of applicable legislation and institutional policies; that AGSA and relevant State organs participate in the Anti-corruption Task Team in the Presidency; and that the framework be strengthened that held the Accounting Officer/Authority responsible for the failure to recover money, through additional measures such as PFMA and MFMA regulations.

Discussion

Mr N Singh (IFP) said it had been stated that there had been technical discussions with the AG. He asked for confirmation that the AG had engaged the NT. It was first mentioned that there were 100 cases, and then 200, it called for additional mechanisms to assist with the recovery of funds lost through maladministration and mismanagement. He asked if what was proposed was complementary to the role of the NT in terms of the PFMA. It appeared that it was not being fulfilled adequately and effectively. He refered to constitutionality. Some big metros were saying that it was unconstutional in terms of section 181. They were referred to section 181(4). He asked if amendments could be made applicable to all spheres of public entities, and whether it was constitutional.

Mr A Mclaughlin (DA) commented that it was said that amendments could lead to duplication of roles. There was already duplication. The AG recorded R50 billion irregular expenditure in the previous financial year. Government was failing. Things that were in place were not utilised. Problems with the courts were not addressed. Prosecutors wanted exiting cases that would get their names in the papers. There was no appetite for monetary stuff. It was seen as boring and was shunted. There had to be a mechanism to address the problem. If the perception was that what was already there was effective, it would not have been necessary to suggest amendments. The AG identified problems and in the following year nothing changed. The AG could only address problems if it was still there after a year. Neither the AG nor the NT were taking action.  To get the ball rolling there had to be action. The current situation was that more laws were passed, but existing ones were not enforced. It was proposed that the AG was not to do recovery, and that it had to be outsourced to existing organs of the State or the private sector. Municipalities were already doing extractions. Use had to be made of available systems.

Ms D Carter (COPE) said it was suggested that the AG reduce audits to once in three years. The AG worked with samples. The Spoornet sample was R500 million. Samples had to be random. If it was known that only R500 million was done, it would be easy to forfeit R50 million three times a year. The AG had a problem collecting the 1% audit fees. The NT did not pay to municipalities but directly to the AG. It was stated that not all irregular and unauthorised expenditure resulted in loss. There was too much leniency and no consequence management. Things were too eassily condoned. Things were either right or wrong.

Ms N Mente EFF) said the reason why the AG got to the point of amending the law was because there was a lack of compliance with the PFMA and the MFMA. Proposal 3 stated that “if the AG issued a certificate of recovery, the recovery had to be done by the relevant institutions in terms of applicable legislation and institutional policies”. It was not done. Neither the NT nor the departments or municipalities complied. It was no use to repeal, amend or strengthen. The AG had satisfied itself that there was irregular expenditure. There was not value for money at all times. There could not be value for money when people inflated prices. The AG had to step in. There were problems with instructions imposed by the Executive Authority, which led to litigation.  Unlawful instruction was unlawful and wrong. The Accounting Officer (AO) had to resist, but did not do so because he knew that the department would cover litigation. Problems were only discovered later. The AG had to pick it up timeously and deal with it. Financial irregularities were only dealt with after two years.

Ms S Shope-Sithole (ANC) referred to the extension of the period for the AG to three years. It had to be more regular. People complained that times were difficult, but State resources were still adequate. Irregular expenditure had to be the starting point. If there was no waste, there would be enough money. There was a lack of accountability. She said she would personally not blame municipalities or SOEs, but rather the NT itself. The AG was complaining about lack of leadership and compliance in the NT. There had been no compliance in the matter of the Integrated Financial Management System (IFMS). The AG had complained about the lack of consequences for the R4.2 billion that thad gone lost. The NT was the hope of the country. When downgrading was done, the Treasury was checked. If it was not compliant, it could lead to downgrading. Things had to be done on time, and dealt with at ground level, where the whistle blowers were.

The Chairperson noted that the NT proposed that the AG get involved with the anti-corruption task team. He suggested that the meeting of the following day with the AG be attended. He had heard what Mr Singh was talking about. The Hawks were saying that they had 100 cases. All parties agreed that the organs that had to fight corruption lacked capacity. He referred to the 1% that had to go to AGSA. It crippled the AGSA if it was not paid. The NT knew about audit fees beforehand. The NT was keen to give guarantees to SAA. He asked why it could not come up with a bulk plan for audit fees. To lose SAA would be less detrimental than losing AGSA. He referred to non-compliance and collection issues. The NT stated that it did recovery work, but it was never told what was recovered. It had to be able to say that out of R1 000 lost through corruption, R700 was recovered. There had to be information about what was recovered, and also about consequences.

Ms Mxunyelwa responded that there were cases that the NT could not resolve because it did not know where the trouble was. Since 2010, the NT had had 100 cases in court. If other law enforcement agencies were added, there could be 200 critical cases. The NT observation was that criminal cases were harshly dealt with, but there was a lack of understanding when it came to prosecution of commercial crime. The NT had set up a unit to to prosecute commercial crime, that referred to the PFMA. There were challenges around processing. The NT did investigations and there were many reports, but it remained with departments and was never processed. The NT was convinced that the NPA was not capacitated enough. It was willing to train people to be able to prosecute. There were prosecutors that were turning to commercial crime, but there were still cases that were stagnant for three years because prosecutors were tied up. A multi-agency approach was needed that combined the forces of the SAPS, the NPA and the NT. There was a challenge to the State to be effective. It was better if the AGSA was a feeder, that made cases uncovered known to the relevant authority. For the SIU to investigate, it needed a proclamation from the President. It could not report to the entity that summoned it. The suggested three year period was relevant to entities with small budgets, like the Language Board, it was not necessary to audit such every year. Risks attached to small entities had to be checked. It could not afford to pay the AGSA more than 1 percent of its assets. The NT would propose that the NT and the AGSA meet annually. Currently AGSA audited without planning how much it would charge. The total fee to the AG had to be agreed on.

She referred to the statement that not all irregular expenditure disclosed caused losses. There was a case in the Eastern Cape where R205 million in irregular expenditure was found, dating back to 1998. It was disclosed as irregular expenditure because tender advertisements were not in the tender bulletin. There was non-compliance with SCM prescriptions. But the accounting officer took corrective actions. The non-compliance was related to how the tender was advertised. But the work was done and there was value for money. Non-compliance did not always result in loss. Figures disclosed had to be unpacked. There might have been an element of corruption in that certain individuals were preferred. There were new NT regulations to enhance the PFMA and the MFMA. It created a good framework to prevent irregularity. On IFMS, she said there were cases brought by AGSA against NT officials. The IFMS had to be moved forward to assist government to have transparent financial management. It had to be a successful tool of government. There were firms sitting for 40 years, that had become obsolete.

The Chairperson suggested that the proposals be looked at individually, to structure the discussion. Proposal one stated that referral of investigations had to be limited to organs of State and was not to include private bodies. The NT stated that it was discussed with AGSA, but the Committee was not privy to that.

Ms Mente remarked that State organs that dealt with commercial crime had to outsource for forensic investigation. The State organs did not have forensic investigation capacity for commercial crime. She asked what it was that was not to be outsourced.

The Chairperson asked how things had progressed to the point where the NT felt compelled to make proposals.

Mr Kimi Makwetu, Auditor-General, commented that technical discussions between NT and the AGSA claimed, were not known to AGSA. AGSA did not want to be implicated. AGSA views were not incorporated.

The Chairperson asked how the NT had arrived at its proposals. He told Mr Makwetu that he did not want to get into a discussion of whether there was consultation or not. It would divert the discussion.

Mr Mclaughlin commented that the proposal was ambiguous. Sometimes private bodies were complicit as a third party in a contract. He asked if investigations or investigators had to be limited.

Mr Singh appealed to the NT and AGSA that there had to be consultation. The two entities were on the same side.The two parties had to meet and inform the Committee on the following day, what they agreed and disagreed on.

The Chairperson said the Committee was not concerned about disagreement between the NT and AGSA. However, financial implications had to be discussed. Still the Committee would make its own decision.

Ms Shope-Sithole commented that the AGSA had to state whether it had the capacity among its staff, or needed assistance.

The Chairperson said AGSA did not have quantity surveyors or lawyers. He asked if the NT was saying that when the AG was doing an investigation, it could not approach Murray and Roberts. The NT proposed that AGSA not do outsourcing, but was silent on the Executive doing it. One could go to any number of State departments, and Bergsman was doing their investigations. He asked why it was acceptable for the Executive to outsource, who had a lot of money, whilst Parliament, who had little money relative to the Executive, was limited. When he spoke of investigation, he assumed that it was part of the auditing process.

Adv Empie Van Schoor, Legal Division, NT, agreed with the Auditor-General that there had been no agreement between the NT and AGSA. The proposals were the NT’s own, there had only been technical discussion, especially with lawyers..

Ms Mxunyelwa responded that AGSA was saying that it would refer, and that meant that it would investigate. That section of the Bill had to be corrected. If AGSA stated that it referred, it was not accountable or responsible for the investigation. If a private firm did an investigation, it would act on AGSA’s behalf, hence AGSA would be doing the investigation. The term “referral”had to be clarified. The NT did not have a mandate to do a criminal investigation. It would refer the matter to a criminal investigation authority. Then the NT was not responsible for the investigation, if anything went wrong. It was the responsibility of SAPS and the NPA. The term “referral” made AGSA to be not responsible. That was the basis for the proposal about private bodies.

The Chairperson said AGSA would do an audit, and would get in a sample that showed that something had been sold at too high a price. There was a potential for corruption. The NT was suggesting that it had to be referred to an agency with capacity, after AGSA had done its own investigation. The Bill stated that if there was prima facie evidence, there had to be referral to the Hawks, the SAPS or the NT. The AGSA would not refer it to a private firm or the Public Protector. Proposal 3 stated that AGSA could refer an undesirable outcome to an appropriate body. It had to be stated what the appropriate State agency was to be.  AGSA would only step in after everything else had been done according to the PFMA and the MFMA, and once the Accounting Authority had failed to follow up, as well as the NT and the Minister. That meant that collection was off the table, from the AGSA point of view.

Adv Van Schoor agreed that the certificate of recovery was only to be issued when it was clear no action had been taken.

The Chairperson continued that the AGSA would do an investigation in 2010 and pick up on fruitless and wasteful expenditure, and would come back in 2011 to ask what had been done about that. He asked if the NT was saying that at that point AGSA could not come back and say you shall do it. The Committee was saying that AGSA had to instruct the entity to do something. It had to be able to go to the AO and ask what had been done, and what was collected. It had to be able to issue a certificate, and if the entity did not comply with it, it was in contest.

Ms Mxunyelwa replied with reference to proposal 5, that the NT proposed the strengthening of the framework that held the AO responsible for the failure to recover money through PFMA or MFMA regulations. It was not stipulated like that in the Bill. In the proposed framework it would be an instruction note. It could be used for monitoring. It was already in the PFMA and MFMA but had to be stated more clearly so that the AG could use it as a point of reference.

The Chairperson commented that he was not opposed to issuing a cerificate after year one. He asked if the instruction note could be issued after year one.

Mr Singh noted that the NT had mentioned section 64, which related to Executive directions with financial implications. Amendments focused mainly on AOs. He asked what the legislation prescribed about recovery from the Executive, where the AO was overridden.

The Chairperson said that all were agreed that there was a gap. It had to be stated that the Minister could be gone after as well.

Ms Shope-Sithole remarked that there was no legislation to prosecute someone who had done wrong and had run away. Yet the Constitution stated that Parliamentary Committees could call anyone to account.

Ms Mxunyelwa replied that in terms of section 64, if it was the Executive, it had to be taken to the Public Protector, who was the custodian in that instance. It had to be captured how the AGSA could act, to issue a certificate to the Executive. Referral could be to the NT, the SIU, or the Public protector.

The Chairperson asked if it had to be put in the principal Act or regulations that AGSA could collect after a year. He asked where it had to be stipulated. He would suggest the regulations, as it was a method of work.

Ms Mente commented that AOs were accountable for State funds, not the Minister. If Ministers issued unlawful instructions, AOs had to learn to say no.

If the AG had to incorporate others, then dealing with the Minister via the Public Protector could only happen two or three years later.

Adv Van Schoor responded that section 64 only referred to unauthorised expenditure. If unauthorised expenditure resulted in loss and the AO refused to implement, it could be dealt with through the regulations, for recovery from the Executive.

The Chairperson said that for whatever contravened the PFMA, the buck stopped with the AA, whether it was a department or the board of an SOE.  The Advocate had pointed out that there was a gap, in that the AA could be overruled by the Executive on unauthorised expenditure. He asked what the difference was between unauthorised and irregular expenditure.

Adv Van Schoor responded that in terms of section 64, unauthorised expenditure exceeded the vote. If the Executive insisted, it could be put into writing and it could go ahead. There were no provisions in the PFMA for fruitless and wasteful or irregular expenditure.

The Chairperson opined that the PFMA had to be corrected. He referred to proposal 7. He agreed that it was critical for AGSA to stay independent. The Committee had a last opportunity in terms of addressing institutional weaknesses of agencies. He was reluctant to tell Parliament who had to do what. If AGSAs  hands were to be tied and investigations had to be given to the Hawks or SAPS, they could sit on it for ten years. He asked what the NT had to say about State capacity to investigate and recover, and the ability of the Hawks, the SAPS, the NPA and prosecutors to prosecute and recover. Unless the NT came up with convincing arguments, the SC would follow its own course. The same course could not be continued with.

Ms Mxunyelwa replied that a multi-agency approach was needed to deal with fraud and corruption. There were things that the NT wanted to do, but it was limited by its legislative mandate. Criminal investigations into fraud and corruption had to follow where the money went. All law enforcement agencies had to be enhanced. The police was used to dealing harshly with crime, but capacity was needed to deal with commercial crime, especially by the NPA. The Hawks were sitting with 200 cases, and there were no hands to take it to court. There was limited capacity in the country. The NT and AGSA were helping through compiling a manual to develop case law, around the PFMA and MFMA, for effective convictions of commercial crime. Recommendations would be made to the NPA. Prosecutors could be trained. More cases were flowing to commercial crime, but prosecutors did not understand the PFMA and the MFMA. There were clear cases where people rightly had to go to jail, but the cases remained locked away. Money had to come to the National Revenue Fund. R500 million had been recovered at the NT through the NPA asset forfeiture, but there were not enough police and prosecutors. Whether the AG or anyone else did it, when hampered by the legislative mandate, there had to be reliance on the next agent of the State. It had to be effective.

Ms Mente remarked that she was hearing what the NT was trying to fix. But there were problems with the current system. Money was flowing out through fruitless and wasteful and irregular expenditure. The AG picked that up every time it audited. The Committee wanted the AG to be able to deal with that in the present. Once the IFMS was in place, what the NT proposed could be done. But currently there was non-adherence, and no systems. The SAPS was not on the recovery level, it could only deal with the criminal element. There was still a void, people could be locked up without money recovered. She had no problem with what the NT recommended, but it could only be operative in the next administration. The AG had to be able to take over in the present..

Mr Singh remarked that it was not the first time that he heard that the Presidential Coordinating Team did not work. It was supposed to bring the NT, AGSA and security together, but the question was who had to coordinate the process. He asked who convened meetings, whether it was the NT.

Ms Mxunyelwa responded that the anti-corruption team was unstable, due to the change in leadership. It was supposed to be led by the Head of the Directorate for Priority Crimes Investigation (DPCI), but that agency had to be properly structured in terms of accountability.  It was under the SAPS, which meant that it could not make independent decisions for the anti-corruption task team. There were decisions to be made about which cases were to be taken, who would be assigned to it, and prosecutors who had to be allocated. When people stole money from the State, part of the money recovered was used to fight legally. All money was supposed to come back to the State.There were dealys with leadership of the forum.

Ms Shope-Sithole insisted that the NT also had to be audited. It was not an equal partner of AGSA. People in the NT who had to understand the PFMA and the MFMA failed to do so.

The Chairperson referred to proposition 5. There was a swing away from debt recovery. The R33 million mentioned by the NT to cover additional functions to the AG, could become R10 million or R50 million. Cost implications had to be reconsidered. When the Bill was submitted to Parliament, there had to be a cost implication. The NT and AGSA had to tell the Committee what it would cost the State. Debt recovery was not an AGSA responsibility, going forward. The R33 million figure had to be adjusted, if debt collection was included in it. There had to be a figure, by the time the Bill was taken to the House. If necessary, AGSA could be given a final draft of the Bill minus one. Local government would ask who was the Accounting Authority (AA), whether it was the Mayor or the municipal manager or the council. When the AA was mentioned in the House, it knew that it referred to national. But the question was what was happening at the local level. No one was collecting for local government corruption. If the responsibility had to be given to the municipal manager, it was said that he had to receive a risk allowance. Otherwise the country would run dry of capable municipal managers. It could not be given to someone who would say that he would not do it because the Mayor overruled him. It was similar at provincial level. The question was how to collect money at the provincial level, and from local government. The Committee was supportive of the reassurance that the IFMS would bring transparency. But the question was if it would be filtered down to provinces. There had been a case before Scopa, from North West province, where the Premier handed coordinating responsibility to an IT company. He asked if every province would have its own IFMS. He asked if things were moving to a point where one could press a button and know how much money went to housing across government. The question was why North West province was currently with SCOPA.

Ms Mxunyelwa responded about recovery. If local government corrective action was not implemented, the Provincial Treasury would step in. The office of the Accountant-General would oversee local and provincial government in terms of the MFMA. In terms of the Systems Act, there were certain metros that were not delegated to the Provincial Treasury, but were accountable to the NT, if the AO did not do what was required.  There was a government moratorium linked to IFMS, against provinces buying other systems. When implemented, it would cover national and provincial. Pilots were undertaken in different provinces to make sure there was reporting in terms of accounting practices. It facilitated consultation and transparency of financial information. The NT looked at provinces buying new systems, to prevent duplication that caused irregular expenditure.

The Chairperson asked if there was a provincial Accountant-General in the North West. It seemed that the matter was brought to her attention. (NT indicated that it was). He told AGSA that it had had the benefit of the doubt over the preceding week. It could defend the Bill on the following day. It was AGSA who originated it. It would be talked to on the following day. After that, the Committee would sit about it, to come up with something that would please the NT, the legislature, and the country. It could only be possible with thorough consultation. Consultation would be concluded on the following day. The NT could contact the Committee Secretary, if there was anything that it would still like to add. The Committee would meet on the following day, in the Good Hope building, at 9h00.

The Chairperson adjourned the meeting.

 

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