Public Audit Act Amendment Draft Bill: briefing on public comment

Standing Committee on Auditor General

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

The Parliamentary Legal Adviser responded about comments and proposals received during the public participation process. A number of submissions challenged the constitutional validity of empowering the Auditor-General (AG) to issue a certificate of debt and to collect that debt. It was felt that to empower the AG in that way would encroach on the powers of other organs of state. The Legal Adviser’s view was that additional powers had to be shown to be rationally connected to the AG’s primary function. Comparative international law supported that view. The AG would not usurp the powers of other organs of state. There were concerns that the term “former” in the definition of the Accounting Officer/Accounting Authority (AO/AA) would make the Bill retrospective. But it was only to hold AOs/AAs to account who failed to act in terms of an audit report issued after the Bill had come into operation. There were concerns about the definition of debtor being limited to the AO/AA. In terms of existing financial laws, the AO was legally obliged to take steps to prevent losses, and to recover the loss if it occurred. There were concerns about mandatory and discretionary audits. There were objections to the proposed recovery process. It was not believed that the issuing of a certificate and recovery of debt from an AO was unconstitutional, but the procedure followed was not to invite constitutional or legal challenges. Submissions raised concerns about the adverse impact of a debt recovery process on AG resources. The preferred option was for the Executive Authority (EA) to collect the debt in terms of an entity’s own debt recovery policy. The presentation also considered excess audit fees; and whether the AG could make regulations.

The presentation by the Content Adviser covered, among others, concerns submitted about the inclusion of the term “former”, as related to the AO/AA, and a possible retrospective effect; the additional function of debt recovery and constitutional independence; the issuing of a certificate as a final demand for the debtor to comply; depositing of recovered money into the National or Provincial Revenue Fund, the establishment of a remuneration committee to recommend on the salary and allowance of the Auditor-General, done by the AG himself;

Audit fees that exceeded one percent of total capital expenditure; and empowerment of AGSA to make regulations pertaining to any matter to facilitate the application of the Bill.

In discussion, the 3-tier recovery process received considerable attention. The Committee agreed with the Legal Adviser that AGSA had to be empowered to refer a matter for investigation at an early stage. The Chairperson opined that it was the kind of power that the SC was asking for. There were remarks and questions about the liability of AOs who had resigned; the constitutionality of remedial action; mandatory and discretionary auditing; liability if the Executive Authority was at fault; an internal resolution mechanism; audit fees; international auditing; empowerment of AGSA to issue regulations; the salary and allowance of the Auditor-General, and the recovery mechanism.

Meeting report

Opening remarks

The Chairperson announced that it was the last internal consultation on the Bill. The legal experts and the Content Adviser would be presenting. Delegates from the Attorney General’s Office were present. There would be deliberations in the following week. 45 minutes would be granted to the Legal Adviser, and 15 minutes to the Content Adviser. It was hoped that it would be possible to instruct the drafters by the end of the day. If it could not be done on that day, it could be done on the coming Friday. He hoped that things could be wrapped up on the day, so that the drafters could work on the Bill over the Easter recess, and after that it could be taken to the House.

Mr N Singh (IFP) apologised in advance for not being available the coming Friday, and also did so on behalf of Ms D Carter (COPE).

The Chairperson noted that apologies were received from Mr A Mclaughlin (DA), and Ms N Mente (EFF). He asked the Legal Adviser to proceed with the briefing.

Response by Parliamentary Legal Advisers on comments and proposals received during the public participation process

Ms Fatima Ebrahim, Parliamentary Legal Adviser, presented. A number of submissions had challenged the constitutional validity of empowering the AG to issue a certificate of debt and to collect that debt. Submissions indicated that to empower the AG to issue a certificate would encroach on the powers of other organs of state tasked with debt recovery. The legal adviser’s view was that additional powers had to be shown to be rationally connected to the primary function of the AG. Comparative international law supported that view. The AG could never usurp the powers and functions of another organ of state.

Concerns were raised that the inclusion of the word “former” in the definition of Accounting Officers (AOs)/Accounting Authorities (AAs) would make the Bill retrospective. But it was not intended to be retrospective. It was intended only to hold to account those AOs/AAs who had failed to act in terms of an audit report issued after the Bill had come into operation.

There were concerns about the definition of debtor limited to the AO/AA. In terms of existing financial laws, the AO was legally obliged to take steps to prevent losses, and if a loss occurred, to determine the source of the loss and to recover the loss from that person. Concerning mandatory and discretionary audits, the AG dilemma was that Parliament had passed legislation requiring the AG to audit institutions without regard for capacity, and budgetary and other constraints.

There were objections to the proposed recovery process. The legal advisers did not believe that the issuing of a certificate and recovery of debt from an AO was unconstitutional, but the procedure followed by the AG was not to invite constitutional or legal challenges. The legal advisers partly supported the 3-tier process presented by the AG, which followed the sequence of the issuing of an audit report with recommendations; the issuing of remedial action; and referral for investigation and the issuing of a certificate

Many submissions raised concerns about the adverse impact that a debt recovery process would have on AG resources. The preferred option was for the Executive Authority (EA) to collect the debt in terms of an entity’s own debt recovery policy. The question of how excess audit fees had to be paid was a policy issue that had to be considered in the light of the AG’s legal obligation to audit. The Legal Advisers also commented on the reporting framework and regulations.

Briefing by the Content Adviser on public submissions that raised legal and policy issues for the Public Audit Act Amendment Bill

The briefing was presented by Mr Xolisile Mgxaji, Content Adviser. The presentation showed in diagrammatic form public submissions, responses from AGSA, and the legal and policy issues involved.

Comments covered the inclusion of the word “former” in the definition of AO/AA, which was said to have a retrospective effect; and the definition of “debtor”, which was seen as confusing. AGSA concurred with the commentators that “undesirable audit outcomes” be changed to “material irregularity”. AGSA concurred that referral for investigation to an “appropriate body” be changed to “relevant law enforcement agency”. AGSA supported the proposal that the National Treasury (NT) or private firms on a pro bono basis had to collect debts owed to the State.

AGSA responded to concerns about the issuing of a certificate by proposing the 3-tier approach of recommendation, remedial action and referral for investigation. Commentators were concerned about the fact that the Auditor-General himself was empowered to appoint a committee to make recommendations about his salary, allowance and benefits. AGSA disagreed with that.

There were concerns about a clause empowering AGSA to make regulations that facilitated the application of the Bill, as there could be conflict of interest. AGSA disagreed, arguing that it was the owner and subject matter expert in relation to the PAA.


Ms D Carter opined that it was critical that the Content Adviser sit down with the Legal Adviser. There were contradictions between what the two were saying and she found it difficult whose advice to follow.

The Chairperson replied that everyone had to be allowed to say their say. It did not matter if they disagreed with each other. The Committee would make the decisions. Various views could be presented in debate as it promoted various views, but at the end of the day, the Committee would express a policy opinion. He agreed with the statement by the Legal Adviser on page 16 about former AOs that had failed to act. The AO had to account during his term. Even if he was gone, he had to be called back. He had no problem with it.

Ms Ebrahim replied that there was a legal problem. The AO had to be given time to fix matters. If he left during the six-month period, he would not have had the benefit of time to fix up the matter. Former AOs who had resigned after the six-month period could still be pursued because they had had the time to fix the matter. But the AO who left before the six months was up, could argue that he had not had the six-months necessary to deal with a matter.

The Chairperson sketched a situation where AGSA issued a disclaimer, and the AO had left the department. There would be a report to SCOPA, with a new AO then appointed. He thought that what the drafters had tried to achieve was that, if the AO left before the report reached Parliament, he could be held accountable. People went to other departments or local government to escape consequences. The principle was that the AO was guilty if he did not prevent loss. He could be hauled before a court, if he failed to do so. The term “former” did not work for him. He asked what the intention had been with the introduction of the term.

Mr N Singh (IFP) remarked that it was the intention of the Standing Committee not to allow people to get away with shirking their work, but the assumption had been that the person would still be in the public service. It was not about going back twenty years. If someone went to the private sector, the question was whether there was anything in the law that would hold him criminally responsible because the intention was simply to hold people accountable. He had had experience of people in the Education Department whom the Department had got rid of, but who went to another province. There was no blacklisting of people who had left a department to escape the consequences. He understood the point about retrospectivity, but it had to be clarified what the Committee meant by about retrospectivity. People got away with murder. People were resigning in Durban and going to other provinces.

Ms Z Dubazana (ANC) agreed that there could be liability after six months, if the person was still there. The concern was about losses in a financial year but those could not be identified until after the year. She reminded the Committee that the Auditor General looked at ten points and that financial loss was only one of the points. The AO was responsible to take action, not only in cases of financial loss.

Ms Carter remarked that the buck stopped with the AO, whether he was still employed, or had resigned, during or after the audit.

The Chairperson said that no one had a problem with the recovery leg, but there was also a liability leg. There were problems with the liability leg of the AA.

Ms Ebrahim stated that the audit report and recommendations had to be binding from day one. AGSA insisted that time had to be given to AAs/AOs to fix matters in terms of financial law. If the AO resigned before the remedial action note was issued, there was a legal difficulty as the AO could plead ignorance. However, it was not advisable to focus exclusively on financial recovery and to let the AO off the hook for everything else. She pointed out that the AGSA could issue remedial action at any time, according to the PFMA and MFMA. There were many instances, apart from financial loss, where the remedial action could be immediate. AGSA had to grant a time period in which the AO could act, and it might not need six months. If a person did not attend a meeting and had caused wasteful expenditure, they could be dealt with in seven days. Proper systems had to be in place to make it work but it could be crafted in the Bill. Officials could be dealt with through HR procedures. Her concern was with the long time that lapsed before AGSA demanded remedial action, which watered down the initial report.

Mr Singh referred to the constitutionality of remedial action. It had been skipped when the way forward was discussed. The question was whether AGSA was empowered to do that. It had to be carefully crafted. He suggested consideration be given to how remedial action had been crafted for the Public Protector.

The Chairperson sketched a situation in which Vincent Smith was the AO on 1 January. Negligence or active participation had caused loss and he had left. Ms Carter, the new AO, worked 12 months back. Ms Carter was given six months to remedy matters. It had to be found out who or what had caused the loss. If Ms Carter said it had been Vincent Smith’s fault, she had to be able to find Vincent Smith. When the Committee had referred to a ‘former’, it had not meant only the AA/AO. It could also refer to the person who was guilty of misconduct in terms of the audit report. It could be any employee and that person had to be held accountable for his or her actions, not only the AA/AO. The Bill could perhaps state that former employees had to be found, if still alive. They had to be found and blacklisted.

Ms Ebrahim responded that that provision was already in the legislation. Liability could create confusion, for example, when an AO was held to account for what he did not do. The law already allowed for action against anyone. It was no defence to say that the person was no longer there. When AGSA came back after 12 months, AGSA had to be able to say the AO had been found liable in law, and institute proceedings against him if he had not followed up even if a person had left the department. If the AO had a valid case, and AGSA lost the case, there would be no recovery.

The Chairperson asked that mandatory and discretionary auditing be written in layman’s language.

Mr Singh Committee mentioned that Dr Naidoo had made a valid point (referred to in the Legal Adviser’s presentation). Whether the office of the AG or the staff could do an audit or not, it was not absolved from that constitutional responsibility. When it was claimed that there was no capacity, ultimate responsibility resided with the office of the AG, not the staff. All audits were mandatory, and it was the responsibility of the AG’s office to do them. In terms of section 188(1)(c) the AG had to audit all national and provincial State departments, and any other entity required by national or provincial legislation. (c) implied that AGSA was obliged to audit everything that was under the State. He asked if AGSA had a choice. He did not think so. AGSA could not say that he did not have capacity as it was a matter of course that all institutions had to be audited.

Ms Dubazana asked at what point it became discretionary. The Constitution had to be adhered to, whether there was capacity or not. The AGSA had its own resources but could also depend on other Chapter 9 institutions.

The Chairperson said that, as he understood it, discretion referred to whether there had to be annual audits. The question was whether it was necessary to do an annual audit for a library that only did one transaction per year. Instead of an in-depth audit, an articled clerk could be sent. He understood that AGSA was saying that it had to audit all public money. That was correct but not every entity needed the same level and depth of auditing. He asked if SOEs could be audited. AGSA could say that it would not send in all its troops. But it had to audit all public money, whether by itself or through another agency. But the Standing Committee wanted to say that all SOEs had to be audited.

Ms Ebrahim replied that AGSA was constrained by the Constitution. Not every institution that received money from the state had to be audited. State-owned enterprises (SOEs) and others fell under Sub-Section 2. AGSA could audit them, but the Constitution did not compel it to do so. The Chairperson had asked if fewer troops could be sent in for mandatory auditing. The framework had changed so that one person could go in. If there was no dispute, Section 20 applied. AGSA could not take everyone who asked to be audited. If there was a dispute about discretionary auditing, AGSA had to declare how it used discretion, by looking at the money made. The Constitution provided for discretionary audits. Nothing prevented the Standing Committee (SC) from saying that all SOEs ought to be audited, but AGSA disagreed. AGSA would have to state why it objected to that. It could be built into new legislation that AGSA could say that it could not audit but could assume an oversight role. If everyone had to be audited, there would have to be constitutional amendment.

The Chairperson asked what political decision was expected of the Committee.

Ms Ebrahim replied that if it was decided to build in that if Parliament wanted auditing of SOEs to be mandatory, it had to consult with AGSA. AGSA could not override such a conversation.

Mr Singh commented that the onus was on AGSA to tell the Committee that it wanted to audit a library only every five years, for instance. It was not for the Committee to say what was needed. It did not have the facts. AGSA had to say which ones were to be audited every three years.

The Chairperson commented that if the SC instructed AGSA to audit, AGSA had to inform the SC which entities it considered would need to be audited less frequently, for example, only every three years. He moved on to the 3-tier recovery process. The Content Adviser was saying that 12 months to engage in all three tiers was the way to go, and the Legal Adviser was saying six months was more than sufficient for all three tiers. The Content Adviser was saying that AGSA would make a finding and go to the AO, instruct him to do something, and allow him time to do something. If nothing had been done after 12 months, AGSA would act. Ms Ebrahim was saying the question was why AGSA had to wait if nothing had been done six months down the line. The AA/AO had to do something within the six months.

The matter was complicated by what had been raised about non-financial matters. If it was a non-financial matter, it had to be dealt with immediately, without waiting another six months, especially if there was no policy for firing people. The six months plus six months period was, in the main, about recovery. The three-tier system was to determine at what point AGSA could step in. It could step in immediately if it was non-financial. Even if there was an HR policy, if there had been an emphasis of matter. AGSA could ask after six months why policies had not been adhered to. AGSA could ask after six months if the responsible person had been found. There was no need to wait 12 months to finalise some matters

Ms Ebrahim replied that her issue was not with the time. AGSA was saying that the timelines fitted in with what they were currently doing. Her issue was with the final step of stage 3. For 12 months nothing had been done, the certificate of debt had not been issued, and then the matter first had to be referred to another body, like the SIU. There was no time frame for such an investigation, and yet the certificate of debt could only be issued after that.

Ms Ebrahim stated that her problem was that AGSA would rely on another body, instead of calling for an investigation the moment it came to the attention of AGSA. It would be better for the investigation to commence at the beginning. After 12 months a certificate of debt could be issued, regardless of the outcome of an investigation or other progress made. Otherwise AGSA might have issued an irregularity claim, and the Hawks could say at the end of 12 months that it was financial mismanagement in terms of the PFMA and they could not deal with it. If there was no prima facie evidence of corruption, it was just an official not doing what he was supposed to do. AGSA then had nothing to act on. AGSA could only act when another body accepted its finding as valid. Her opinion was that a finding was valid from the day it was made and reported on. She would ask AGSA why it doubted its own report after 12 months.

The Chairperson agreed that AGSA could not wait 12 months to be able to say to an entity that it could be held accountable for whatever had been picked up in an audit.

Ms Carter agreed that there had to be an immediate response.

The Chairperson said that the SC agreed about timelines. Leeway had to be given for 12 months. Beyond 12 months, AGSA had to act. Consequences had to be inserted in the Bill.

Mr Mgxaji responded that if there was prima facie proof of the amount owed by the AO, but during the investigation, the Hawks or the SIU could find other things and therefore say that the AGSA opinion of the amount of the corruption was incorrect. The certificate of debt had to be issued after the outcome of the investigation was known. If the certificate issued was based on the AGSA opinion, it was merely based on the findings of the AGSA audit and not on an investigation.

The Chairperson commented that if there was a two-tier certification, AGSA could state in its report that there had been theft and provide evidence of it. Even if it was just the tip of the iceberg, a certificate could be issued for that amount. The rest could be handed over for investigation. The process would be that of additional charges made. A second certificate of debt could be issued after the full investigation. It had to be seen if that was legally possible.

Ms Ebrahim responded that there could be irregular expenditure through non-compliance with Supply Change Management principles. A bid might have been given to bidder No 2 instead of bidder No 1 who had scored highest. It could be established through subtraction what might have been saved if bidder No 1 had been used. The AGSA had to act on that.

There could be a corrupt relation manifest in many different forms in the institution and there could be 20 other corrupt ones. The auditee could be punished for what was discovered, and then it could be given to the Hawks. AGSA could use experts as part of its forensic audit to determine amounts.

Mr Singh agreed that it was not necessary to wait. He cited the example of money given to a municipality for a clinic. It had turned out that the material had been used at the Mayor’s house. When AGSA had finished its report, there was prima facie evidence of theft. AGSA was able to act immediately.

The Chairperson agreed that that was the power the SC was asking for.

Ms Ebrahim recommended that a time frame not be put on remedial action. If someone did not pitch for a conference, no investigation was needed and there had to be action within seven days. AGSA would give an instruction to start proceedings. If that was not done, there would be remedial action. If the AO did not act within six weeks, there would be action against him. The AGSA could apply its mind to decide whether 6 months or 12 months would be appropriate, or whether there had to be a shorter time frame.

The Chairperson turned to whether the term “appropriate body” had to be changed. He was against it.

Ms Dubazana opined that the proposal of the Content Adviser be followed, and that the term “relevant law enforcement agency” be used.

The Chairperson remarked that all that the SC was saying, was that actual names were not to be mentioned. It was not necessary to lose sleep over the exact terminology.

Mr Singh asked about the use of the term “law enforcement agency” in other legislation.

The Chairperson opined that “relevant authority” could be better. The question was what “law enforcement” referred to.

Ms Ebrahim agreed that it might be necessary to refer matters to the Constitution Commission.

The Chairperson moved the discussion to consider whether debt collection had to go to the NT or the Executive Authority (EA).

Mr Singh asked what the situation was when the EA was responsible for the loss, through instructing the DG in writing.

The Chairperson noted that thus far it had been said that it could be the relevant authority or Parliament. The EA had to notify Parliament. There were two or three cases where Ministers had been questioned. It was normal for it to go to the Minister, but, where appropriate, it also had to go to Parliament. It was under AGSA discretion.

Mr Singh said that if a person was seen to be guilty, the EA could institute action. But the question was who could act against the EA. Even the former President had to be acted against.

The Chairperson noted that the Constitutional Court had stated that Parliament had failed to exercise its executive authority in respect of the former President. AGSA could request that money be collected by Parliament as part of oversight.

Ms Ebrahim responded that the AO would be held liable even if the EA was at fault. If the Mayor made an official purchase something for him, it was up to the AO to hold the official accountable. In the municipalities EAs forced the officials to do corrupt things, and they were too scared to refuse. The AO had responsible for accounting, which included what the Executive was doing. Parliament had oversight, and matters concerning an EA could be sent to the relevant parliamentary committee.

The Chairperson noted that there was an internal process to give the Accounting Authority a chance to state his case. After that the AGSA’s decision was final. He noted that the Content Adviser asked why it could not go straight to court.

Mr Mgxaji responded that it was not necessary to create another internal resolution mechanism. Based on the outcome of an investigation, the court could be consulted about a problem with the AO.

The Chairperson accepted the Content Advisor’s position. He referred to audit fees. The AGSA was never to be out of pocket. The question was how to predict costs. He asked if there had to be upfront consultation. He suggested that the document took the Committee closer to what it wanted to achieve and that it should be tidied up by the drafters.

Ms Marissa Bezuidenhout, AGSA Business Executive, responded that access to the National Revenue Fund could have unintended consequences.

The Chairperson said that the SC was concerned about funds accruing to the State. Parliament got the top slice and could give to Chapter 9 institutions. AGSA had to take a look and come up with something.

The Chairperson referred to the term “undesirable outcome”. He asked if it had to be changed to “material”.

Mr Mgxaji responded that it was an umbrella term. Commentators had suggested “material irregularity”.

The Chairperson accepted the point. He remarked that he had no problem with international auditing practices being followed by AGSA. With reference to Generally Accepted Accounting Practice (GAAP) or Generally Recognised Accounting Practice (GRAP), the solution would be to abide by current best practice. The SC was in agreement about AGSA being empowered to make regulations. He referred to the matter of the Auditor-General’s salary and allowances.

Mr Mgxaji responded that the Auditor-General could appoint members to a remuneration committee that made recommendations to the Independent Commission on the salary, allowance and benefits of the AG. Some commentators opined that it could result in conflict of interest. He advised that the establishment of the remuneration committee be done in consultation with the SC.

The Chairperson remarked that he had sat on a committee that had made recommendations about remuneration, and there was never any mention of conflict of interest. The Independent Commission could not be expected to be experts. To involve the SC would add another leg.

Ms Dubazana opined that recommendations had to be presented to the SC.

Mr Singh remarked that he had prior experience. When the salary of the previous AG had to be decided on, the Independent Commission informed the SC in midstream of the contract that the salary, benefits and perks included in the contract signed with the President was incorrect. The SC heard the Commission out. The AG appointed the recommendation committee. It was not independent, as it worked for its master. The SC had found fraud in what was proposed and had set up a subcommittee. It consulted with Alexander Forbes and had interrogated the process. It was claimed that the AG had to get a Chief Justice salary and perks as the Act mentioned something about a Judge. The SC had argued that it did not mean Chief Justice. The report was taken to Parliament and then to the President, and adjustments were made.

Mr Adiel Kamedien, AGSA Senior Manager, noted that at the time there was a dispute about who the highest judge was.

The Chairperson said that it was necessary to consult the SC.

Ms Ebrahim responded that there had to be five members on the remuneration committee, and the majority had to be external. The remuneration committee had to advise the Independent Commission, but it had to come to Parliament first. Mr Mgxaji was saying that it had to come to Parliament before the remuneration committee advised the Independent Commission.

The Chairperson advised that the remuneration committee approach the SC after applying its mind. He referred to the term “satisfactory explanation”.

Mr Mgxaji responded that commentators argued that it had to be defined. It could grant leeway for subjectivity, but it was no longer relevant because AGSA would no longer execute the debt recovery function.

Ms Ebrahim responded that it had referred to a satisfactory explanation for why a certificate was not to be issued. It had been stated in public hearings that there had to be criteria for how AGSA had to exercise a decision to issue a certificate. She had agreed as it had applied to the report that the AGSA was to have issued, but with the report taken out. Other criteria had to be thought of to lessen subjectivity. Subjectivity was not unique. Legislation prescribed that a Minister had to apply his/her mind whether to grant a licence or not. It was not difficult to get around; the gap could be closed.

Ms Dubazana remarked that she endorsed the recovery mechanism referred to at the top of page four of the Legal Adviser’s presentation. AGSA had to design such a mechanism. The Committee had to endorse it because it was not yet on the way forward.

The Chairperson agreed that it had to be endorsed and taken into account in the way forward and had to appear in the legislation.

Ms Ebrahim responded that it would be unconstitutional if AGSA did not allow the AO sufficient time. If there was not going to be a six-month timeframe, AGSA would have to have a process for allowing appropriate time and explaining that.

Mr Singh commented that the office of the AG could look at regulations.

Ms Bezuidenhout responded that AGSA had started to draft regulations. It would be ready by April of the following year.

The Chairperson concluded that the SC was 99 percent there with the Bill. It had to be cleaned up and tidied up and brought as close as possible to what would be taken to the House. It could be brought back to the Committee for a clause by clause deliberation. By the end of April or beginning of May, the Committee would like to check on progress made with the Bill over the recess.

Mr Singh reminded the Chairperson of the long weekend at the end of April and advised that there had to be a media statement about progress made with the Bill, with reference to public inputs. The Bill had attracted great interest.

The Chairperson said that the Bill could be taken to the National Assembly by the end of May.

The meeting was adjourned.


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