Public Audit Amendment Bill: briefing & finalisation

NCOP Finance

26 June 2018
Chairperson: Mr C de Beer (ANC; Northern Cape)
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Meeting Summary

Documents Handed Out: Office of the Premier of the Free State comment on the Bill [awaited]

The Committee received a briefing on the Public Audit Amendment Bill and approved the proposed law with no amendments. The Bill was approved by the National Assembly and referred to the NCOP via this Committee for concurrence.

The Parliamentary Legal Advisor highlighted that the amendments were necessary to address four crucial problem areas identified by the Office of the AGSA, namely - the glaring lack of compliance with financial management laws (e.g. PFMA,), disregard of audit recommendations by institutions, the continued rise in unauthorised, irregular, fruitless and wasteful expenditure and lastly, to restore the integrity of government’s financial and performance systems.

A key aspect of the remedial action was to empower the AG to enable it to take action and hold transgressors to account - e.g. this would impact on officials (municipal or departmental employees), accounting officers (DG’s and Municipal Managers) and the Executive Authority (Ministers, Boards etc.)

Some of the important clauses the Bill sought to amend included amongst others -

  • some new definitions - the Bill proposed new definitions for Accounting Authority, Accounting Officer and  Executive Authority. The Bill also defined a Material Irregularity as “any non-compliance with or contravention of legislation, fraud, theft or breach of fiduciary duty” that can result in material financial loss.
  • criteria for discretionary audits - the amendments proposed new criteria to enable the AG to conduct discretionary audits when requested by public entities like museums and libraries (requests can be rejected if audit costs exceed annual turnover of entity) 
  • specialist/performance audits - these new amendments were inserted to enable the AG to conduct audits for a specific reason or over a specific period rather than just conducting a usual annual audit as prescribed currently. Included here were audits conducting on behalf of International bodies like the United Nations and WHO (World Health Organisation).
  • audit irregularities - the Bill will contain new proposals that will empower the AG to refer any suspected material irregularities uncovered during an audit to the relevant public bodies for investigation (e.g. police, Hawks etc.)
  • remedial action - these amendments contained substantial implications for transgressors as it will empower the AG to take any appropriate remedial action. Where the transgressions involved material irregularity and monies had to be recovered from individuals guilty of transgressions - a certificate would be issued to recoup the money via a prescribed procedure (Certificate of Debt).
  • some administrative amendments - these were mainly to improve the operations of the office AGSA and included amongst others, - aspects on remuneration, recovery of audit fees from struggling municipalities and the processing of financial statements in accordance with international best practice.

The Auditor-General indicated that his Office intended to have in depth workshops with the provinces and SALGA (by the end of 2018) to ensure that those who operate at the coalface were sufficiently empowered with knowledge about the amendments. A key deliverable will be to ensure that everyone involved in financial matters in all spheres of government - impacted by the Bill - knew and fully understood the rules regarding material irregularities. The rules would be known upfront so that no one would be surprised when the consequence management of irregularities kicked in.

The Office of the Free State Premier raised a late concern that the Bill may not be constitutional and that the additional powers for the AG in the amendments would constrain the independence of the office of the AGSA. Both the Parliamentary Legal Advisor and the AG strongly disagreed with this view and said that the concerns raised by the Premiers office had been taken into consideration and addressed in the Bill.

Members said that the bill was a very positive move to strengthen the auditing of public entities, expressed concern that it took so long for this legislation to be drafted and sought clarity if there were specific timelines within which the AG had to act to ensure that audit transgressions were remedied

Meeting report

Opening remarks by Chairperson

The Chairperson welcomed everyone. He thanked the Office of the Auditor-General for the work it was doing but added that it had taken far too long to amend the legislation.

Briefing by Parliamentary Legal Advisor

Ms Fatima Ebrahim, Parliamentary Legal Advisor, provided the following input on the Public Audit Amendment Bill (the Bill).

Her briefing contained four key elements - the background to the Bill, powers and functions of the AG, problem areas the Bill sought to address and lastly, a summary of the clauses to be amended.

Background

A key reason that drove the changes was to strengthen the powers of the AG as allowed by the Constitution, i.e. additional powers and functions (other than auditing and reporting on accounts and financial management). Currently the AG has no power to take remedial action on audit transgressions and the changes proposed in the amendment was to give the office of the AG additional powers to enable it to take remedial action as prescribed by the Bill.

Powers and functions of AG

This was aligned to section 188 of the Constitution and contained the following key aspects - appointments and administration of the AGSA, manner in which audits had to be conducted plus some other amendments to address operational issues like remuneration, recovery of audit fees where state entities could not pay.

Problem areas

The amendments were necessary to address four crucial problem areas identified by the Office of the AGSA, namely - the glaring lack of compliance with financial management laws (e.g. PFMA,), disregard of audit recommendations by institutions, the continued rise in unauthorised, irregular, fruitless and wasteful expenditure and lastly, to restore the integrity of government’s financial and performance systems.

A key aspect of the remedial action was to empower the AG to enable it to take action and hold transgressors to account - e.g. this would impact on officials (municipal or departmental employees), accounting officers (DG’s and Municipal Managers) and the Executive Authority (Ministers, Boards etc.)

Some of the important clauses the Bill sought to amend included amongst others -

  • some new definitions - the Bill proposed new definitions for Accounting Authority, Accounting Officer and  Executive Authority. The Bill also defined a Material Irregularity as “any non-compliance with or contravention of legislation, fraud, theft or breach of fiduciary duty” that can result in material financial loss.
  • criteria for discretionary audits - the amendments proposed new criteria to enable the AG to conduct discretionary audits when requested by public entities like museums and libraries (requests can be rejected if audit costs exceed annual turnover of entity) 
  • specialist/performance audits - these new amendments were inserted to enable the AG to conduct audits for a specific reason or over a specific period rather than just conducting a usual annual audit as prescribed currently. Included here were audits conducting on behalf of International bodies like the United Nations and WHO (World Health Organisation).
  • audit irregularities - the Bill will contain new proposals that will empower the AG to refer any suspected material irregularities uncovered during an audit to the relevant public bodies for investigation (e.g. police, Hawks etc.)
  • remedial action - these amendments contained substantial implications for transgressors as it will empower the AG to take any appropriate remedial action. Where the transgressions involved material irregularity and monies had to be recovered from individuals guilty of transgressions - a certificate would be issued to recoup the money via a prescribed procedure (Certificate of Debt).
  • some administrative amendments - these were mainly to improve the operations of the office AGSA and included amongst others, - aspects on remuneration, recovery of audit fees from struggling municipalities and the processing of financial statements in accordance with international best practice.

Ms Ebrahim emphasised that she was confident that the Bill was aligned to the Constitution and that there would not be any challenges in this regard.

The Chairperson said he was happy to hear that as Parliament did not want to pass Bills that could be challenged in the Constitutional Court.

He asked the AG if he had any additional comments to make.

Comments by the Auditor General

Mr Kimi Makwetu said that the AGSA had no further input to make on the Bill and the briefing provided by the Parliamentary Legal Advisor, but wanted to make a few related comments

The documents had been forwarded to the provincial legislatures as well, in preparation for consultations with the provinces. The AGSA intended to have in depth workshops with the provinces and SALGA (by the end of 2018) to ensure that those who operate at the coalface were sufficiently empowered with knowledge about the amendments. A key deliverable will be to ensure that everyone involved in financial matters in all spheres of government - impacted by the Bill - knew and fully understood the rules regarding material irregularities. The rules would be known upfront so that no one would be surprised when the consequence management of irregularities kicked in. Although the concept of “debt certificates” for transgressors was new to SA, they were already in use elsewhere, e.g. in Ghana where a list of officials with debt certificates was published. 

Discussion

Mr F Essack (DA, Mpumalanga) thanked the Parliamentary Legal Advisor for a fantastic presentation and said that the amendment was a very positive move to strengthen the auditing of public entities. He wanted to know why it took so long for this legislation to be drafted.

Mr Essack further asked how long the process would take to address transgressions as provided for in the Bill, how the budget (R34m) for the new amendments would be met, what would be done if the executive failed to address audit concerns raised by the AG and lastly, what were the timelines regarding Section 5 (remuneration process) and Section 10 (audit fees) of the Bill which may come into affect at different times.

Mr O Terblanche (DA; Western Cape) also commending the AG and those who drafted the amendments, but raised the following concerns - he wanted to know why it took so long to draft these amendments, he asked if there was not another mechanism to ensure that even “small” audits could be done by the Office of the AGSA (e.g. for libraries and museums) - could National Treasury (NT) be approached to fund these? Lastly, he wanted clarity on how the process regarding the issuing of certificates of debt would work, specifically in instances where implicated employees had since left (e.g. retired).

Mr L Gaehler (UDM; Eastern Cape) commented that time frames for the Bill was very important, in that remedial action had to occur as quickly as possible (i. e process should not drag on indefinitely). He said that AGSA employees had to be remunerated properly otherwise work quality would be compromised - one could not attract good professionals with inferior salaries.

Mr M Monakedi (ANC; Free State) raised the following comments and concerns - he welcomed the presentation and said that the legislation was long overdue and that it would go a long way to address the concerns identified and suggested that it was Parliament that was responsible for the delay. He wanted assurances that the Bill being presented here to the Committee was the same as the one passed by the National Assembly (NA).

Mr Monakedi wanted to know who paid for the audit fees conducted by the AGSA for international clients (like the WHO). He said it was clear that there would be some human resource implications as a result of the amendments, but the financial implications were not clear. He wanted clarity on the term “tabled for consideration” in clause 4 of the Bill - related to certificates of debt tabled to parliamentary committees.

The Chairperson advised he had just received a written comment on the Bill, from the office of the Premier of the Free State and that he had passed it on to the Parliamentary Legal Advisor.

Mr J Mohai (ANC, Free State) was also very happy with the presentation. He commented that there were a number of telling reasons for the amendments - i.e the glaring lack of compliance by some officials and a lack of “proper” oversight by Parliament. He wanted clarity on the letter from the office of the Premier of the Free State who felt that new amendments compromised the independence of the AG. 

Ms Z Ncitha (ANC; Eastern Cape) said she was very appreciative of the good work done to amend the Bill and that this was indicative of the new dawn that was correcting the wrongs of the past. She had a concern about the financial implications of broadening the scope of the AG to include international markets. She agreed it was good for development and the overall image of the country but was concerned about the implications of it on the already overstretched resources in the AGSA office. She said it was imperative that provincial offices and institutions like municipal offices be engaged to ensure a proper understanding of the amendments and help to improve the service delivery on the ground.

Ms Ebrahim said there were no specific timelines within which the AG had to act to ensure that audit transgressions were remedied - the Office of the AGSA would issue a report outlining the actions required but would allow the entities (or individuals) impacted by the findings to remedy the situation with a reasonable time frame. The AG did not want to usurp the powers of Accounting Officers by fixing a time period for corrective actions.

If the Executive Authorities failed to take action on audit outcome recommendations (e.g. recouping monies where debt certificates were issued) - there were two options for redress  - the electorate could vote these transgressors out of office and secondly, they would be held accountable by Parliament (hence copies of debt certificates would be tabled in Parliament as well). Executive Authorities were also accountable to Parliament.

On provincial consultation, Ms Ebrahim said that as the Bill was a section 75 Bill, there was no need to consult extensively with provinces in the manner that section 76 required - but that this would and should not prevent the AG and his team from engaging with provinces on the Bill.

The Office of the AGSA had thus far funded its own operations from audit fees, without any allocations from government. The AG could comment more on the additional sum of around R30m required as a result of the amendments.

Ms Ebrahim commented that when someone replaced a DG who had retired (under whose “watch” a transgression occurred)  the new incumbent, although not the guilty party-  would be held accountable to ensure the audit recommendations were implemented (e.g. recovering monies as a result of a debt certificate issued). In essence the new DG would hold the previous DG accountable to ensure the monies were recouped. The Bill made it clear that action had to be taken to recover losses incurred by the state due to the unlawful actions of someone or an institution.

The Bill presented to the NCOP was the same as the Bill considered by the NA. The NA unanimously approved the Bill.

Debt certificates were tabled in Parliament to keep the legislature informed of developments but also to enable it to take action against executive authorities where necessary.

Ms Ebrahim provided the following response to the letter from the office of the Free State Premier. (The letter was not made public to the meeting, the Parliamentary Legal Advisor merely provided feedback on the issues raised in the letter).

  • At the outset she said the Bill was in line with the Constitution and that the constitutional concerns raised by the Premier’s office would not cause any problems or challenges
  • ​The AG could be given additional powers as long as these powers were rationally connected to auditing.  
  • She disagreed with the comment from the Free State Premier’s office that the amendments would lead to the AG being accountable to the Executive Arm of government (hence lose its independence)
  • Regarding a challenge from the Premier’s office that only a court of law could find or issue a charge of negligence (in terms of PAJA - Promotion of Administration of Justice Act), she did not agree with this view as the AG could issue audit findings due to negligence. It would allow adequate time for responses from impacted individuals or institutions. As an example - an Accounting Officer had to indicate what action was taken to remedy the problem and what investigations took place. Only after all reasonable requests to redress the problem were ignored would the AGSA take the next step, e.g. issue a debt certificate. 

Mr Makwetu said that the Office of the AGSA received many similar concerns as those raised by the Office of the Free State Premier (regarding constitutionality and the independence of the AG). The concerns raised were addressed during the drafting process in amending the Bill and as advised by the Parliamentary Legal Advisor was aligned to the Constitution.  If needs be, the Legal Advisor could provide the Premier’s Office with a legal briefing on the matter.  The issues raised by the Premier’s office had been dealt with in the Bill.

He emphasised that auditing without consequences was as good as only editing - to be effective, auditing - he said, must have teeth. In auditing, there were two key aspects related to an activity - a legal aspect that tracked a specific process, e.g.  issuing a tender for building a school.  This would monitor and track the tender process where there could be many service providers competing for their share of the allocated budget. The second issue was of more importance and had a bigger impact or materiality - the economic substance of the audit process - e.g. this would track the actual material sourced to build the school to ensure that the money allocated (via the legal process tender) resulted in “bricks and mortar” being sourced to build the school. He said if this was not done, the legal process would merely result in monies flowing out (via a legal tender following due process) but with no service delivery and no impact on the ground!

Regarding the roles of the executive, he said clear roles and responsibilities were needed to ensure that those in executive roles were empowered to do the right thing and avoid the misspending of state resources.  A common thread throughout the Bill was to ensure that incumbents did the right the thing. In 2008/9 the fruitless and wasteful expenditure was about R10bn, but by 2018 this had risen to R60bn. He cited various instances that could be to blamed for this - the rise in the use of consultancy services where expenditure did not match service delivery, no action against incumbents who were responsible for fruitless and wasteful expenditure, the lack of proper qualifications of some incumbents in CFO positions where the lack of financial management expertise and on the job knowledge led to wasteful expenditures and fraud (e.g. same invoice paid twice)

Mr Makwetu said that the AGSA’s audit expertise was well appreciated in the international arena. This placed the country alongside the UK, USA, China and France and other African countries like Ghana. From 2002 until 2012 SA had audited the WHO. This was an exceptional learning experience for SA citizens as the process involved acquiring new skills related to dealing with international laws, currencies and other intricacies. All the audit fees had been paid by the UN.

The AGSA office was currently involved in auditing the AU but no audit fees were charged for this service - only out of pocket expenses were being met by the AU. It was felt that this SA’s contribution to improving the overall governance of the continent and that the exposure and learning for young audit professionals in AGSA was an additional benefit to the country.

The time frames alluded to in the Bill would be contained in regulations that would be drafted as soon as the Bill was approved. The time frames (for specific action to address audit irregularities and the subsequent remedial action) would not be long but would be linked to current audit time frames. Details still needed to be developed, but it could be conceivable that transgressors would be given 30-60 days to correct audit findings. If this was not done, penalties would be invoked as per the Bill. He emphasised that the AGSA would find the responsible people even if they had left their previous job (where the irregularity was committed).

He commented that the auditing of smaller state entities like museums and libraries had to be looked at, as often the costs involved far outweighed the annual turnover of the entity. 

Mr Makwetu said the current budget of around R34m was an estimate based on the AGSA’s current understanding of how the process would unfold. A more realistic budget would be in place once the new system was established and operational. Initially about R14 will be earmarked for additional capacity within AGSA - this would involve forensic, legal and additional accounting resources. The remaining R20million would be used during the initial phase of the new process as outlined in the amendments. This would enable the AGSA to outsource the investigation of large irregularities uncovered during audits to external agencies who were skilled in forensics. He cited that the 80:20 rule would be used as a yardstick, ie that 20% (i.e. the top 20 of most risky cases uncovered) could potentially yield 80% of the benefit to the AGSA and the country as whole.

The Chairperson said that members had received an in-depth and detailed briefing on the Bill. In addition the Parliamentary Legal Advisor and the AG had provided clear responses to queries and questions raised by the Committee. A clear plan was in place to engage with provincial structures to appraise them of the developments in the Bill and the implications thereof.

He said that the Committee had to do robust oversight because it (and by implication, government) was dealing with money paid by taxpayers and therefore had to ensure that it was spent in the way government intended it to be spent.

Committee Report on the Bill

He said the Committee had considered the Bill and had agreed to the Bill as presented in the meeting, without and further amendments.

This was agreed to be all Committee members.

Committee Business

The minutes of the previous Committee meeting was adopted.

The Chairperson reminded members that it was going to engage with the North West Province later in the week on similar issues as was raised in the Bill - that of irregular, fruitless and wasteful expenditure. 

The meeting was adjourned.

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