Audit Outcome 2017/18: Auditor General briefing

Public Accounts (SCOPA)

10 October 2018
Chairperson: Mr T Godi (APC) and Ms Y Phosa (ANC)
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Meeting Summary

A joint meeting between the Standing Committee on Public Accounts (SCOPA) and the Standing Committee on Appropriations received a briefing by the Auditor-General (AG) on the 2017/18 audit outcomes.

A total of 434 government departments and state-owned enterprises were audited. Only 25% received clean audits compared to last year when 34% received clean audits.

Audit outcomes regressed from previous year with 99 clean audits recorded compared to 129 clean audits for the previous financial year. Clean audits for departments regressed from 47 to 40 or this year and from 82 to 59 for public entities. Outstanding audits used to be an exception and that number his risen from the usual two or three to 8 departments and 33 entities at the time of the audit process. Within those 41 entities, many are struggling with ‘going concern’ issues.  According to the AG, the number of years with deficiencies in financial management and control have resulted in a “financially bad situation”, i.e. not able to pay creditors on time and costs and expenditures are staring to exceed generated revenue.

Cabinet Ministers and heads of government departments who have failed in their duties must be held responsible for the poor audit outcomes. This was according to SCOPA chairperson, Themba Godi who said the amendments to the Public Audit Act was an admission by Ministers and DGs that they have failed.  

The committees raised concerns over the rising irregular expenditure which was around R50 billion and noted that the increase in irregular expenditure shows that some departments are not adhering to the Public Finance Management Act (PFMA).

With the expected amendments, AGSA will be getting “teeth” to institute remedial actons against repeat offenders accounting officers that failed to adhere to PFMA regulations. The AG also noted that some state entities such as SAA, SA Express and Denel had not yet submitted their financial statements for auditing, which could mean that the amount of irregular expenditure is even greater

Meeting report

Co-Chairperson Phosa welcomed everyone and said the objective of the meeting was to receive and discuss the 2017/18 national and provincial audit outcomes. The Office of the Auditor-General of South Africa (AGSA) was a Chapter 9 institution created to strengthen South Africa’s constitutional democracy. It was crucial to the basic functioning of Parliament. Today was an opportunity to reflect on how public entities used the resources to deliver services to the public.

Co-Chairperson Godi reminded Members to ask questions of clarity only after the presentation, because substantive questions will be answered by the departments when they appear before Parliament.

Auditor-General on the audit outcomes

The Auditor-General, Mr Kimi Makwetu, said he was reporting on the audit outcomes of about 434 departments; 258 national departments and 176 provincial departments together with their entities. He explained the colour coding on the presentation (see attached) and said the presentation was really a cross-cutting analysis of key trends picked up from the audit outcomes.

As a preface, he said if one was to look at the accountability system, it was clearly laid out in sections 38, 39 and 40 of the Public Finance Management Act (PFMA), and if you are looking at what should be done if nobody executed the control activities, the legislated remedial actions can be found in sections 81, 83 and 86 of the PFMA. The amendment of the Public Audit Act can almost be seen an activation of those six sections. The amendment was not new; it simply created capacity and power to activate what was already in existing legislation.

The AG gave an overview of the ‘plan-do-check-act’ cycle and also highlighted the vulnerable IT controls across all departments.

Audit outcomes regressed from previous year with 99 clean audits recorded compared to 129 clean audits for the previous financial year. Clean audits for departments regressed from 47 to 40 or this year and from 82 to 59 for public entities. Outstanding audits used to be an exception and that number his risen from the usual two or three to 8 departments and 33 entities at the time of the audit process. Within those 41 entities, many are struggling with ‘going concern’ issues.  The number of years with deficiencies in financial management and control have resulted in a “financially bad situation”, i.e. not able to pay creditors on time and costs and expenditures are staring to exceed generated revenue. The 198 departments and entities with unqualified audit opinions was a strong showing that there was an effort towards better financial management control; and the finding were mostly on compliance with legislation.

Material supply chain management compliance finding still high:

-Not able to audit procurement of R6 498 million due to missing or incomplete information

-R265 million in awards to employees without complying with legislation

-False declarations of interest made by 1 372 suppliers

-Uncompetitive and unfair procurement processes at 56% of all auditees

Irregular expenditure slightly increased from R45 312 million to R45 595 (1%increase) – total irregular expenditure amounted to about R50 billion with audits finalist after the deadline.

According to the AG, 82 departments (55%) technically had insufficient funds to settle all liabilities that existed at year end if the unpaid expenses at yea –end were also taken into account. If the budget for employees cost is not taken into account, 15 department (10%) have effectively spent more than (10%) of the 2018-19 operating expenditure budget

Root causes of limited improvement over four years:

-Management  do not respond with the required urgency to messages about addressing risks and improving internal controls

-This slow responses from management was evident at 89% of auditees, while there was not even any response at some auditees

-If officials who deliberately or negligently ignore their duties and contravene legislation are not held accountable for their actions, such behavior can be seen as acceptable or tolerated

-Instability and prolonged vacancies in key position can cause a competency gap and effect the rate of improvement in audit outcomes

Discussion

Mr C Ross (DA) said the AG has indicated around R50 billion irregular expenditure. The DA has done some analysis and was of the opinion that irregular expenditure amounted to R72 billion. He asked for clarification in the differential of the figures; the accumulated amounts from previous years and the AG’s recommendations in terms of addressing the irregular expenditure. It appeared the 31 August cut-off date was used and the DA used the Annual Report cut-off date of 30 September and got to R72 billion.

Mr A McLoughlin (DA) said the numbers and the presentation overall showed things are not getting better. Is it your experience that you are getting more and more resistance from those you audit to provide you with the information you need?

Mr T Brauteseth (DA) said things are not getting better and he was sure it was a great frustration to the AG. Some few years ago the Office of the Chief Procurement Officer was established to coordinate supply chain management and he asked if that Office was actually working and playing a particular role. Is Treasury playing its role in bringing departments where they should be? Is the nationalisation of supply chain management working or should decentralisation be looked at and beefing up protocols at lower level? Page 31 of the presentation outlined the process that referred to the drafting of secondary legislation being ‘in progress’. He asked where that process was and how long it would take to get sorted out. The President cannot assent to new legislation and he asked why the process referred to ‘waiting for President’s assent’. It was all good and well to amend the Act to give you the power of prescribing remedial action, but if the legislators are slowing it down, there was clearly another agenda at play. When do you see the actual roll-out of the Debt Certificate?

Ms Z Dubazana (ANC) said looking at the Gauteng example of irregular expenditure with the bus tender, she asked if it was possible that similar situations existed. The AG has indicated that he will be having engagements with provinces on the outcomes and she asked at what level that engagement will be, because it was important to involve the people who are conducting the internal controls.

Mr A Shaik Emam (NFP) said it was expected that the report would be as damning as it was. Given that the Amendment Act will be giving the AG more powers, he wanted to know what processes would be followed when reporting to Parliament. The confusion still existed, because while it gave more powers, will it be able to get you to the root of the problem and identify repeat offenders? His understanding was that it will only give the AG the power to make recommendations and MPs needed the will to act on those recommendations. He said his understanding was still, no matter how good the auditing systems was, that if you know how to manipulate the system, you can get an unqualified audit by deceiving the AG. Do you have any mechanisms to be able to identify that? South Africa lost approximately 40% in the supply chain of goods and services which were about R200 billion through tender processes, because there was no value for money and he asked what mechanism are in place to deal with that. He said he has been hearing about auditors being threatened throughout the country and he asked if has happened and to what extent.

Mr M Booi (ANC) referred to page 30 and asked if it was new methodology being used. He asked how long has Director-Generals (DGs) been engaged and how it worked, because the regression in the outcomes did not reflect these engagements.

The AG responded and said the Acting Accountant-General can augment his answer on the Procurement Office. On the engagement with the DGs, he said the engagements started last week at the Forum for South African Directors-General (FOSAD) where all the DGs from national departments and provinces were present convened by the DG in the Presidency which was an annual event where they not only learn about their own portfolios, but also of key trends of concern. In addition, because they are as accounting officers responsible for various things, the final clearance of any audits in their portfolios, are with them first, because they have the responsibility to account to executive authorities as well. It is not a meeting to instruct, but the AGSA shared with them the more risky areas they might have missed. In terms of the methodology, he said the status of records review was a discipline that has been in financial management predominantly over the years, but less so in the public sector. Private institutions are listed in the Johannesburg Stock Exchange (JSE) and every year or half-year they needed to present their results on the JSE. Part of what they did was a status on records review, because it brought to the attention of decision makers some of the issues that could result in significant systemic failure. As an example he said there was a time a few years ago they went to a municipality in the Eastern Cape and they were presenting their outcomes and financial statements. Because they have never done the reconciliations of their accounts, all they did was to ‘pluck the figures from their trial balance’, put it on a spreadsheet and reported those numbers. Some balance in the books was around R65 million and they showed it as a sundry debt owed to them. The response by AGSA was that there was no amount of such significance the year before. The status of records review asked for the books to be shown as they are – not a summary. After some digging it was found that the R65 million was a sundry miscellaneous account. ‘Miscellaneous’ by definition was a combination of different things and they did not do a proper reconciliation of the account to know exactly what the R65 million was for and only through the audit process, the genuine amount that could be classified as a debtor was somewhere around R500 000 and the R64.5 million was an accumulation of transactions. It was not new methodology, but rather a form of enhanced internal control.

Contestations in an audit happened often and they have the right to contest, because it was their representations and the audit reported on those representations. If there was information not made available to the auditor initially and new information was subsequently provided, it may change the original opinion of the auditor. The audit opinion cannot change without substance.

On the reporting process after the amendment, the AG said steps have already been put in process after June. It was still in progress, but has progressed to the point of a national gathering of the Office of AGSA with about 300 senior managers and above from all nine provinces to socialise the amendments and regulations across the Office. It is something that must be owned by and known to the people who will be doing these audits. The regulations will now be engaged on with the Standing Committee on the Auditor-General (SCOAG) that will be happening in October still. The ‘how’ this will be done will be clearly set out in that meeting.

In terms of collusion to deceive the auditor, he said if there was collusion and people agree among themselves on an amount, the auditor as an outsider would be none the wiser once there are high levels of collusion. If some senior managers can override the controls and make it seem that the environment was still being managed according to the controls, it was still possible to deceive. However, an auditor was required to remain skeptical, because there are other things aside from the books that are done to show where the bulk of transactions, credits and debits should have gone. Sometimes these things results in the fights, because an auditor tried to reconstruct what the balance would be.

AGSA engage with provinces at executive level and when doing road shows, the target is to meet with Premiers and the team and the Speaker and team. On the Debt Certificate and drafting of secondary legislation, he said they were almost there and whatever will arise from the SCOAG meeting will determine what still needed to be done, if anything. The matter once Parliament has processed it is normally sent by Parliament to the President.

On the differential in irregular expenditure, he said the audit process should be trusted, because it has shown itself over the years to be authentic and credible. The audit process has always been a reliable source of all the deficiencies and it had unlimited access to verifiable information which was a constitutionally protected right. Anybody else aside from an auditor might bring a combination of speculation and fact. As long as a person did not have a statutory license to do an audit, they might confuse speculation and fact and nobody will know the right number.  There are hundreds of people who interrogated these numbers across the country in all 434 audits and that effort produced the number.

On things not improving, he said his take was that the discipline to action recommendations was a discipline that got cultivated in an environment where there was leadership stability. If someone has been charged to look after the affairs of a department for six months and another for 18 months, sometimes the people left in that department see a gap in the internal control environment, because they know that the people administering the accounts in the financial year were no longer there. For an internal control to be sustainable, it required supervision over a period of time.

Ms D Senokoanyane (ANC) said people are contesting for the sake of contesting and it was an area for serious concern. She asked if government departments used the accessibility of AGSA in between audits to engage and address issues, because this level of non-compliance was unacceptable.

Mr N Gcwabaza (ANC) referred to slide 18 that showed that 67% of health departments faced claims exceeding 100% of their budgets. Do the claims include accruals and what are the implications for the next financial year budgets? He referred to the R50 billion and R72 billion and said he found it rather strange that “our colleagues a few months ago sat among themselves, picked up a few figures and called a press conference and caused confusion among people”. Only now they come to ask the AG to verify and he said he imagined that they would have consulted the AG before going public and it casted aspersions on the credibility on the AGSA and its skilled personnel. Mr Gcwabaza said it was very regrettable.

Ms N Khunou (ANC) said PFMA regulations concentrated more on the accounting officers, whilst middle management where a lot of the problems and disputes can be found, was ignored. Supply chain management was a big problem and these people are not vetted, but play around with prices. What was being done to make middle management accountable? She referred to departments that did not report on time and how it affected accountability and oversight.

Co-Chairperson Phosa referred to the outstanding audits and she asked what the AG’s recourse was. It was important to find solutions, because the committees can formulate recommendations and recommendations adopted by the House can be more binding. What are the possibilities for the AG to carry out audits on a six-monthly basis? It might be costly, but it was a necessary exercise. National Treasury has promised to send out instructions to departments to deal with the 30 days non-payment issue to service providers, because these non-payments killed small businesses, job creation and economic growth. What advise can you give? The response has always been that service providers did not submit invoices on time, but what service provider would not want to get paid?

Ms M Manana (ANC) referred to the Independent Development Trust (IDT) that has a disclaimed audit opinion for four consecutive years and she said it was a serious problem. In most cases senior managers account, but most of the corruption happened in middle management.

Mr Shaik Emam said the problems are getting worse and unless administration was separated from politics, the problems are going to persist. On the actual process, what would be expected from the AG in terms of the amendments, because the onus will still be on somebody else to act on your recommendations?

Mr Brauteseth said last year there had been very disturbing reports about actual death threats to AGSA personnel in eThekwini Municipality. Can you comment on who was threatened and by who, because it needed to be reported to the South African Police Services (SAPS) for a follow up?

Mr Ross said the DA tried as a party to establish through the Annual Reports the irregular expenditure and the scourge of possible corruption. The top 12 departments, according to DA research, contributed to R61 billion in irregular expenditure. He asked if the differential was because of the closing balance or whether it was just for the financial year; and if the AG could provide the party with the 12 departments with the highest irregular expenditure incurred. Eskom has irregular expenditure of R19.6 billion; SANRAL stood at R10 billion; Transnet (R 8 billion) and the Department of Water and Sanitation has R6 billion. He asked for a schedule of all departments with irregular expenditure of more than R1 billion. 

Ms S Shope-Sithole (ANC) said the AG was assisting with information and the Committee must do its part. The Appropriations committee “must follow the money”, because the State’s money must be used for what it was planned for.

Co-Chairperson Godi said the DGs and Ministers must act and the amendments to the Audit Act were an admission that Ministers and DGs are not doing their work. The Committee might also have to schedule an engagement with the Office of the Accountant-General on procurement.

The AG asked for the schedule Mr Ross had to see if the AGSA can reconcile it, because Transnet and Eskom are not part of AGSA’s reconciliation, but are being audited by outside firms. He said since the last audit in KZN, AGSA has not experienced similar incidents. On the 30 day payment, he said it was a Treasury directive, but 30 days payment is difficult to maintain if there a questions about an invoice or service delivery. An accounting officer cannot escape section 44 of the PFMA and the final accountability lies with the accounting officer. On timely submissions, the PFMA even gave the AGSA the reporting responsibility for those who have not submitted in the form of a report, but it has been done in the past, but nothing has happened. On the process after the amendments are implemented, he said currently auditing takes place and audit reports are issued at the end of July. This was followed by an analysis and interaction with different stakeholders. What was envisaged with the amendments was that material irregularities will be dealt with during the audit process and with recommendations that guide the accounting officer towards the relevant sections of the PFMA. If those recommendations are not enacted then the proposed remedial actions will come into play. AGSA would be required to report on the Debt Certificate and the remedial action, i.e. what has been fixed or has not been fixed. This will be included in the AGSA’s Annual Report to SCOAG and findings on audit reports would be reported within, as well as the steps taken. With the new dispensation audit findings will not just disappear. The status of records review was a ‘close enough’ to a six monthly engagement of accounts, because it will be difficult to do a statutory audit halfway through the year, because of logistical challenges. The status of records review is another way of having an audit of some sense. Although no opinion would be offered, a report will be issued if there was cause for alarm. 

Ms Zanele Mxunyelwa, Acting head, Office of the Accountant-General, National Treasury, said throughout the years the audit environment has improved and evolved and the monitoring has been enhanced. It might seem that it was going downwards, but now issues are being raised not talked about before. Treasury has also enhanced accountability and transparency through account classifications and it raised a lot of findings for people to explain. There was a Procurement Bill in progress to ensure that .the Chief Procurement Officer has got a mandate and authority to enforce certain regulations in all spheres of government. South Africa never had supply chain practitioners so that people who enter into the supply chain management environment are professionalised. Treasury has advocated for the professionalisation of practitioners and there was an interim board e4stablished to look at professionalisation. Treasury was also putting new regulations in place in terms of good financial management. A centralised supplier database managed by the Chief Procurement Officer was very important for certain areas such as education and health products.

Co-Chairperson Phosa said it was reliable information that can be used in engagement with departments. She thanked the AG and his team.

Meeting was adjourned.

 

 

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