The Audit Committee of the Auditor General of South Africa (AGSA) said that its report was required in compliance with the Public Audit Act and the King code of governance principles. The mandate of the audit committee was to fulfil its duties as set out in the Act, and to provide assistance to the Deputy Auditor General in fulfilling her responsibilities as the accounting officer of the organisation.
Some of their key actions included a review of governance protocols, its mandate and independence, to ensure appropriateness and relevance. It had recommended the appointment of the new external auditors to the Standing Committee on the Auditor General (SCoAG) for approval, re-appointed the internal auditor for one year, and provided oversight over the financial and risk management aspects of the AGSA. The Audit Committee recommended that SCoAG note the Integrated Annual Report as tabled, and approve the re-appointment of the external auditor, Crowe Johannesburg.
The Auditor General said that the organisation wanted to see a South African public service that was characterised by strong financial and performance management systems, oversight and accountability, commitment and ethical behaviour by all, and a value-adding assurance provider in the form of the AGSA.
The Auditor General of South Africa was driven by its mission, which states that it had a constitutional mandate and, as the supreme audit institution of South Africa, existed to strengthen South Africa’s democracy by enabling oversight, accountability and governance in the public sector through auditing, thereby building public confidence.
He said there had been an increase in audit contestations, amounting to 56. These had been mainly due to disagreements with findings or technical consultations, regression of the audit outcomes, concerns around the quality of the audit teams and auditees challenging the change in the Audit Methodology Programme (AMP), and expectations of a clean audit not being met. This had resulted in auditees missing out on opportunities to improve their processes that were aimed at service delivery, undue pressure on AGSA’s audit teams, two court actions involving the SA Revenue Service (SARS) and the Department of Water and Sanitation, a delay in the conclusion of audits, and unnecessary increases in the cost of audits
There was a surplus of R67 million which the AG would need to motivate in writing regarding why they needed to retain this amount. The SCoAG would deliberate regarding this matter behind closed doors. The Committee also urged the Audit Committee to come back to Parliament with a solid transformation plan.
Auditor General of South Africa: Audit Committee Report
Mr John Biesman-Simons: Chairperson: Audit Committee, Auditor General of South Africa (AGSA), said the mandate of the audit committee was to fulfil its duties as set out in the Public Audit Act (PAA) and its terms of reference. It was also to provide assistance to the Deputy Auditor General in fulfilling her responsibilities as the accounting officer of the organisation. The committee consisted of at least three members, appointed by the AG in terms of the PAA Section 40. Its members were himself as chairperson, Ms Carol Roskruge-Cele (Governance Leadership), and Ms Grathel Motau (Development Finance).
Its key actions included reviewing its governance protocols, mandate and independence to ensure appropriateness and relevance; recommending the appointment of the new external auditors to the Standing Committee on the Auditor General (SCoAG) for approval; reappointing the internal auditor for one year, until 31 March 2019; and providing oversight of the financial and risk management aspects of the AGSA.
The committee reviewed the purpose, position and independence of the internal audit function; evaluated the internal audit reports with findings, including noting areas requiring improvement and mitigations by management, and tracked the clearance of previous report items; approved the annual internal audit plan and the internal audit fee; and the quality assurance review done by the Institute of Internal Auditors including action plans for improvement.
The Audit Committee concluded that the system of internal control was adequate and partially effective.
Regarding the external audit, the committee reviewed and approved:
- The statement and presentations on Crowe Johannesburg’s independence at all stages of the audit;
- The external audit plan, and the proposed audit approach based on audit risks identified and the proposed materiality level;
- The budgeted external audit fee for the reporting period, including the review of any non-audit work;
- The performance of the external auditor and the quality of the external audit process, and resolved to recommend to SCoAG that Crowe Johannesburg be appointed for the financial year ending 31 March 2019.
It reviewed and approved the revised Risk Management Framework, including the risk log, risk appetite and combined assurance report; reviewed and approved the strategic risk profile, and monitored the organisation’s performance in relation to the assessed strategic risks; and deliberated on the inherent risks, mitigations put in place and actions undertaken by management to manage the risks to a level where the residual risks were considered acceptable
The committee had reviewed the management representation letter relating to the annual financial statements and satisfied itself that the AGSA would maintain the ability to trade as a going concern for the 2018-2019 financial year. It had considered the appropriateness of the accounting policies and whether the annual financial statements fairly presented the financial position, the results of operations, changes in equity and cash flows of the organisation in all material respects, and reviewed the external auditor’s audit report on the financial statements, key performance indicators and predetermined objectives
The committee had considered and reviewed the performance and expertise of the chief financial officer (CFO) and the finance function, and was satisfied that the resources and expertise within the financial function were adequate and appropriate to fulfil its requirements.
Mr Biesman-Simons concluded having received, evaluated and overseen the work of both the internal and external auditors, as well as considered reports presented by management, the committee had recommended to the Deputy Auditor-General that she sign the integrated annual report and the accompanying annual financial statements. It recommended to the SCoAG that they note the Integrated Annual Report as tabled, and approve the re-appointment of the external auditor, Crowe Johannesburg.
Mr V Smith (ANC) said Mr Biesman-Simons had said that an assurance had been given to the audit committee. Did this mean that he had not applied his mind himself? Secondly, what was the nature of the gaps they were being referred to? Could they identify the type of information technology (IT) control gaps there were in order for the Committee to also apply their own minds regarding whether or not the gaps were significant. He was concerned about the chairperson saying that they had been told, instead of the audit committee applying their own minds to the issue at hand.
Mr Biesman-Simons responded by saying that they were not involved in the actual process, but all reports presented by internal and external auditors came to the committee and they reviewed them. In meetings, if there were any concerns about what management had said, they would address any shortcomings identified and would interrogate management on them. They did ask the difficult questions when necessary. As far as examples of IT control issues reported were concerned, it was difficult to come up with actual specific items, as they could relate to access control, whether backups were being done on a regular basis, off-site storage, or storage in the cloud. They went through those reports and had three meetings a year in which they reviewed the work with external auditors as it came through. He wanted to check with a colleague if she could recall anything specific in this regard. He said his colleague concurred with him regarding examples of gaps.
Ms Tsakani Ratsela, Deputy Auditor General, said she wanted to share what some of the gaps were. They would conduct internal audit reviews throughout the year. They conducted detailed reviews on the IT environment covering issues such as access control. The auditors identified issues which needed to be resolved. In the context of those reports given by the auditors, the management team had to look at what the issues were and obtain some sense of how those gaps were being closed, and whether or not there were mitigating controls to avoid a loss to the organisation. They were able to give that sort of comfort. The audit committee had rightly requested that the auditors come back and require IT security to make sure that two things had happened -- firstly, that there would be no breach, and secondly, evaluate whether the initiatives which were developed by management were being implemented.
The Chairperson of the Standing Committee said that what needed to be emphasised was that they were dealing with the Auditor General’s report. Everybody expected it to be perfect. It was important for SCoAG, as an oversight body, to receive clarity. If it was in this report, this was a concern, and it had to be dealt with. She hoped that by next week, they would have this in writing so that they knew exactly where the gaps were. When they fulfilled their oversight duty, it would make things easy for them. SCoAG would also write a report. If there were mention of gaps, it would be a serious concern. What were those gaps? What was AGSA doing to mitigate this?
The overall conclusions were that controls were adequate and partially effective.
Mr Biesman-Simons said that in respect of controls, internal auditors did a lot more work than external auditors. They had reached a conclusion that the system was adequate to meet the needs of the organisation in terms of not having breaches of controls. They could be relied upon and would support the organisation in terms of presenting numbers that fairly represented the situation. What they were saying was that the framework that was in place was appropriate and adequate.
In terms of effectiveness, which was looking at controls, the access controls and security controls as expanded on by the Deputy Auditor General, if they did identify a few gaps -- as they did and as had been discussed -- they would conclude that the controls were partially effective. This was because they found a couple of areas they considered partially effective. In most cases, the controls were adequate and effective. Being partially effective came out of the IT arena. As the Deputy Auditor General had said, because of concerns, the committee had asked them to do a review of the areas where there were concerns. They had then concluded that everything was in order. At the end of the year, the conclusion could be that they were partially effective, but they needed to review the whole period. In the earlier part of the year, there had been a conclusion that there were gaps, and the overall conclusion was that they were partially effective. They were happy with the work that they had done.
The external auditors had been appointed to provide an opinion on the predetermined objectives. They had presented the report, and the Audit Committee reviewed it and interrogated it to the extent necessary. There was a conclusion signed off by the auditors in the financial statements.
Regarding the reappointment of the external auditors, Mr Biesman-Simons said that indeed they had not replied by the end of June, but during what he thought was the first week of July. The mandate that was received from SCoAG was that transformation was very seldom a case of instant gratification. Transformation was very difficult to implement. There needed to be a plan which was developed against which progress could be measured. That the plan had been finalised while he was overseas. He had reviewed it and emailed comments. However, his colleague was far more intimately involved with the external auditors. He asked to hand over to her to deal with this.
Ms Z Dlamini-Dubazana (ANC) said that there was no need for him to hand over to his colleague. What the audit committee needed to do, as per the SCoAG request, was to go back to their office and tell the Committee exactly what was being proposed as a plan so that SCoAG was able to monitor whether the proposal or plan was being achieved. They also needed to give a time frame, because at the moment, they were simply providing assumptions. She was happy with the reply, but they needed to put it in writing so that the Committee was able to compile it’s report for Parliament.
The Chairperson concurred with Ms Dubazana. Transformation was a matter which the Committee took seriously. If one needed to explain what was in the report, it meant that the offering was inadequate. Without this, it would be difficult for SCoAG to perform its oversight role. Regarding the letter dated 6 July, she said it was not as clear as it could be. She asked that the transformation plan be provided as soon as possible.
Mr Biesman-Simons said that the external auditors had already given them an indication of what they had done so far with the plan. They had implemented certain things to date. They would communicate these, if the Committee so wished.
The Chairperson said that it was important for the Audit Committee to provide such information in writing in order to enable the functionality of SCoAG.
Mr Biesman-Simons said he unsure what the question pertaining to Crowe was.
Ms Dubazana responded by saying that she was praising them for reviewing it.
Mr Smith said they had mentioned the reappointment of the incumbent internal auditors. Who were the internal auditors? Was it an outsourced internal audit function, or was it people on the payroll?
Mr Biesman-Simons responded that it was Sizwe Ntsaluba Gobodo. It was an outsourced function.
Mr Smith asked to know why they had outsourced their internal audit function. Was this due to a lack of capacity? He wanted to understand the principle behind the decision.
The Chairperson said that she hoped they would attempt to answer that question, because it was a serious one. Other departments would come before the Standing Committee on Public Accounts (SCoPA), and answer why they were outsourcing their internal audit -- did they have the same thing with the AG? This was a serious problem and concern. She hoped that when AGSA started with their briefing, they would clarify that.
AGSA Performance Review
Mr Kimi Makwetu, Auditor General, AGSA, said that the integrated financial report tabled the previous week was the subject matter of their presentation. They wanted to see a South African public service that was characterised by:
- Strong financial and performance management systems;
- Oversight and accountability;
- Commitment and ethical behaviour by all;
- A value-adding assurance provider in the form of the AGSA.
AGSA was driven by its mission, which stated that it had a constitutional mandate and, as the supreme audit institution of South Africa, existed to strengthen South Africa’s democracy by enabling oversight, accountability and governance in the public sector through auditing, thereby building public confidence.
He also mentioned that he had requested SCoAG to look into the matter of packages for AGSA personnel, as this was a pertinent matter.
AGSA’s commitments to Parliament were structured around four strategic goals:
- Value-added auditing aimed at providing audit-derived valuable insights to stakeholders on the status of their internal controls and performance environment, accompanied by actionable recommendations. If implemented, AGSA’s recommendations would lead to visible improvements in public sector administration.
- Viability. An internally-focused perspective of AGSA’s work ensured that it had the necessary resources: an enabling legal framework, independent financial resources, and the required skills, competencies and culture to execute its mandate economically, efficiently and effectively.
- Visibility for impact, structuring its stakeholder engagement programmes to effectively encourage and enable the required improvements in the public sector.
- Vision and value-driven. Through its work and behaviour, AGSA aimed to lead by example and continually demonstrate that clean administration and transformation were achievable.
AGSA’s performance against predetermined objectives in the area of value-added auditing had seen the entity conduct 1 003 audits, with 82% concluded within the legislated time frames. It had audited 11 out of 21 Schedule Two state-owned enterprises (SOEs), and had continued to oversee SOE audits to ensure consistency in reporting to the National Assembly
The integration of audit disciplines had been successful. Investigations staff had been involved in 259 audits (80 fraud risk engagements, 131 fraud risk and data analytics (FRDA), and 48 high-risk contracts). ISA (International Standards on Auditing) staff had contributed at 298 risk level 2 and 3 auditees, while regularity auditors completed technology checks for 161 level 1 auditees. Performance Auditing had done work at 157 auditees.
AGSA had tabled a report on sustainable human settlements in the Eastern Cape; successfully implemented the revised audit methodology without significant disruption; implemented a value chain approach for the health and education sector audits, and some water infrastructure audits at metros; and further enhanced the process of compiling the general report and its content
Mr Makwetu reported that there had been an increase in the number of audit contestations. There had been 56, with two court actions involving the SA Revenue Service (SARS) and the Department of Water and Sanitation (DWS). Three contestations – from the Department of Environmental Affairs (DEA) and the Western can Eastern Cape Department of Agriculture – had been tabled late. The main causes had been disagreements with findings or technical consultations, regression in the audit outcomes, concerns around the quality of the audit teams, and auditees challenging the change in the Audit Methodology Programme (AMP), and expectations of a clean audit not being met. The effect of these contestations had been auditees missing out on opportunities to improve their processes that were aimed at service delivery, undue pressure on AGSA’s audit teams, and a delay in the conclusion of audits and unnecessary increases in the cost of audits.
During the year under review, AGSA had held 2 783 meetings with its various stakeholders; prioritised 125 stakeholders and had 360 interactions, intensified its discussions with Portfolio Committees and incorporated its recommendations in their resolutions, and provided its insights for their oversight visits. SCoPA utilised AGSA information for their oversight purposes. The Association of Public Accounts Committees (APAC) capacity-building sessions focused on sector reports and unauthorised, irregular, fruitless and wasteful (UIFW) expenditure.
AGSA’s flagship engagement programme was aimed at identifying key areas of concern, providing its assessment of the status of key focus areas, assessing progress made in implementing action plans, and identifying matters that add value. There had been a 54% implementation rate of status of records reviews at all planned auditees. Full implementation was envisaged over a 22-month period and would be finalised by March 2019.
There had been a systematic approach to engagement with citizens to educate them about the AGSA. Media engagements had been successful. Provincial media briefings had been reintroduced to share and enable provincial media agencies to report on key provincial messages. Social media had extended AGSA’s visibility and reach, and had been used to highlight its engagements with universities, professional organisations and its international programmes
Mr Makwetu referred to engagements related to development of the PAA amendment bill, and said there had been detailed engagements with SCOAG and the Minister of Justice, as well as public hearings and engagements with various organisations, such as the Independent Regulatory Board of Auditors (IRBA), the South African Institute of Chartered Accountants (SAICA) and the South African Local Government Association (SALGA).
He said there had been a unique assignment resulting from the decision of the Constitutional Court on 17 March 2017 related to the work of the SA Social Security Agency (SASSA) panel. A 10-member panel of experts, chaired by the AG, had evaluated the work of SASSA on grant payments. The AGSA had offered full secretarial service and absorbed the costs related to the functioning of the panel.
Based on the value provided by the panel, its work had been extended to 30 September 2018.
Regarding the status of the internal PA project, AGSA was preparing its internal and external environment for the implementation of the amendments through extensive internal communication. The drafting of regulations had been concluded, and engagement with the SCoAG was planned for 23-26 October. The implementation approach had been defined and a review of processes, systems, capacity and skills was under way. Training material preparation was in progress
Feedback from stakeholders indicated that 80% of constitutional stakeholders – coordinating ministries, portfolio committees, Public Accounts Committees, auditees – were satisfied with AGSA’seffectiveness in supporting them in carrying out their duties, appreciated its focused discussions, and considered its staff as well prepared and knowledgeable. 90% of citizens -- the media, civil society organisations, government communicators, institutions of higher learning and professional bodies -- were clear about their role as active citizens in holding government accountable, understood the role and mandate of the AGSA, and expressed the view that without powers to enforce consequences, AGSA’s work would not fully contribute to better governance and accountability.
Ms Ratsela gave an overview of the human capital performance. Of the 1 085 employees, 541 (50%) were internal appointments, and 544 were external appointments. Of these, 371 (68%) were trainee auditors. Commenting on the trainee auditor scheme, she said 995 chartered accountants had been produced since its inception. 1 144 learnership contracts had been awarded, and 50% of participants were African females. 59% of participants in 2018 were Certificate in the Theory of Accounting (CTA)-qualified tax auditors (TAs). 382 candidates had written the Initial Test of Competence (ITC) exam, and 218 had been successful. 224 candidates had taken the Assessment of Professional Competence (APC) exam, and 150 (67%) were successful.
With regard to the trainee auditor pipeline, she said academic trainees appointed amounted to 20, which was a 65% increase. There had been 75 Thuthuka-sponsored students, and 67 Thuthuka CTA students had received placement. The external bursary scheme had amounted to R11.2 million in support of 130 students.
Ms Ratsela referred to the augmented employee value proposition (EVP), and said the augmented EVP meant that joining a pension fund and medical aid scheme was on offer to new employees. A group comprehensive insurance scheme was available, and a basic rewards and recognition programme was in place, while a non-monetary reward component had been added.
AGSA had implemented most of its ICT-related projects, although it had fallen short of its targets. A TeamMate upgrade to R11 had been successful, with no significant loss of audit time or revenue. The Enterprise Resource Planning (ERP) upgrade was also fairly successful, and phase 2 was in progress to ensure full benefit was realised. However, the general development of new applications had been slow due to insufficient skills.
Regarding AGSA’s contribution to transformation, she said the entity had been a level 2 Broad-based Black Economic Empowerment (B-BBEE) contributor for the fourth consecutive year. The buy-in to the transformation agenda by its staff had greatly improved. It had been a finalist for the Disability Award at the South African Board for People Practice (SABPP). In 2017/18, 16 business units had achieved level 2 status, while six business units had over-achieved, attaining level 1 status.
From a financial point of view, R575 million worth of audit work had been outsourced, amounting to R402 million between 2016-17. R456 million of this had gone to B-BBEE level 1 and 2 firms. R 255 million of work between 2016-17 had been allocated to black-owned firms, of which R53 million had been allocated to black women-owned firms. AGSA had also adopted 16 schools, including rural, special needs and semi-urban schools
The external audit opinion of AGSA was that it had achieved a clean audit for 2017/18. Its internal control environment remained adequate and partially effective, and 99% of its employees had submitted their annual declarations. The ethics policy now included a cooling-off period for joining auditees. It had received 25 complaints as at 31 March 2018, of which 18 were closed and seven were pending, being in various stages of the investigation process
AGSA had recorded an impressive set of financial results. These results came at a time when the South African economy was on a path to recovery, coming from the recession experienced in the first quarter of the 2017-18 financial year. Compared to the previous year, revenue had increased from R2.977 billion to R3.247 billion, gross profit from R1.008 billion to R1.184 billion, and the previous year’s deficit of R15 million had been turned into a surplus of R67 million. The previous year’s deficit of R15 million had been mainly driven by the investment costs arising from the Audit Methodology Programme, coupled with catch-up projects, and the organisation had managed to consolidate its resources through implementing strategies such as driving efficient utilisation of resources, cost optimisation tactics and strict management of working capital, to achieve the R67 million surplus.
The major highlight from the trading section was increased productivity levels, as shown through the achievement of a productivity rate of 60% in line with targets, and this was deemed a milestone considering the full implementation of the revised audit methodology, which brought about savings in hours. This strategy, coupled with pooling tactics, had created opportunities for the take back of some of the audits, resulting in a reduction of Contract Work Contracting (CWC) from 20% to 18% of audit income in the current financial year, resulting in revenue increasing by 9% year on year.
Overheads had responded positively to the journey of cost containment and cost optimisation tactics, with total overheads spent significantly below budget. This journey included a moratorium on headcount, strategic sourcing wherein major contracts were renegotiated, use of own resources instead of consultants, and general appreciation of cost consciousness by staff.
Included in this financial performance was an amount of R58 million written-off as part of the settlement agreement with National Treasury of R150 million to liquidate the long outstanding and prescribed debt owed by the 1% of financially distressed municipalities. Also included in the results was the AGSA contribution to the fiscus of R72 million, which came through unbilled hours as a result of budgetary constraints by auditees, which further demonstrated its commitment to affordable fees.
The balance sheet remained in a healthy position, with the cash balance increasing by 20% to R664 million (2017: R553 million) at year end, resulting in an improvement in the monthly cash reserves to 2.14 months (2016-17: 1.9 months). The drive behind these encouraging results was attributable to its concerted effort to manage its financial performance, collections and working capital.
The debt book continued to perform well, driven mainly by the settlement from National Treasury of an amount of R150 million. As a result, the year-end provision for impairment of R87 million had decreased from R177 million from the previous year. Furthermore, the local government debtor days had improved from a high of 424 days to an all time low of 165 in seven years.
The National Assembly and the National Council of Provinces (NCOP) had passed the PublicAudit Amendment Bill 2018, unopposed. These amendments would enable AGSA to audit more smartly, thereby entrenching efficiencies that had not been possible before. Furthermore, the amendment to section 23 of the Public Audit Act would soon enable it to access the National Revenue Fund (NRF) directly to supplement the audit fees that auditees in financial distress were unable to pay.
The quality of AGSA’s debt book had improved, which was indicative of the success of its enhanced collection strategies and a significant payment from the National Treasury. Its debt book as at 31 March 2018 was R650 million, compared to R806 million at the same time last year. In addition, the local government debt of R249 million (2016-17: R391 million) constituted 38% of the total debt, an improvement from a high of 49% in the 2016-17 financial year.
AGSA had continued its ring-fencing and litigation efforts to further improve collections. It had collected a cumulative amount of R274 million through ring-fencing agreements, with R91 million (2017: R94 million) collected in the current year. This initiative was still considered to be effective, as it allowed some of the debtors to catch-up with their old debt whilst liquidating the current debt. The strategy of enforcing the collection of debt through litigation had resulted in an amount of R73 million being collected, compared to R63 million in the same period last year. Since the implementation of this strategy, an amount of R244 million had been collected. AGSA had incurred R1.4 million (2016-17: R1 million) in legal costs to recover the debt through this process.
Mr A McLoughlin (DA) said it appeared that from what they had done independently, there had been a misstatement of the shortfall of fruitless and wasteful expenditure. He wanted the AGSA to make it clear what the figures were, going into the future.
Regarding the increase in audit contestations, SARS and the DWS had taken the AGSA to court because they disputed their results. This was an undesirable state of affairs, as both parties were using taxpayers’ money in order to achieve a result. How were these costs dealt with, and who decides whether the cases are viable or not? Were there any attempts to mediate a settlement of the dispute before litigation took place? If these were two of the 56 disputes, what happened with the other 54? Were they likely to end up in litigation? If the problem was that they were disputing the audit result, he thought there must be another way of dealing with the situation. Was there no way of bringing in an independent person to check in order to arrive at a conclusion about which party was accurate? It could not be a legal question -- it had to be an auditing or accounting question.
He wanted to know if there was a reason for the huge discrepancy in the percentage of senior managers (70% to 87%) who had passed tests from 2015/16 to the 2016/17 years. How did they deal with the actual results -- were there consequences for those managers who had not passed, such as a reduction in salary?
The AGSA had said they had 2 783 meetings with various stakeholders, and 360 interactions. He asked what the difference between a meeting and an interaction was.
He commented that the 54% implementation rate of status of reviews seemed very low. The AGSA had stated that the 22-month period would be finalised by 2019. Did this mean that there would be a 100% rate reached by then? Was the AGSA concerned about this? Was there a good reason why the figure was only 54%?
He wanted to know what the result of the court assignment with regard to the SASSA panel was.
Ms Dlamini-Dubazana referred to the R67.3 million surplus, and said the SCoAG had to approve or disapprove of this. What usually happened was that it always approved AGSA returning a surplus. This was a decision which they needed to agree on as a Committee. If it approved what she was proposing, the AG would return the surplus, after which they would be given 30 days to motivate how they would utilise the funds.
It was up to the SCoAg to first make a pronouncement about agreeing and approving integrated reports. This should take place before speeches or reports were written, confirming them.
She thanked the AG’s office for trying to ensure that there was transformation in South Africa. She hoped this would be an ongoing practice.
She also suggested that next time the AG compiled this report, there were words which needed to be avoided because such words created an incorrect perception. On page 122, there was a report of an independent audit. The main function of the external auditors was to look at the financial statements and how the institution was performing, based on their predetermined objectives. Due to the fact that there was other information which they were sitting with, they tended to give an opinion on it. She was uncertain about the mandate. If the mandate allowed them, they needed to give clarity. For example, on page 122 they spoke about other statements, not the financial statements. They concluded that “there was material misstatement of other information. We were required to report the fact. We have nothing to report in this regard.” She contended that to someone did not understand auditing or finance, it left room for misinterpretation of information. She believed it was the DG’s office which was responsible to ascertain what the information viewed was based on when an opinion was reached.
In the integrated report, they spoke about the amendment of the PAA, but sections 5, 7 and 34 were not clearly outlined in terms of what it dealt with.
Mr Smith wanted to know if there was a schedule which explained the reason for writing off bad debts, for tracking purposes, in order to ensure that there were no serial repeaters.
Last year around this time, the KPMG and Nkonki Inc auditing contracts had been a highly contested issue. The AG had taken a decision to relieve them of their duties. Was this still the case? If so, had it had any impact on the workload of the AG? Were they still on the supplier database?
Mr Makwetu responded to Mr McLoughlin’s assertion that there had been a misstatement of the shortfall of fruitless and wasteful expenditure, where there had been R50 billion reported, but it was R72 billion combined.
The AG had reported on irregular expenditure in a consistent pattern for more than a decade. They had not included the big trading entities for several years. For instance, when Eskom was reporting its financial results, there was no requirement for including certain items as per international financial reporting standards, as was the case with the Public Finance Management Act (PFMA). Therefore, for historical reasons, the R20 billion difference had been observed. AGSA had always expected that they would be the ones who reported on irregular expenditure. It was good to compare different databases by various other parties interested in the number. However, if one stuck to who reported in terms of the mandate on this particular occurrence, which was a statutorily determined function for that report, it would be beneficial. On the periphery, if someone had picked up data from other sources, it would supplement them in terms of reconciling number that one had. If there was more than one report, it would confuse the public. If someone had a different number, they could contact the AG and inquire why the number was different to the one which was independently sourced. A change in the numbers at this stage would cause a distortion of figures and an accompanying uproar. This was the key point he wanted to make. Anybody who wanted to know about irregular expenditure ought to use one number. Such a number was communicated by the AG’s office. He also made an appeal to anyone who had not seen the audit evidence and had no documentary backing for a number, in terms of a substantive engagement in an audit, the AG’s number would be the closest number in terms of reliability and certainty in an audit. Another number would probably not pass the test when traced back to the originating source. Another reason was the substantive matters which made it continue the way it did. Nevertheless, the AG took the point about the need to reconcile it.
Regarding the legal challenges, the current leadership at SARS had decided that they were no longer going to pursue the matter reported by the AG, which dealt with bonuses. The AG had proceeded in accordance with the Act, which stipulates what should occur. SARS had decided that it was not worth pursuing the matter further.
They were unsure about what would occur with the Department of Water and Sanitation matter. The AG had reported about certain items, where it had also used the services of an independent expert to evaluate certain matters. It often happened in an audit that people would have a different view about how certain items were treated in line with a particular standard. A standard was not a set of rules. It involved matters for consideration in assisting one to come to a conclusion. There would also be a gap in interpretation and understanding of why certain disclosures must be made in financial statements. It was a new phenomenon for people to run to the courts. An audit conclusion was an opinion. It was not saying that one was absolutely certain, in no uncertain terms about a particular matter. In their opinion, the matter had needed to be reported. In instances like this, there may be a contestation. The AG did not believe that it was a matter which could be resolved by the court. It was an audit. There needed to be something provided as corroborative evidence by an auditee in these cases, rather than explaining it to the AG. The AG was also reluctant to commit public resources to legal contestation. They were also open to finding alternative solutions in such scenarios.
The important issue about financial statements was that they were largely about the substance of the matter, if one looked at them from a government point of view. Sometimes, they were not about the letter of the law, which was where the difference came in. The AG appreciated the substance in terms of exposure to matters of possible malfeasance, while someone else might be interpreting it with rules of jurisprudence, which they did not fault and was probably a valid matter. However, when one looked at an issue of substance, a different conclusion could be reached. This was the case particularly where there were no weaknesses in the control environment, and significant exposure and losses in the past. There would always be a difference between a lawyer and an accountant when it came to the appreciation of some of those matters. Some parties were eager to rush to the courts, despite there being space to engage before this.
Looking at AGSA’s processes in terms of the review showed that when they had completed an audit, they submitted it to an independent pre-issuance review so that another auditor who was not involved in detail in executing the audit, could give their own view about whether the conclusion of the audit was supported by evidence. In this way, AGSA could then take assurance from someone who understood the rules of accounting and auditing prescripts. They took confidence in having an independent eye.
Mr Makwetu said the sample that was selected by the independent quality assurance process was only to the extent of 63 files of the 1 003 reports which were signed off. This was the sampling technique which they used. There needed to be a file which represented an audit done nationally, one done provincially and another done at the municipal level. There also ought to be a broad range of managers, which included those which had just been promoted to senior manager rank, as well as those which, due to the AG’s quality assurance rules, were subject to continuous compulsory review. With regard to the other 940 files, what were the chances that similar types of deficiencies could be found? The AG would not be able to determine that scientifically. If the determination of the sample was done scientifically, then one would be able to extrapolate the results based on what was found in the sample to be typical of what was found in the rest of the population.
AGSA had come across 83 senior managers, and they had delivered on their audits extremely well. The AG was of the view that there would be similar patterns in the other files which they may have not selected, because behavioural and orientation issues influence across different levels of people, sometimes in different audits. The predominant issue which was picked up in the quality review process was sometimes a lack of documentary evidence for certain conclusions which were reached. This was a risk for the AG. This was why certain staff failed when they had made certain assertions without evidence.
There were consequences for the failure to meet quality standards. This situation was followed by an investigation of instances where, for instance, someone had expressed a clean audit opinion. However, when doing a quality review process it was found that there were certain deficiencies, there would be an investigation to follow up and check the appropriateness of such a conclusion. Secondly, the person who had failed the test would be subjected to compulsory selection for the next two years until quality assurance was satisfied that there were no significant matters. If it had been a clear dereliction of duty in certain instances, consequences would follow. These could range from no longer being allowed to sign-off, to becoming a normal contributor to different sections of the audit. The quality score was added to other measures which were considered in the evaluation for performance at the end of the year. Therefore, a dismal score would be part of the grid which went into the overall performance group. If a score was really bad, it meant that an individual may fall below the threshold of individuals who receive certain considerations at the end of the year. Other than that, the individual would realise that they were not trusted technically, which was undesirable as a professional. A removal of the ability to sign was a tacit statement of a lack of confidence in an individual’s ability to mitigate certain risks. This usually resulted in an improvement in order to ensure that they met the benchmark.
The 54% regarding the status of records review had been an initiative which the AG had introduced themselves 18 months ago. This was done in response to a question about what the AG could do in the interim in order to abate the risk of audit failure. The 54% was not a specific target, but was just a position the AG was in at a specific point in time. The AG would like to complete all of them, but the reality was that sometimes there were busy with other audits. The AG had made significant progress in introducing the culture of internal control over the last 18 months, and they were just over 50% of entities which they had to audit. Therefore, this did not necessarily mean that they had a target of 100%. This was something they believed would be completed at the end of two years from the date of commencement. What the AG’s position was that to the extent of 54% of the status of records review, the remainder needed to be completed. There was no risk attached to the percentage.
The SASSA panel had 10 members, together with the Auditor General. They had often reported to the Constitutional Court on work assigned to them, and the final outcome of it was also a final report to the Constitutional Court. This was one of those instances in which one did what was requested of one. There were no obligations or responsibilities beyond it.
Mr Makwetu agreed with Ms Dlamini-Dubazana about the surplus funds. One of the things which the AG did was to leave it in the hands of the Committee when they did their deliberations. The AG would also submit the kind of things which they had an interest in. One which came to mind was that they would be moving into the implementation phase of some of the responsibilities that would come with the amendment of the Public Audit Act. It would be in that context that the AG would need additional resources. It would be helpful if the surplus were to be viewed in this context. Since the beginning of the strategic plan, there were numerous projects which had been put in place. These would strengthen the capacity of the AG and ensure that it remained sustainable. The relevance of the institution would also follow a similar pattern.
One of the guidelines for putting together an independent auditor’s report included things like consideration of other information, such as whether the auditors had checked the books of an entity and had satisfied themselves. For some reason, the Deputy AG in her report had written a paragraph about a farm owned by the AG, and it was for such instances that an auditor must reflect on other information. The above information had no relevance to the financial statements which had been audited by the auditor. The auditor in this instance had been asked to report about things which they may have come across which were not typical of the business of an entity. It may sound vague because it was driven from a technical template, but that was what it was about.
The statement that had been issued in April which said that the AG had severed ties with Nkonki Inc and KPMG, still stands, and until something changes, the position would remain. There were investigations which were still outstanding from the Independent Regulatory Board of Auditors which were examining all manner of things. There was also the Ntsebeza Inquiry, which was instituted by the SA Institute of Chartered Accountants (SAICA). Both of these processes had not yet been completed. The AG would also be well-informed when both processes were finalised. If it happened that any of them wanted the AG to make an investigation, there would need to be a system-wide intervention from the IRBA and from SAICA. The AG would then take their cue from the above.
Its impact was that because it had happened in the middle of the reporting period, the AG had had to make some tactical changes internally, but had also had to accommodate a few staff members who had fallen off the bus as far as those who were working at Nkonki. Some of these professionals had many years of experience. They were now working under the guidance and discipline of the AG. The workload had definitely increased. The AG had had to complete audits with the assistance of staff from the likes of the Development Bank and DENEL, with the latter still in progress. The impact of this had been to stretch the resources of the AG. They had taken some short to medium term steps to proactively manage this process. The AG had interacted with the principal management and leadership of these institutions through the audit. They believed they would be able to provide quality assurance to these entities, but would need additional resources because of the high demands. 11 of 21 of these entities were large organisations which would require the right personnel. The failure to do this would result in increased risk for the AG.
The R57 million write off had largely been the interest on the debt which had been outstanding for many years. This had been done after receiving a cash payment for settling this debt from National Treasury. They had given the AG R150 million. Some the debt had been outstanding for seven or eight years, and what was left on their income statement was the R57 million. The AG had then decided to debit their income statement in full and final settlement with the R57 million. The list of the municipalities was available, but they were predominantly in the Northern Cape and the Free State, with some in the North West. The latter were provinces which had significant balances at the local government level. The situation had now been resolved.
The Chairperson thanked the AG for their responses, and highlighted that the institution promoted the accountability of entities. The questions which were posed had been aligned in this manner for the AG as well. The calibre of personnel at the AG needed to be high in order to stifle instances of litigation. This was a matter of grave concern for the Committee. The Chairperson asked about the assurance which the AG would provide. She wanted to know whether this was the practice or not. Was there an additional cost for this? What was the norm for this globally? She also said that the percentage of disabled individuals was very low, and that it could be improved. There had been complaints about some staff members who had gone on to start their own companies such as SekelaXabiso, but were committing errors which they should not be committing, given their experience at an institution like the AG. It was important that at a strategy meeting with SCoAG, the AG needed to deal with the above matters.
With regard to the packages, there had been mention of the medical aid for staff and increments, and the SCoAG needed to be given an opportunity to discuss such matters. This was important for the AG as well, because there needed to be discussions about the post-tenure period of the AG. The Committee needed to have a session in which the above would be discussed. If employee interests such as these were ignored, it would lead to problems. Employees who were well-taken care of would also demonstrate this in their work. There was no need to allow a brain drain to occur.
Mr Makwetu thanked the Chairperson for the points she had raised, and said AGSA would take these points into consideration.
He said when people left the firm to start their own, there was not much that the AG could do about it. There was little which could stop employees from moving once they had made the decision. The fact that they were exposed to certain disciplines meant that once they had left, they found themselves in an environment with a different culture orientation. They might move to a firm which shared the same values, but such an environment would have to sell, which was not the case at the AG. The work had already been sold for the AG in the form of a statutory mandate. When former employees moved to the former-mentioned firms, they adopted practices which were not similar to what the AG did. They operated aggressively in an attempt to win work, and they probably would not be the ones delivering the work. The cooling off period helped the AG as far as this was concerned.
The pre-issuance or status of records review was built into the cost base of the audit. It was part of the final quality review of an audit in order to get to an opinion. The status of review process had been positioned as an investment of time. The statement of records was supposed to be housed within an internal audit function of a particular entity. The AG would not get preoccupied with the status of records review forever. If the institution showed that there was a strong internal audit function, the AG would recommend that their internal audit function be the one which highlighted red flags on a continuous basis. The AG was at 54% of the journey. Over time, they would relinquish this aspect to the Accounting Officer.
The Chairperson said that the Committee would be reporting to the National Assembly on 25 October 2018. All reports which should be provided by the AG would need to be provided before 19 October.
Ms Dlamini-Dubazane said that after the meeting and after the integrated report had been scrutinised, the Committee would need to deliberate about whether or not the surplus should be retained by the AG or not. The AG still needed to provide a report. This would also be necessary in order for the Committee to utilise it in its reports.
Mr Smith observed that there was no quorum to follow suit, as Ms Dubazana had suggested. Secondly, the Committee would deliberate behind closed doors about this and it would be put in the Committee’s report to Parliament.
The Chairperson agreed with these sentiments.
Mr McLoughlin wanted to verify what portion of the stated surplus was billed hours, and not cash in the bank. If the former held true, it would be difficult to pay this amount.
Ms Ratsela responded by stating that most of it was sitting in the debtor’s balance. The debtor’s balance was far greater than the amount of the surplus. In order to support the Committee, the AG would submit a formal request as they normally did for the retention of the surplus, with details of how they intended to apply it.
The Chairperson said that there would be communication with the Committee regarding when the report would be discussed and formally adopted. The regulations were scheduled for consideration on 23, 25 and 26 October. By 16 October, the Committee was expecting recommendations from the AG for the regulations on the PAA so that the legal department of Parliament could start working on it.
The meeting was adjourned.
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