Deputy Auditor-General appointment; Public Audit Amendment Act Regulations; Annual Report & Legacy Report

Standing Committee on Auditor General

26 February 2019
Chairperson: Ms N Khunou (ANC)
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Meeting Summary

Documents handed out: Summary document [Members’ only]; Public Audit Amendment Bill: Draft Regulations briefingPublic Audit Amendment Act

The Auditor-General of South Africa presented to the Standing Committee on the Auditor General on regulations pursuant to the Public Audit Amendment Act (PAAA), the progress of AGSA’s Centenary Scholarship, and the renewal of the Deputy Auditor-General’s term of office. The Committee also discussed its Annual & Legacy Reports.

The Auditor-General made the case for both two and five year extensions to the Deputy Auditor-General’s term, noting that the two-year extension may make sense in terms of a natural transition as the current AG’s term expires only 4 months before. However, the AG and Committee members agreed that a five year extension had the benefit of ensuring continuity and institutional memory at AGSA, while not compromising the current DAG’s prospects of taking the AG’s vacant office.

In terms of PAAA regulations, the Auditor-General clarified the AGSA’s preparations for the implementation of new enforcement capacity, including roadshows and education of related agencies, as well the construction of an objective metric to permit the AGSA to target highest-risk municipalities in its first year, which would be the pilot programme for these regulations. Members from the EFF and ANC noted the need for internal capacity and high ethical standards, which the AG concurred with, detailing AGSA’s preparations in terms of a forensic and legal unit to deal with administration of potential issues and material irregularities.

The Committee then discussed issues surrounding the formatting of the Legacy Report and what to include, which were to be concluded at a later sitting.

Meeting report

The Chairperson welcomed the Committee, and noted that this would likely be the Committee’s last meeting.

The Chairperson read out the apologies that had been submitted.

She then dealt with the first agenda item, apologies: Mr A McLoughlin (DA), Ms D Carter (COPE), Mr V Smith (ANC), Ms P Bhengu-Kombe (ANC). 

The Chairperson proceeded to agenda item 2: the appointment of the Deputy Auditor General.

Appointment of Deputy Auditor-General (DAG)
The Chairperson clarified some background on the matter: Section 31 of the Public Audit Act 2004 provides for appointment of the DAG. The Act requires that the Auditor General consults the Standing Committee before appointing the DAG. The current DAG’s term ends on 31 March. Section 31 provides that the DAG may serve up to 5 years. It also provides for the reappointment of the DAG to serve up to 5 more years. The Act does not require consultation in the event of reappointment. The Chairperson then gave the floor to the AG.

Mr Kimi Makwetu, Auditor-General, AGSA, thanked the chair and greeted members. He then moved to his introductory comments: Section 31 2A of the Public Audit Act handles the term of office of the DAG. Members would recall that when term of the current DAG commenced, the AG had engaged in a similar exercise, briefing the standing Committee in 2014. The DAG’s term ends 1 March 2019.

Mr Makwetu then explained the options available to him. Declaring a vacancy was discounted. He will pursue the other option: extending the contract of the current DAG. The process of regularising the appointment has already begun, in terms of due diligence. For example: the DAG’s appointment came with the condition of security clearance, which expires with the current DAG contract. Section 31 (2((b) includes performance requirements. One of the things still outstanding with renewal of the DAG is renewal of clearance. He has already signalled procedure to continue with the regularisation of the reappointment of the DAG.

Section 31 (2)(a) provides for renewal of one further period of no longer than 5 years – it is useful to extend for the full 5 years or for a period that harmonises with the natural transition in the office when the AG’s term expires in November 2020, for instance the extension for 2 years of the DAG’s contract so she is in place for a short time after the current AG’s time ends 30 Nov 2020. The possibility is extension to 31 March 2021, although the AG made it clear that when he was appointed AG, his contract as DAG still had a number of years remaining – so this was not an obstacle to the DAG becoming AG.

As far as due diligence was concerned, Mr Makwetu stated he was working well with the current DAG and had no issues. His question to the Committee was: for what period should the DAG’s term be extended?

Discussion
The Chairperson moved to discussion of the issue.

Ms N Mente-Nqweniso (EFF) thanked the AG, and recognised the 2 options. She wondered about the legal implications of the transitional approach, questioning whether it was permitted to extend the DAG’s term for just 2 years. 

Mr Makwetu responded that section 31 (2((b) of the Public Audit Act (PAAA) did not state that the term must be extended for another 5 years, just for a period of no longer than 5 years.

Ms Mente-Nqweniso replied she then did not have a problem, especially seeing the DAG was the first black female in that office. 

Ms Z Dlamini-Dubazana (ANC) agreed with the AG that the 5th Parliament is finishing its term and the AG’s term of office ends Nov 31 2020. Her experience of Parliament since 1994 is that it is crucial that whatever happens, the DAG must not find themselves uncomfortable about having to fill a full 5-year term in the new parliamentary dispensation. She requested specificity in terms of the extension, proposing 2 years, so that there is no power vacuum in the transition to the new AG, and it maintains institutional memory.

Mr Makwetu replied this would extend the DAG’s term to 31 March 2021, 4 months after the new AG’s appointment.

Ms Dlamini-Dubazana stressed this gives a chance to the new AG to adjust and choose a new DAG.

Mr N Singh (IFP) noted that the AG had the capacity to appoint for 5 years. Two options are available: an appointment for 2 years, which creates expectation that the current DAG will become AG. He proposed extension for 5 years, and if the DAG applied for the AG’s position and got it, the contracts could be amended. However, if there is a new AG, the institutional memory of the current DAG should not go to waste. She’s good, experienced, why should the Committee remove job certainty from her? He reiterated his preference for a 5 year contract, and if new AG comes into office, they will have to live with her.

Ms Dlamini-Dubazana stated we are living under a democratic constitution, and so we cannot avoid change. She preferred not to establish certainty in appointments so long before the vacancy was proposed. Depending on who will be President at that point, the DAG could become AG and run the process of appointing a new DAG, or have her term extended to run the full 5 years.

Mr Makwetu replied that it was a question of preference. There is an extreme argument on the other side: what if we have a different outcome and we would have preferred a different person for the next 5 years as DAG? However, the 5-year extension is allowed by law, and it means there is no bottleneck down the road. If the DAG did not succeed with her application to be AG, then it was not an issue as she still had a 5-year contract as DAG. The law is there for whoever becomes AG to exercise discretion on the DAG. The AG is required to notify the new speaker on the forthcoming vacancy in the AG’s position by the end of March 2020. The key issue is to ensure there is no power vacuum at AGSA. The AG thus leaned towards a 5-year extension, as it changes little about the process of transition to the new AG.

Mr M Shackleton (DA) supported Mr Singh’s statements about the need to maintain institutional knowledge.
           
Ms Dlamini-Dubazana verified that the 5-year extension would run from 1 April 2019 to 31 March 2024.

Mr Singh stated that like any contract, it can be pulled out of at any time. So, the 5-year option is better, as it provides more certainty and institutional memory.

The Chairperson noted the Committee’s agreement on a 5-year extension, hoping it wouldn’t affect the DAG if she was to become the new AG. She then moved to the Public Audit Amendment Act regulations.

Public Audit Amendment Act (PAAA) regulations

The Chairperson stated that members have had the information for the past week. She questioned if there was something they wished to change, but first gave the floor to the AG to summarise the document.

The AG stated the Committee will remember the engagement with the Committee on 21 November 2018, where the AGSA shared the regulations drafted pursuant to the PAAA. What was submitted to the Committee the previous week was a summary of issues raised in that meeting, contained in Annexure A, as well as what was discussed at the consultation session on 28 November.  The Committee had referred to 2 regulations in particular, dealing with material irregularities as well as the regulations that would drive implementation of the PAAA amendments.

The AGSA talked to the drafters of Act, to ensure that there was a consistent flow in the Act and the regulations arising from it. That had been done, and the advice of the Committee was contained in the resubmitted regulations accompanying Annexure A.

The AG gave an example: what if the firm to whom we are planning to refer material irregularities to did not have the necessary capacity? The response was to be able to engage multiple firms to establish who is capable. He recalled that in terms of SIU, there was better capacity because of the introduction of a tribunal to deal with issues they raise directly. The AGSA will be regularly engaging firms and bodies. In terms of material irregularities, the AGSA made sure that recommendation in case of material irregularities is to proper law enforcement bodies, instead of just being an investigation. The AG raised the issue of Section 5.2 item 3 of the PAAA regulations: if the AG has decided to refer material irregularity to a public body, it must be done in writing, so it is an official process that can be returned to.

Discussion
Mr Singh stated that 21 November was a long time ago, but he was glad that the AGSA has taken the Committee’s input into account. He wondered if there was anything else the AG picked up to be implemented in regulations since the last meeting.

Mr Makwetu replied there was not. The AGSA constantly learns as it goes along; its current concern is to get the team ready. If one looked at the amendments, for instance, one calls for identified material irregularities to be incorporated in the audit report instead of the management letter, which often wasn’t subject to oversight. The management letter is sufficient for certain issues, but where an item has significant consequences, it must be included in audit report. 

Mr Makwetu stressed the importance to maintain discipline of going through the regulations in year one on a pilot basis: the enforcement will not go universal, or the AGSA will be spread too thin. The AGSA has already identified metrics to target auditees, including size of financial risk and highest disclaimed expenditure, which make material irregularities likely.

This pilot will allow the AGSA to give feedback and broaden knowledge. It will be spread, not concentrated across one specific sphere of government. The feedback from year one will allow the AGSA to identify issues and give tips. The AGSA is not currently entirely confident in terms of the implementation of these regulations. For instance, what will be the response from the system to remedial action? A disclaimer has to translate to action within 6 months, so there is a need to develop a monitoring process. Anyone disclaimed on 31 July must have acted by 1 January. It must be ensured disclaimed auditees implement AGSA’s recommendations, otherwise this necessitates remedial action, and if this is not implemented, the issuance of a certificate of debt. The regulations give grace to the system to fix issues before enforcement measures come in to play. The system ought to be ready to deal with that continuum. AGSA is ready, and has implemented training and taken staff to different business units. In order to minimise fights between auditors and auditees, The AGSA is taking the meaning of amendments to stakeholders. AGSA would try and push the envelope after May in terms of implementation, as it was currently in a busy period.

Mr Singh agreed that if the AG had not established an objective metric, implementation would have to be universal, but there is no capacity for this. An objective way of determining who to audit first is positive, otherwise the AGSA could be questioned on where it audits first, and its office could be compromised.

Ms Mente-Nqweniso referred to the KPMG saga, where the AGSA used people not controlled by its own structures, and said this was an issue. She added that she can only currently count 3 institutions in South Africa holding morals high in terms of governance.

Ms Mente-Nqweniso recalled that when the process started the issue of budget arose, wherein the AGSA was going to establish a unit to capacitate its office and end the outsourcing of auditing to those possibly taking bribes – how far along was this unit?

Mr Makwetu agreed with Ms Mente-Nqweniso, stating the need to establish internally an office to deal with submissions as they come in. In 2020, when the full rollout of PAAA regulations occurs, the AGSA must have an office with a combination of forensic and legal skills. AGSA would receive submissions of different business units at the end of the financial year cycle, for example if a department has material irregularities, it will be submitted to this unit. The unit’s job will be to navigate what is given by business units to see if a case can be made and if PAAA regulations must be implemented.

Ms Dlamini-Dubazana stated the problem with most bills passed in Parliament is enforcement or implementation, and agreed to put all her energy into the PAAA to make it be enforced. She hoped that everyone else was on board, and that there would be no hiccups to prevent what the AGSA is supposed to be doing. The integrity of the AGSA will be looked at; people will try to discredit the AGSA. People playing with public money moving from department to department will no longer be able to thanks to the PAAA. She wondered how the AGSA is going to engage stakeholders, legal, departments – how does the AGSA train them/consult them so everyone is on board? When the enforcement of PAAA regulations begins, will everyone be on course and not complaining? Already there are rumours that when the same auditors go to the same departments for too long, they end up making friends in the departments – how will AGSA deal with that?

Mr Makwetu replied by identifying 3 key issues: commitment to protecting AGSA’s independence (operational and financial), commitment to technical capacity as well as ethics. It was part of the AG’s mission to make sure ethics were kept to a high standard. If ethics and professional independence are compromised, the person is no longer an auditor but an editor. Instead of auditing documents, they will be doing spell checks rather than looking for substance behinds words and figures.

Mr Makwetu also raised the issue of rotation to deal with risks of familiarity. The AGSA never deploys senior managers to the same department, to ensure a fresh perspective. As far as roadshows with agencies are concerned, this had already been accomplished with the SIU and others. The AGSA was also invited by the National Prosecuting Authority to train prosecutors on the functioning of PAAA regulations, in line with what the AGSA had planned. The AGSA is also presenting the regulations to accounting officers.

Mr Makwetu drew attention to the presence of specific provisions in the PFMA and MFMA that have long been ignored. If these provisions are not addressed, it is a dereliction of the responsibility to prevent fruitless and wasteful expenditure, or to plan for future expenditure. If someone disclaims these responsibilities, they probably do not want to be an accounting officer. The PAAA regulations are merely a continuation of the provisions contained in Section 38 of the MFMA (which handles the stopping of municipal funds). Others will try to contend that they don’t need to be investigated – the best way to not be investigated is to comply with the requirements of the PFMA. Some try to do it, but he proposed that the reality is that the PFMA is largely not complied with.

Mr Makwetu identified that the AGSA had a chance to get the whole system to be aware that when an audit starts, it is no longer a routine exercise done because the law says so. Audits will be instructive. If you know your accounting records are properly kept, expenditure is tracked quarter by quarter and reports to the respective portfolio Committees are accomplished, you will escape these provisions. In that case, it is unlikely to get material irregularity. There may be mistakes, but nothing in the realm of a material irregularity that is likely to cause significant financial risk. This helps the AGSA as it doesn’t have to mobilise millions of rands of resources to chase the obvious. The PAAA regulations won’t only work in the hands of AGSA, but will also call on those in oversight structures higher up the line. These issues should be dealt with from a preventative angle. This lifts the financial burden of hiring auditors, which is a significant expenditure for AGSA. When accounts are submitted at SCOPA, there is a very clear set of questions leading to some form of action. This is consistent with what AGSA is trying to do. However, when AGSA speaks of specific examples in portfolios, they get forgotten. AGSA does not have the power to say “thou shall”, but oversight does.

Ms Mente-Nqweniso cautioned the Auditor-General on his contention that if accounting officers come to Parliament to report, at least there is interaction with wrong transactions. She replied this is already done all the time. For example, in the Department of Water and Sanitation, each Director-General will come and report, then be changed. If that is the approach and this practice is not scrutinised, it will cause problems. These people incur expenditure they know is irregular, get fired and the next DG comes to report on it, absolving themselves of responsibility as they were not in office at the point where the irregular expenditure occurred. 

Ms Dlamini-Dubazana noted that, when the new Parliament is inaugurated, the speaker’s office always organises induction of new members. She wondered if it were possible in compiling the Committee’s legacy report, it could request the speaker’s office allow the Auditor-General help to induct the new members of the Standing Committee.

The AG replied this was already included in AGSA’s schedule for June.

Ms Dlamini-Dubazana asked if this included all legislatures.

The Auditor-General agreed, noting the roadshow includes all legislatures, including councils in MFMA roadshows, some of which were currently taking place. MFMA roadshows have two parts, one part is the history of audit outcomes, the other handles the amendments to the Public Audit Act. The AGSA has started sharing this information at national level. It had also done some provinces, and would be bringing the roadshow to mayors, municipal managers and provincial executives. Municipalities would also have their own roadshow programme from next year.

On the question from Ms Mente-Nqweniso on parliamentary scrutiny, the AG noted the reporting requirements that have been included in the PAAA. When the AGSA submits an annual report on an auditee, this will include analysis of the general report of the AG. Where irregular expenditure has been identified, the AGSA will analyse how the 3 powers have been implemented. If remedial action was triggered when a specific accounting officer has been implemented, responsibility does not sit with the department, but with the individual themselves. Follow-up from the AGSA will be linked to the consequence-management process.

The Chairperson thanked the AG, stating she was looking forward to the implementation of the amended PAA. The country had been watching, feeling that nothing was being done on corruption. Across the world, there is a perception of Africans as corrupt. If the new PAA is implemented, it benefits everyone to show something is being done about corruption. The Committee will make sure everyone works with AGSA.

The AG requested to move to the last agenda item, as he had to leave early.

The Chairperson agreed, ceding the floor to the AG.

Invitation to AGSA’s centenary scholarship awards ceremony

Mr Makwetu reminded the Committee that the AGSA had celebrated its centenary in 2011, and inaugurated 3 legacy projects. One was a centenary book, the other was an installation of a museum on AGSA’s history and records at its head office, which includes records going back to the times when the main economic activity was agriculture, including bodies like the Suid-Afrikaanse Aartappel Raad (South African Potato Board).

The final project was a once off centenary scholarship fund, awarded to matriculants from across the country. The AGSA selected 2 or 3 students from all 3 provinces, more from rural areas than urban. These students attended universities of their choice. A total of 32 students were funded. Some students fell over, but the AG was heartened that after 7 years of this commitment, 18 have qualified, having passed their Certificate in the Theory of Accounting (CTA) and are employed at the AGSA to serve their articles. Some students are still finishing off, having been allowed an extended period. The AG argued that the return on investment was already delivered, the R10.1m investment having allowed the AG to take in new talent without having to search for it. Some of the candidates are writing the board exam to qualify as chartered accountants. Whenever these students were on holiday, they were given a chance to experience the working environment at the AGSA.

Mr Makwetu invited the Committee to the awards ceremony in Pretoria on 14 March to celebrate all the candidates, who would be present. Some of these candidates would be able to call themselves CAs within one decade

Discussion
The Chairperson noted that only 3 members have agreed to attend, and hoped everyone would go.

Mr Singh replied it was unfortunate the ceremony was during sitting. In the preceding week, the parliamentary order paper had become increasingly full.

Ms Dlamini-Dubazana said that, although she did not get a mandate from the Committee, she was practicing her powers to take the opportunity to thank the AG, since this was the last Committee meeting. She noted they had worked well with Mr Makwetu for many years, although sometimes the Committee would lose it, maybe because of knowledge or lack of experience. She thanked the Auditor General on behalf of absent members, especially for changing financial practices in this country that she felt no one could ever change back, and that would endure past the AG’s end of term. It was proper to thank the AG and Cindy Bailey (Committee Secretary) as well as staff, content advisors and researchers.

The Chairperson thanked Ms Dlamini-Dubazana.

As it was the last meeting, Mr Makwetu expressed gratitude to the Committee on behalf of the AGSA. Their pushing of the mandate of the AGSA and the PAAA had created a great deal of excitement and anxiety. He noted some of his colleagues could not believe the support for the (PAA) bill in the National Assembly. The Ghanaian national audit office had given him feedback in terms of the reaction to similar amendments: its staff was amused at the new environment as auditors were now to be taken seriously. The amendments championed by the Committee would have a similar effect in South Africa. On a personal note, he wished members well.

Appointment of DAG

The Chairperson noted that the Committee was returning to the first agenda item, the appointment of the DAG. She stated the Committee has agreed for a term extension from 1 April 2019-31 March 2024. She called for a mover and seconder.

Ms Dlamini-Dubazana requested reading of the accepted clause for the parliamentary ATC.

The Chairperson read the clause confirming the extension by the AG of the DAG, Ms Tsakani Ratsela, from 1 April 2019 until 31 March 2024.

Ms Dlamini-Dubazana moved, Ms R Adams (ANC) and Ms D Carter (COPE) seconded.

The appointment was according endorsed.

Consideration of draft regulations

The Chairperson brought up the consideration of draft regulations to the PAA for purposes of the ATC.

Mr Singh requested the implementation date.

The AG responded that the AGSA had requested from the President 1 April 2019 as the implementation date, this will thus handle all financial years ending on or after 1 April 2019. As the AGSA does not have a ministry of its own, it was discussing practicalities with the Minister of Finance

Mr Singh said the AGSA should do this quickly as the Minister won’t be there in June.

Ms Dlamini-Dubazana moved for the adoption of amendment to regulations with Annexure A, Ms Mente-Nqweniso seconded.

The regulations were accordingly accepted.

Committee Legacy Report

The Chairperson moved to the matter of the Committee’s annual and legacy reports. A member of the Committee had proposed to change the format.

Ms Dlamini-Dubazana referred to the legacy report and proposed that instead of starting with key highlights, the report should start with an introduction (rather than following the provided template).

At this point the AG departed

Ms Dlamini-Dubazana stated that the content of the introduction should be the legislative framework as amended and the members constituting the Committee because it’s a legacy report. From there, the functions of the Committee according to the rules of the House, then its key challenges. She also requested that the Committee revise the legacy report to reflect the newly enacted legislation under the PAAA. She noted there was some repetition and some outdated content, especially in terms of the capacity of the AG.

The Committee Secretary indicated that the template was received from the Committees section as a standard format. This can, however, be changed according to the Committee’s wishes.

The Chairperson noted that whatever the Committee proposed would be reflected in the report.

Ms Dlamini-Dubazana emphasised the need for the report to flow.

Ms Mente-Nqweniso noted that page 8 of the report refers to the Committee not receiving any challenges in bringing legislation: she requested clarity whether this was the general challenges faced by the Committee or specifically in terms of bring the PAAA to the House.

The Committee Secretary clarified that this section refers to any administrative challenges pertaining to bringing legislation. The challenges refer to the section they are included in only. In the new report, they might have a section that deals with all the challenges together.

Ms Mente-Nqweniso approved of this. She noted one of the challenges faced in terms of Committee’s work was persistent challenges to AGSA reports that were actually true, on the grounds of baseless information. These cases were lost in court, and the outcomes remained the same, but were delayed. The outcomes of AGSA reports could not be concluded until the end of court process.

The Chairperson asked if this could be put in key highlights.

The Committee Secretary noted that, at present, this was handled in section 4.1 on page 2, which talked about increased resistance to the Auditor General.

Mr Xolisile Mgaji, Committee Content Advisor, stated that what the Committee was bringing up was captured in the annual report.

Ms Dlamini-Dubazana noted that these issues came to the point of becoming so bad that there was a need to change the Public Audit Act. The legacy report needed to reflect this process.
           
Mr M Shackleton (DA) clarified that page 10, paragraph 2, also mentioned growing resistance from auditees.

Ms Dlamini-Dubazana proposed leaving it to the Committee Secretary, then to return to the report after or during plenary that afternoon.

The Chairperson proposed that members will receive the new draft of the report when they get into the House. She suggested that members would get the document and then reconvene to vote on the adoption later that afternoon. 

Adoption of minutes of 28th November meeting

The Chairperson proposed this would also be adopted later on, as the wrong documents were included.

The Chairperson thanked members for attending and, as this was the Committee’s last meeting, she thanked members for work they had done. The contract signed with the people of South Africa in 2014 must be remade. She noted that being a politician is not about money, it is about a commitment to the country. This was the glue that kept members together, although they fight in Parliament, they were friends after. The members had fought well in the Fifth Parliament. The Chairperson gave her best wishes to members of the Committee. 

The meeting was adjourned.

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