Internal Audit function, emerging risks and assurance engagements for Provincial Government of Western Cape for 2019/19: Audit Committee

Public Accounts (SCOPA) (WCPP)

26 July 2019
Chairperson: Mr L Mvimbi (ANC)
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Meeting Summary

The Committee met to be briefed on the roles and responsibilities of the internal and external auditing committees in order to gain an insight into their lines of reporting and levels of independence.

The Committee was told that the external audit committees were independent entities whose members were recruited from auditing firms and the general business environment. They reported to the Accounting Officers of provincial government departments and the Standing Committee on Public Accounts (SCOPA). The internal audit unit reported separately to the Accounting Officer and Audit Committee. All audit entities act independently of the executive, and help departments to achieve set objectives through strategic planning, risk, financial and performance management. Internal audit tests the effectiveness of controls and makes recommendations on areas of concern. It also monitors the implementation of the recommendations. Some of the emerging risks in the Western Province include water shortages, unethical practices among public officials, fiscal pressure, changes of leadership and land invasions.

Members expressed concern about public officials’ obsession with clean audits, fearing that this would lead to mere ticking of boxes to satisfy the Auditor General, at the expense of effective service delivery. They also said were many cases where transfer payments and grants to municipalities were diverted to other purposes. Land invasions also constituted a risk in certain environments. They stressed that the audit entities should hold the executive and public officials accountable for financial and performance management. Consequence management should be handled seriously. The auditors should pay both scheduled and unscheduled visits to municipalities to ensure money was used for the intended purposes. Public officials should receive continuous training on ethics to improve organisational value and service delivery to recipients.

Members agreed to attend the Southern African Development Community Organisation of Public Accounts Committees (SADCOPAC) conference -- the central conference for numerous public accounts committees – to gain an understanding of how to address the challenges other PACs face.

Meeting report

Introductory remarks

The Chairperson said that the Committee was meeting for the first time since the election and his election as Chairperson. The Committee had invited the Speaker of the Western Cape Provincial Parliament, Mr Masizole Mnqasela, the Premier of the Province, Mr Alan Winde, and the audit committees in the province to the meeting. He apologised on behalf of the Auditor General (AG), who could not attend the meeting due to other commitments. The Committee’s responsibility was to hold the executive and Parliament accountable, but the Committee would conduct its oversight function in a spirit of cooperative governance.

The Speaker said the Committee should be non-partisan and should effectively hold public officials to account without fear or favour. It should be well capacitated and resourced to ensure all public entities and officials performed optimally. Its workload would be lighter if other committees performed adequately. It was important that the whole of Parliament supported the Committee, and he promised to support it with requisite tools to ensure optimal outcomes. He commended the quality of the co-ordinator of the Committee and all of the Members. The Province and Parliament were fortunate to have a Premier who was ready to support the work of the legislature. The Committee would have oversight over all the departments in the province to ensure effective service delivery and that money was spent for its intended purposes. He congratulated the Chairperson, and wished him success in his role as the leader of the Committee.

The Premier said the DA caucus had decided to elect a Member of the main opposition party, the ANC, as the Chairperson of the Public Accounts Committee. This was a new development since the nation's democracy began in 1994. He believed the country needed to embrace rigorous changes. All role players had to deliver to the best of their ability to serve the people they represented. The current administration would build on the success of the previous administrations and work harder to bring the dividends of democracy to the masses. The audit processes should also become more rigorous to eliminate corruption in the public sphere. The Province was proud of its clean audit outcome, commenting that Gauteng was the only other province that had achieved a clean audit. Such level of maturity fostered an environment that ensured effective service delivery.

The government of the province would ensure transparency, trust and accountability through active engagements with various role players like the national and provincial treasuries, departments and audit entities. The Committee on Public Accounts should also be effective in its oversight to hold the executive and the departments to account. The government would deliver its objectives without the possibility of corruption and wastage. It would seek to improve its efficiency and effectiveness. The executive and the legislature had to work harder to ensure better service delivery to the people they represented. He hoped that the province would be a better place, in terms of service delivery to the masses, at the end of the Sixth Parliament.

Presentation by Audit Committees and Internal Audit

Mr Ronnie Kingwill, Chairperson: Audit Committee, Department of Health (DoH), apologised on behalf of other chairpersons who were absent due to other commitments. He said that the internal audits of the various departments reported to the heads of departments (HODs), but received their mandates directly from the Audit Committees (ACs), which served as a guiding body for the internal audit units. The ACs had the wealth of experience needed to provide background about the work of the internal audit units.

Ms Blanche Cairncross, Chief Audit Executive: Department of the Premier, described some of the internal audit functions and assurance engagements by the departments. She said that the roles of the internal audit were derived purely from the Public Finance Management Act (PFMA) and Treasury regulations, which basically required the Accounting Officer to have a system of internal audit under the control and direction of the Audit Committee. The Provincial Treasury regulation allows for shared internal audit functions. The internal audit units ensure a system of control and effective governance, reporting independently to the Accounting Officer and six Audit Committees.

Ms Cairncross said the objective of the internal audit was to help departments to achieve their set goals. It conducts quality assurance and consulting engagements, tests the functionality of controls and makes appropriate recommendations. It also identifies areas that need improvement. It performs advisory functions through consulting engagements. It identifies emerging risks and recommends measures to mitigate them. The internal audit complies with the Institute of Internal Audit Standards, which was the professional practices’ framework. It maintains independence from various forms of interference. It receives its mandate from the Audit Committees, and reports to both the Audit Committees and the Accounting Officers. It was vital that staff of the internal audit have an impartial and unbiased approach in its role to avoid a conflict of interest. They needed to perform their duties in a responsible manner.

There were six Audit Committees in the province. The social cluster included Social Development, Community, Cultural Affairs and Sport and entities, as well as Human Settlements. The economic cluster comprised the Departments of Agriculture, Environmental Affairs and Development, and Tourism. The govermance and administration cluster was comprised of the Department of the Premier (DotP), Provincial Treasury (PT), Local Government (LG) and the WCPP.

The organisational structure of the internal audit included the Chief Audit Executive, who reports to the Accounting Officer; the directors, who report to the Chief Audit Executive; the deputy directors, who report to the directors; and various staff members who report to the deputy directors. The departments were grouped into the various clusters based on the strategic direction of the administration.

Discussion

Mr D America (DA) asked how the individual directorates fitted into the strategic goals, if not the administration.

Mr Kingwill replied that the members of the Audit Committees (ACs) were not employed by the Government. They were independent members appointed from the external environment. All of them contributed to the sustainable development of the province. They brought their expertise from the auditing profession and general business environment. The province had been able to attract high quality and dedicated auditors. The Audit Committees had oversight of both internal and external audits. They performed their duties without interfering with the independence of the external auditors.

The ACs focus on financial reporting, governance and management of risks. They were accountable to the Accounting Officers as part of the reporting structure, and to the SCOPA as the oversight body. He promised that the ACs would be ready to provide inputs and explanations to the Committee whenever invited.

He said that effective risk management was vital to achieve set objectives. Risks could not be totally avoided, but could be managed appropriately. Each department had to have clear risk management strategies and policies. These were reviewed with the Department every quarter. The internal audit monitors the effectiveness of the risk management process. The AC emphasises strong governance that is based on good principles, a sound value system and sound ethics. Effective risk management facilitates the achievement of strategic goals and objectives. He said that the drought was an emerging risk that had affected the province because nobody had planned for it in advance. It required the involvement of all the different stakeholders, and that responsibility required effective communication among the stakeholders. Most of the entities and departments had been incorporated into the risk assessment and risk awareness processes. This had resulted in clean audits in the majority of the departments, and it had been a very strong succession down the road.

The AC usually presented its annual report to SCOPA in either October or November. The briefing allowed the ACs to provide detailed explanations to SCOPA Members. Some of the discussions were confidential, and thus were not in written documentation. There were two approaches to risk management in the province. In the past, each department had identified and mitigated its risks in isolation. The administration, however, had decided to formulate a province-wide risk register, which cuts across various departments. This helps to avoid duplication among departments. Five key areas -- water shortage, climate change, interruptions to service delivery, fiscal pressure and ethics -- had emerged out of the initiative.

Mr Ameen Amod, Chairperson: Audit Committee, Social Cluster, spoke about the charter that had been approved by the Cabinet on 17 October 2018. Under emerging risks, the Risk Committee was now called the Risk and Ethics Committee. The Committee reviews any situation that arises from a violation of ethical standards, a potential conflict of interest or questionable situations of a material nature, and reports to the Accounting Officer. The AC ensures appropriate consequence management.

Mr Richard Rhoda, Chairperson: Audit Committee, Economic Cluster, emphasised that the AC was an oversight committee, just like SCOPA, so it did not have operational involvement with the departments. The Committee was totally independent, and had interactions with a department at arms’ length. As an example, it met with the departments for four quarterly meetings. The Audit Committees had quality engagements with the departments at predetermined times, and receive necessary information during those meetings. They receive reports from assurance providers regarding assurance management in relevant departments. They also get reports from the Provincial Treasury, DotP and internal control, and from internal and external audits. The internal audit plays a vital role as an assurance provider.

The ACs report to the Accounting Officers, SCOPA and the Minister, based on the reports received from the internal audits. They play a post-factorial role and receive a briefing from the AG every July on the performance and financial information of all departments within the financial year. They then report to SCOPA in October. The ACs also play a preemptive role from a quality assurance perspective. They consider and interrogate the internal audit plans and determine the effectiveness of controls.

It was vital that the province look beyond clean audits to ensure value for money and performance audits, economic efficiency and intensification of service delivery. Obsession with clean audits might force public officers into the ‘tick-box’ syndrome at the expense of effective service delivery.

Mr Rhoda said land invasions and changes in leadership constituted a serious challenge. Changes in leadership brought instability into the system in terms of thinking, staff and staffing. There was a possibility of memory and institutional losses if the system was not well guarded. The amendment to the Public Audit Act was an emerging risk, as its implementation would discourage qualified individuals from assuming leadership positions because they did not want to take personal responsibility for material findings. The amendment of the Public Audit Act may have unintended consequences. Early retirement was another emerging risk that needed effective control in order to retain competent professionals in the system.

Ms Cairncross said the internal audit unit used the provincial risk register and other documentation to assess the potential risks that departments faced. It focused on service delivery and risk management. It had assurance engagements with departments to ensure that they complied with the Department of Public Service and Administration (DPSA) regulations on human resources. The unit also ensured that transfer payments to departments and other entities were used for their intended purposes.

Mr America commented that most departments had external entities, and asked if the mandate of the internal audit extended to them. Did the AC have authority over the external entities? How did the ACs and internal audit monitor the implementation of their recommendations? What was the nature of consequence management, and who took responsibility for the implementation of the recommendations? He observed that the internal audit unit reported to the Accounting Officers of departments, and wanted to know how it managed to maintain its independence from its clients.

He commended the mode of recruitment of Members of the Audit Committee, which was mainly from external entities and devoid of political interference. He said that unethical practices constituted a major risk to effective service delivery and accountability in the country, as revealed by the state capture inquiries. Were there measures to mitigate unethical conduct? He urged the audit entities to consider lifestyle audits, police clearance and intelligence reports to get relevant information on public officers. How would the province move beyond its clean audit? The amendments to the Public Audit Act would encourage public officials to tick boxes in order not to be held liable for fruitless and wasteful expenditure.

Ms D Baartman (DA) sought clarity on how the ACs monitored transfer payments to municipalities. How did the committee ensure that money was used for its intended purpose, and did the consequence management involve when there was mismanagement of funds?

Ms M Maseko (DA) thanked the ACs for addressing some of the concerns raised by Members of the Fifth Parliament, especially in relation to consequence management. She urged the committees to spend quality time with the departments and entities to mitigate identified and emerging risks, and to ensure that departments attached a sense of urgency and timeframes to the implementation of their recommendations. She sought clarity on the province-wide risk register. How did the AC work with various departments to deal with transversal risks?

Mr R Allen (DA) asked how the Audit Committee would achieve value for money in the province. What indicators would guide the assessment of projects to ensure that targets were achieved? How did the Audit Committees seek to identify emerging risks, and what were the mitigating measures?

Mr M Xego (EFF) urged the Audit Committee to monitor the effectiveness of service delivery, despite the achievement of clean audits by some departments, as clean audits did not always translate to effective service delivery. How did the ACs mitigate against the fiscal pressure associated with urbanisation in the Western Cape? He commented that land invasions could be avoided through proper planning mechanisms.

The Chairperson asked for further clarity on how the Audit Committees helped to maintain a balance between clean audits and effective service delivery, emphasising that a clean audit should not be at the expense of service delivery. The province had to move beyond public officials just ticking boxes to achieve clean audits, or to avoid confrontation with the AG. He commented that the amendments to the Public Audit Act would encourage an obsession with clean audits.

Ms Maseko said that the AG should be seen as an entity that encouraged departments and entities to achieve service delivery, and not as a whip. The Audit Committees should create an environment where public officials could pursue effective service delivery, as opposed to an obsession with clean audits.

Response

Mr Kingwill said that some departments had external entities, like library services and cultural communities. Those entities had their audit committees and boards that ensured adequate internal controls and the implementation of recommendations. Complex entities like the Western Cape Gambling and Racing Board and the Liquor Board had independent boards that served as the Accounting Officers, and they report to SCOPA. As enormous revenue came from the gambling and liquor boards, the AG had decided to increase the audit fees from around R150 000 to about R600 000. This had huge implications for the management of those entities. He said that the Audit Committees prioritised value for money by effectively monitoring and validating the implementation of targets as set out in the annual performance plan (APP). This role aligned with the expectations of the AG and SCOPA. It was important that departments ensured that transfer payments and grants were used for their intended purposes.

Mr Rhoda said that a clean audit was achieved if departments followed strategic plans set out in the APP. The departments set pre-determined objectives, which the AG considered during audit. He proposed that relevant authorities in the province should have a comprehensive discussion with the National Treasury and the AG to address the balance between clean audits and effective service delivery. All stakeholders had to work together to achieve clean audits and value for money.

In response to Ms Baartman’s concern on transfer payments to municipalities, Mr Rhoda said that Treasury Regulation 8.4.1 mandated the Accounting Officer to ensure that transfer payments and grants were used for their intended purposes. There must be regular monitoring of money and projects. The internal audit units must be proactive. The departments must organise both scheduled and unscheduled visits. A department should be held liable if all the control measures were not in place.

Mr Kingwill said that the diversity and inconsistency in the definition of indicators at the national level posed a formidable challenge to departments. The Members of Executive Councils (MECs) and relevant authorities should be equipped to address some of the challenges at the national level. The province should also challenge the view of the AG on certain matters that were unique to the province. He commended the determination of the AG to perform sector audits, as this had brought tremendous results in certain areas.

In response to Mr America's question on consulting services, Ms Cairncross said that the internal audit unit makes recommendations on both consulting services and assurance engagements. There were measures to ensure effective monitoring. The unit had active engagements with top management, and both had an obligation to report to the Audit Committees. Internal audit maintained its independence by reporting separately to top management and the Audit Committees. The ACs determine the scope its duties. The internal audit unit signs a code of ethics on an annual basis, which mandates every member of staff to treat information with confidentiality and objectivity. Her role involved the declaration of organisational independence to top management and the ACs.

Mr Rhoda said that the Audit Committee was independent. The members were appointed based on Section 77 of the Public Finance Management Act, and Section 3.1 of Treasury Regulations describes the responsibilities and authority of the committee.

Mr Kingwill said that internal audit and the Audit Committees had effective reporting structures in place. Internal audit was housed by the Department of the Premier, but it maintained its independence. Each department could have its own internal audit team. A study conducted in 2014 had revealed that the internal audit function could be strengthened, and it might be possible for the Chief Audit Executive to report directly to Parliament.

Mr Rhoda said ethics-related risks could be mitigated through adequate training of staff on integrity and honesty. These risks could also be mitigated through correct allocation of human resources. People must be placed in the right positions. He cited a scenario in Kwazulu-Natal, where the entire staff of the supply chain management (SCM) in the Department of Health had been transferred due to unethical practices.

In response to Ms Maseko’s questions on accountability, Mr Kingwill said that the Audit Committee meets with the HODs on a quarterly basis. It also meets with the MECs on a regular basis. The Audit Committee had the authority to bypass the MECs and bring matters directly to Parliament. Internal audit had direct access to the independence of the Audit Committee. This prevented conflicts of interest with the department. He said that the provincial risk register was in its developmental state. All stakeholders had to work together to ensure effective management of transversal risks. This would facilitate accountability in governance.

Mr Amod said that a clean audit meant an unqualified audit with no material findings, and every administration should aspire to achieve this. Clean administration resulted from effective leadership, governance, financial and performance management. There were procedures to deal with emergencies and deviations at the national and provincial level.

Mr Kingwill said that every department should maintain a balance between audit outcomes and service delivery.  Various departments adopted diverse approaches and budgets were allocated based on the funds they received from the national level and their own revenue streams. Parliament should ensure that the departments had effective strategic plans.

He said that land invasions were a real challenge. Local authorities had the mandate to deal with such matters. He urged those responsible to prioritise their resources to solve most of the problems linked to housing, community safety and security.

Ms Cairncross said that the findings on the Expanded Public Works Programme (EPWP) projects arose from the difference in definitions and interpretation of the indicators used by the AG and the Department. The internal audit unit had investigated the matter and made appropriate recommendations to the relevant authorities.

Further discussion

Mr America urged the Audit Committees and SCOPA to make the internal audit assurance report which had been presented to the previous SCOPA, available to new Members.

Mr Rhoda said that the departments should enter into Service Level Agreements (SLAs) with municipalities before transfer payments occurred. This would help to evaluate the preparedness of the municipalities to handle such projects.

Ms Cairncross said that the external quality assurance report had been done in 2014. She promised to make the progress report available to Members.

Mr Xego sought clarity on the measures the Audit Committees had introduced to mitigate risks linked to land invasions. He stressed that land invasions could be avoided if spaces and land resources were managed adequately.

Ms Cairncross said that there were processes in place to ensure effective management of land. There was collaboration between the Departments of Environment Affairs, Development Planning and Human Settlements. An impact assessment was done, for example, to determine if a structure should be erected on a piece of land. However, people sometimes invaded the space before building ever started. This constituted a major risk to the affected departments.

The Chairperson thanked the internal audit unit and the various chairpersons of the Audit Committee, and looked forward to having robust engagements with them throughout the Sixth Parliament.

Consideration of Committee’s programmes

The Chairperson said the Committee had already outlined its programmes for the rest of the year, but he sought inputs from Members in order to address areas of concern.

Ms Maseko urged the Committee to organise a meeting to hear the briefing of the AG on sectoral audits. Departments had to ensure that money transferred to municipalities was used for the intended purposes. She urged the Committees to press the internal audit unit to submit the progress report on the external quality assurance conducted in 2014.

Ms Baartman said the Committee should look more deeply into the R1.9 million that had been allocated to the canal project. The various stakeholders had to have a comprehensive discussion on those responsible for the project in order to clarify various areas of concern about the project.

Mr Dustin Davids, Committee Coordinator, said the project and other related matters had been previously discussed in various forums. He promised to research the matter and provide the Committee with information and recommendations.

Mr America concurred with Ms Baartman on the status of the canal project. He suggested, however, that the Committee should not summon the MEC for Local Government on the matter. The Committee should try to investigate and develop appropriate mechanisms to monitor the transfer payments that were made to all municipalities. This would ensure that transfer payments were used for the intended purposes.

The Chairperson urged the Committee to avoid an obsession with matters surrounding the canal and other related projects. Certain Standing and Portfolio Committees were in charge of those matters. The Committees could only escalate those matters to SCOPA if they could not find solutions.

Mr Xego urged the Committee to seriously consider matters related to land invasions.

The Chairperson said that there were committees that dealt with the land invasion issues. The Departments of Environmental Affairs and Human Settlements also had policies on land management. SCOPA could look into those policies and suggest mitigating measures to address the risks.

Ms Maseko advised the Committee to focus on the financial management of all the departments in the Province. Matters relating to the operations could be handled by the other Standing and Portfolio Committees. The Committee had a busy schedule and it needed to streamline its activities to effectively deliver its mandate.

Ms Baartman reiterated that the Committee should investigate the canal project in the context of financial management.

The Chairperson instructed Mr Davids to research the matter, and advise the Committee on it.

Mr America said the affected municipality should bring the matter to the attention of the government.

The Chairperson urged the Committee to avoid interference with the activities of other entities. The Committee would, however, intervene where necessary. It should give other entities space to operate in the spirit of cooperative governance. He urged Members to seriously consider ethics and morals, as mentioned by Mr Kingwill. Ethics dealt with individual conduct, while moral dealt with societal expectations from an individual. All Members should be well capacitated on ethics.

Committee matters arising

The Committee discussed the forthcoming Southern Africa Development Community Organisation of Public Accounts Committees (SADCOPAC) conference. SADCOPAC was a central version of the Association of Public Accounts Committees (APAC), and the conference occurred in either the first or second week of September annually. The SADCOPAC conference for 2019 was scheduled for 9 to 14 September. It seeks to address the challenges various PACs face at certain levels, which subsequently leads to the adoption of resolutions. Each country adopts resolutions in alignment with local realities and reports to the appropriate authority on the implementation of those resolutions. The Committee reserves the right to attend, or not attend, the Conference. The decision to attend had been made in a Committee meeting. The draft minutes of the meeting formed the basis of its commitment and had been forwarded to the international cooperation officer, who makes logistical arrangements for Members to attend.

Ms Maseko said that it was important for all permanent Members of SCOPA to attend the conference to learn about the challenges other PACs face, and how they resolve the challenges.

Mr America asked if the resolutions taken at SADCOPAC were binding on the South African Parliament. Were there measures to ensure that it implemented the resolutions?

Mr Davids said the resolutions were binding. The Western Cape Provincial Parliament had not found any difficulty in implementing the resolutions so far.

Ms Baartman seconded Ms Maseko on the decision to attend the conference. She urged the Committee to educate new Members on the previous resolutions, however.

The Chairperson said the conference would address various economic development opportunities and poverty eradication strategies.

Mr Xego supported the decision to attend the conference.

The Chairperson said the Committee’s next meeting would take place on 14 August. It had already held three meetings in July. Most of the work was going to start during the presentation of the annual reports, which started on 9 October.

Ms Maseko urged Mr Davids to organise the draft programme. Other matters arising would be incorporated into the programme and treated accordingly.

Mr Davids informed the Committee about outstanding matters from the previous Parliament and matters that the Committee would likely have to address in the Sixth Parliament. He said that the Committee needed to strategically plan its meetings on Fridays to avoid clashes with other committees. Based on Standing Rule 77, the Committee had the authority to meet on Fridays.

Adoption of Minutes

Mr America moved the adoption of the minutes of the previous meeting, and was seconded by Ms Baartman.

The meeting was adjourned.

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