Capacity Building Session by Office of the Auditor-General

Public Works and Infrastructure

20 August 2019
Chairperson: Ms N Ntobongwana (ANC)
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Meeting Summary

Auditor-General South Africa briefed the Committee on the audit process, its role, the new Public Audit Amendment Act that came into operation on 1 April 2019, the oversight roles of AGSA in conjunction with the Portfolio Committee in capacitating department financial compliance. Slides were shown of the last 10 years of audit findings.

Brief explanations were given of the role of AGSA and what its capacity is in identifying financial losses, investigating the causes and effects of these losses, and the recommendations  given to departments to rectify these losses. It outlined what the AG does not do when performing audits and what those audit outcomes reveal, do not reveal or cannot reveal.

The Committee was informed of the new powers the Auditor General has, through the new amendments, to provide further oversight through the capacity of consequence management. The definition of "material irregularity". These are in the forms of certificates of debt and follow ups through referral to any of nine public bodies for investigation.

Members asked about the significant improper expenditure at all levels of government. They asked about the capacity of AGSA in view of the new amendments, and if these would translate to tangible results considering the lack of service delivery even within municipalities that have clean audits. Specific findings relevant to the Department of Public Works and Infrastructure were requested as well as further capacity building to ensure the Committee is able to effectively perform its oversight role.

AGSA responded that there is a want and a need for it to work side by side at every step with the Committee for both of them to effectively perform their roles effectively. It noted that there will be a full audit briefing on the Department in October. 

Meeting report

Mr Mthokozisi Sibisi, AGSA Audit Senior, opened the capacity building meeting by stating that purpose of this meeting is to provide an overview of the overarching principles that are held to when conducting an audit and background information into what the Office of the Auditor General (AG) is about. With consideration that Members come from different backgrounds the presentation will not be technical and examples will be given where possible.

The first slide is the reputation and promise slide. This appears many times on AG presentations and speaks to what the AG office is about and what it is trying to achieve. The AG office exists because of its constitutional mandate to strengthen the country's democracy. Its focus is enabling oversight, ensuring accountability in the public sector and government space through the audit process, and as a result build public confidence. This is what the AG aims to achieve.

Slide two speaks of the specific legislation that gives the AG its power. Section 188 of the Constitution says that the AG office must, not may, but must audit the accounts, financial statements, financial management and many other items of the departments. That is its mandate. The enabling legislation expands and elaborates further in section 20 of the Public Audit Act. There are three main things done when auditing:
1. Audit the financial statements and accounts of the departments or entities within the public sector, with the purpose of expressing an opinion on the fairness of what is presented in those statements. Determining if there are material mistakes or significant errors, and expressing an opinion on their credibility or quality.
2. Check compliance with laws and regulations and again give an opinion on that in the audit report.
3. Report on performance information, those items which the entity said it wanted to achieve in its Annual Performance Plan (APP), whether they have been achieved as reported in the Annual Performance Review. Section 5 of the Act deals with all other discretionary audits such as investigations and special audits.

There is a need to clarify the things the AG does and the things that do not fall into the scope of the audit. There is assurance given that the financial statements are free from material errors or distortion. However, there is no guarantee on the accuracy of all information within the statements because due to the nature of the work not every line item can be assessed. Therefore, assurance can be given that statements are free from serious distortions and mistakes, but there is no assurance that all information is 100% correct. Similarly, with the APP targets the capacity is there to state if the items outlined have been achieved, but the AG is not at a stage where assurance can be given that service delivery had been achieved. When looking at compliance with the law, the main legislation looked at are those applicable to that entity; however, there is not an assurance that every law and regulation, within every section, has been complied with. There are several reasons for this: Before an audit there is a process of deciding on the main provisions the audit team, and the audit itself, will focus on. There is a need to identify the key controls and weaknesses that exist within the environment. As an example, the audit will not look for fraud but while going through procedures and coming across indicators of fraud, the policy requires steps to be taken to report it. However, the audit process itself is not geared towards assessing whether there is fraud or not.

In summary, the AG audits the financial statements and gives an opinion on whether there are material mistakes or not. It checks compliance with laws and regulations and if there are any findings, these are included in the audit report. This is the same with APP objectives - where there are deviations or non-compliance, these are included in the audit report. Where items are identified that require investigation, it can be done as a discretionary audit but only with approval from the AG. There are also special audits, which include factual findings. These are audits where the entity's management wants the AG to focus on certain areas that are specific to the entity’s environment. As an example, for entities that borrow money there are certain procedures that must be done. AGSA could be asked specifically to check and report on that.

Slide 6 speaks to the five different outcomes resulting from the audit process:
1. Clean audit is when there are no significant material mistakes or distortions in the statements, no non-compliance is found, and the items to be achieved in the APP have been done it is issued as financially unqualified with no findings.
2. Unqualified opinion with findings is where there are no significant issues with the financial statements; however, issues have been found in the area of laws and regulations and/or performance information.
The next three categories are when financial statements are found to have material issues, either in the way records are kept or the statements are prepared.
3. Qualified opinion is given when the financial statements have a few material issues.
4. Adverse opinion is when the AG receives financial statements but there are so many or such significant problems in the financial statements that even a qualified opinion cannot be issued.
5. Disclaimer is when the AG receives the financial statements but there is no additional or credible information given to validate the statements, therefore the AG cannot express an opinion because there is simply not enough information.

Slide 7 deals with the financial statements. The best opinion is the unqualified opinion which means that the financial statements are correct. The qualified one is when there is mostly compliance with the framework for preparing financial statements except for a few deviations. Adverse is when financial statements are received, and information is given to support it, but the information does not support the numbers in the statement. Disclaimer is when the statements are received but no information is given to support them.

To get a clean audit, the financial statements need to be free from material misstatements or significant errors, there is compliance with laws and regulations, and no issues with the performance information.

Ms Tintswalo Masia, AGSA Senior Auditor Manager, dealt with the audit outcomes of the last 10 years to provide a snapshot of the trends, not specific to this department but as a representation of all audits. To understand the colour codes:
- Green is representative of a clean audit, unqualified with no findings.
- Yellow is unqualified with findings on compliance, performance information or both.
- Purple represents auditees that received a qualified audit as there were a few items in the financial statements not in line with the accounting framework.
- Pink is adverse as the financial statements were not done in line with the framework.
- Red is disclaimer, where the financial statements were not substantiated or supported.
- Blue is an outstanding audit for whatever reason.

The majority of auditees are sitting in the category of unqualified opinion with findings on compliance and performance information. Performance information and compliance continue to be the most problematic areas. Slide 9 deals with national and provincial government. Slide 10 reflects local government. Most auditees are sitting in the yellow, unqualified with findings on compliance and performance information.

From information gathered from audits over the last 10 years, a significant area of non compliance is irregular expenditure, fruitless and wasteful expenditure and unauthorised expenditure.

Irregular expenditure is expenses incurred in buying goods and services where rules and regulations on supply chain were not adhered to. When comparing local government to provincial and national government, the irregular expenditure is much higher. Meaning the money spent in the national and provincial government to receive goods and services was so outside of the rules and regulations. Irregular expenditure does not mean goods and services were not received, it is just that rules and regulations were broken.

The next graphs shows fruitless and wasteful expenditure which means the entity spent money that could have been avoided. For example, a late payment incurs interest or penalties that could have been avoided.

Unauthorised expenditure is when a department budget is voted in, but the money given to spend on the voted outcomes is spent on something else. More money was spent on a line item than what was originally budgeted for. This graph shows that there is a greater amount of unauthorised expenditure in local government than national departments.

The purpose of slide 14 is to paint a picture of whether consequence management is working. It represents if money that has been categorised as irregular expenditure, fruitless and wasteful, or unauthorised has been returned, recovered, accounted for or has not been managed. Once irregular expenditure has occurred, steps need to be taken by the accounting authorities to either recover the money or understand why it has happened. If consequence management steps are taken, to what extent are they effective? The majority of irregular expenditure has not been dealt with, almost 89%; for unauthorised, it is almost 81%, and for fruitless and wasteful, it is about 80%. There is significant opportunity to improve on consequence management in local, provincial and national levels.

Looking at the historic figures allows for projections on areas for improvement especially in how to move entities from the red and yellow categories, to the green category. In the majority of cases, a significant challenge has been no or slow response to audit recommendations which hinder the ability for the auditee to receive a clean audit outcome. Another key challenge is instability or vacancies or not having people with the proper competencies to execute credible annual financial statements and know the laws and regulations that need to be followed. The other challenge was inadequate consequences where even though it was identified that things were happening incorrectly, there was not sufficient management to hold people accountable.

Slide 16 gives numbers to the previous information on audit outcomes over the last 10 years. It is possible to see as an example from the 2017/18 audit outcomes that 952 regularity audits were completed. From these,  a consolidated Public Finance Management Act (PFMA) General Report was generated for national and provincial audits and the Municipal Finance Management Act (MFMA) General Report for municipalities, which include assessments of the implementation of initiatives in the medium term.

Slide 17 reflects on enabling oversight and accountability through the audit process. After an audit, a status of records review is done with the accounting officer. This looks at key focus areas where there might be risks that hinder the auditee to improve on audit outcomes or lead to a decline. Also there are sessions with the portfolio committees where the audit outcomes, findings and recommendations are shared to empower the committee to bring the entity or department to account and see what loopholes can be closed.

The process starts from when the APPs are prepared by the departments and submitted to the portfolio committee. There is usually a session where AGSA capacitates the portfolio committee before the APP is presented to gauge whether the APP has targets that are useful and information that is reliable. Then, as spoken about prior, there is the sharing of audit outcomes. After that are further clarity briefings where the AG, department and committee will come together to reflect on the outcomes and what has not been done.

The Portfolio Committee will gather information through reading reports, attending briefings and holding hearings. From there they will make findings, formulate recommendations and issue its report. This report will be adopted and an executive will be called in to understand the areas the committee wants focus on and provide recommendations to close loopholes identified.

There is also a need to explain what the new amendments to the Public Audit Act are about to empower the Committee to understand what its role will be. In the past when the graph is presented on irregular, fruitless and wasteful, and unauthorised expenditure, the question was asked, “What has the AG done about this?” Now, with these amendments, the AG can do something about the irregularities.

The definition of "material irregularity" was noted. Material irregularities are non-compliance with or contravention of legislation, fraud, theft or breach of judiciary duty. The guideline is the irregularity must be material. This is defined in an audit as a material financial loss, misuse or loss of material public resources which cause substantial harm to a public institution or the general public.

Though the Amendment Act has been implemented there is still a need to build on the processes informing how to move forward. There are a significant number of audits that happen each year and so there is a need to ensure ongoing capacity. There will be a phased in approach to implementing further systems.

Slide 22 gives more detail on the additional powers given to the AG and how to deal with material irregularities. Material irregularities can now be referred to relevant bodies for further investigation or can be investigated further by the AG. The new powers also mean that binding remedial action can be taken for failure to implement recommendations. Through the audits, material irregularities and non-compliance will be identified. This will be communicated to the financial officers and recommendations given to be implemented within a specific time. If these are not implemented, binding remedial action can be taken. It is now possible to issue a debt certificate, when dealing with financial loss, for failure to implement remedial action.

For the Portfolio Committee's oversight role, it would be critical to use the information in the audit reports, and reflect on material irregularities found, whether processes were followed and if the recommendations were implemented. Then when meeting with the entity they can be held to account without misinformation.

Discussion
Ms B Hicklin (DA) asked for Public Works-specific audit findings that can be sent to the Committee, and whether the audits could be obtained directly from the AG or alternatively through the chair.

Mr E Mathebula (ANC) asked when the audit outcomes for the specific department will be provided. There is an eagerness to get started on capacitating the department with audit findings. Further clarification is needed around the AG’s responses to fraud as it was mentioned that not all issues of fraud are realised unless they are at a certain level, does this mean that when minor fraud is noticed a blind eye is turned?

Ms S van Schalkwyk (ANC) referred to the increase over the 10 years in outstanding audits moving from 1 to 9%. What is being done about this and is there a time frame for when they will be completed? On the high levels of irregular expenditure, are recommendations for consequence management given to the departments and what is the AG role in remedying those situations? Are there special interventions to work with departments to ensure those recommendations are indeed implemented? What measures are being taken if not implemented? In consideration of the audit outcomes over the last 10 years, the new amendments are hopefully going to assist the AG in dealing with this; however, there is a need to ensure it is having effective results. Though the legislation is in place, how does this translate to compliance? A certificate of debt was mentioned but there is a need to understand what happens after that.

Ms A Siwisa (EFF) referred to local government irregular expenditure and said the new powers hopefully mean the AG recommendations will be adhered to and can bring departments to account. There are local municipalities that are justifying such expenditure and there has been no improvement. Does the AG have specific targets to start with now that the legislation is in place?

Mr P Van Staden (FF+) referred to slides 9 and 10 and asked if these municipalities and departments are known. National government is supposed to set the example for local government but their figures show quite a lot of money going down the drain and it seems the local governments are following this example. What is the turnaround plan to combat this? At what stage will the outstanding monies on slide 14 be dealt with? How will this disregard for the law and unethical behaviour with no consequences be stopped at all levels of government?

Ms S Kopane (DA) asked if the 952 audits completed in 2017/18 was a specific target. With the new amendments, there is surely more work to be done, does the AG have the capacity to deal with this or are there other entities that are going to be assisting. There are specific municipalities, such as one within the Free State, where they have consistently received a disclaimer and is currently under administration, but nothing seems to be changing. This is clearly an issue with certain municipalities, so with these new amendments will something actually be done about these.

The Chairperson noted the mentions of PFMA and MFMA and asked if there are different sets of rules and regulations for the different levels of government. The municipalities used to use PFMA but the MFMA came into being in 2006 and local government is seemingly over-regulated. On unauthorised expenditure, when comparing the local government and the provincial and national governments, are the same regulations used? Local government is the one on the ground providing services for the general public. If there are such levels of unauthorised expenditure the future is potentially bleak for the people there. On the new amendment powers for "referral to other bodies for follow up", who is this in reference to?

Mrs Kopane remarked that in some cases, provinces will have a clean audit but there are still service delivery problems. Is it possible to measure the clean audit against service delivery?

Response
Mr Sibisi responded that the audit findings can be shared in this meeting. However, this is a capacity building session to gauge an understanding of what Members are worried about. For this portfolio, specifically, not every entity's audit has been finalised and so the AG will come back in October and share the detailed findings and recommendations and clarify specific concerns the Committee may have.

It was asked if the Office of the Auditor General turns a blind eye to fraud when it is something small. When the AG finds indicators of fraud it is not investigated but it is responded to. If something is picked up that relates to the numbers being audited, there is a need to clarify and understand those to give opinions on the audit outcome. It is the role of the AG to report those identifiers to the executive authorities but not to investigate the root causes of fraud. Understanding the identifiers will, however, affect the audit opinion given.

On outstanding audits, the AG has started taking back several Schedule 2 entities and some of the outstanding audits fall within that. SAA is an example of this. In the process of auditing there will also sometimes be occasions where items need to be addressed, thus extending the audit and missing the audit deadlines. In producing the PFMA and MFMA General Reports, there needs to be a cut-off point and the General Report will reflect those audits that were able to be completed before that point.  

On irregular, fruitless and unauthorised expenditure, the legislation requires that these be investigated. During audits there is a requirement that auditees disclose this and there is a decision to be made on whether this money needs to be recovered. There is a need to understand why this fruitless and wasteful expenditure has occurred, such as non-compliance when goods were received and if this can be condoned. These are the recommendations that the auditees put in place. There is no allowance though for these numbers to be taken off without investigation and this is also a contributor to why the incomplete audits are growing because until the auditee complies with providing the information as to an investigation into why these monies are wasted, it remains incomplete.

Implementing the amendments is a massive task. For PFMA, 16 auditees were highlighted based on the audit outcomes received in the past and the quantity of irregular expenditure. The definition applied is 'material irregularities'. For MFMA, there are nine municipalities where the same thing will happen. There is still a need to analyse the pilot auditees and definitions within PFMA to understand how best to move forward, with MFMA these have just started and will continue to roll out.

One wants to apply audits to each and every auditee that must report financial statements in order to realise the legislation. 952 was not a target but what was covered for that financial year. From a capacity point of view, this requires further analysis of the pilots to establish whether capacity is there.

On the point of irregular, fruitless and unauthorised expenditure, these items are not simply written off. Before anything is written off, certain processes need to be followed. In the MFMA there are legislation provisions that require an establishment of whether that money needs to be recovered. If those steps are not taken, the AG would say that there is no evidence that proves that provisions have been followed and so the audit is distorted because numbers have been excluded that should not have been.

In slides 9 and 10 the auditees are known but that list is not present at this meeting. A meeting is held with each portfolio that discloses and discusses all that information. For the Public Works Portfolio that will be in October. 

Slide 14 on outstanding monies is not specific to where money has not been recovered. It is where auditors have requested investigation and the auditees have not investigated why there was irregular expenditure.

In reference to consequence management, the AG reports on irregular expenditure in the first year, the following year the legislation requires the auditee to implement the AG recommendations and investigations. If this is not done then the AG paragraphs that the accounting officer did not do what was recommended. There is no specific AG power to force departments to do this, only to persuade through recommendations

There is currently no specific work done into service delivery. If there is a clean audit, this means that internal controls and processes are functioning correctly within the auditee. From there it is possible to focus on what is needed on the ground, such as service delivery, but a clean audit does not equate directly to service delivery.

Ms van Schalkwyk reiterated the question of what happens after the certificate of debt is issued when enforcing compliance.

Mr Sibisi replied that the audit identifies non-compliance and that leads to irregular expenditure but that does not automatically trigger a recovery. Once that has been identified, there is still a need to record whether there was financial loss. Irregular expenditure can be identified in the initial audit, but further investigation is needed to establish if there was financial loss. If that has been established, the financial officer is given 20 days to respond to what happened with the irregular expenditure which has led to the financial loss. Based on the financial officer's responses, the AG decides whether this is satisfactory - either they have implemented steps to correct it or they have not. If not, there is an opportunity for them to present an oral report on why they have not. If the AG is still not satisfied, there is a need to see if it is investigable by the AG or needs to pass to other bodies that can facilitate that. There are agreements with nine public bodies that it can be referred to. If still nothing has happened, a certificate of debt is issued to the financial officer to recover the money and the official collection of money is handed over to Treasury.

An AGSA official clarified that irregular expenditure does not mean that the service was not provided. Related specifically to the Portfolio Committee on Public Works, one would ask what could be the contributing factors that would make the department take an irregular route, with an understanding that these things do happen. Part of the capacity building is to empower the Portfolio Committee to perform the oversight role better. Members all bring different skills, some of which may not be specific to Public Works. How does the AG assist the Portfolio Committee to ensure the Department brings an APP which is user-friendly and easy to perform oversight on, as it could become difficult if the Member is not technical? The departments can bring an APP which hides issues in the operational plans. From an oversight point the APP seems to run in circles and is about random funds, where it should be able to quantify these. The AG is surely better placed to help the Portfolio Committee because of their specific skills, in approving the APP and helping to perform its oversight role.

Ms Masia gave an example specific to the Department of Public Works which is responsible for state funerals. It may happen that due to the nature of the event, it cannot be planned for in advance and needs to happen within a short turnaround time. Some supply chain management regulation might complicate the process and it is not done just to get the state event to happen. This would lead to irregular expenditure. When the AG reports in October though there will be specifics on what was found this year on irregular expenditure.

There have been challenges this year with the elections; however, in a normal year the AG has a session with the Portfolio Committee [in May] where capacity is built on the APP and what has been picked up in previous years in the audit reports. Sometimes there might be critical information that is missed which is within the mandate of the Department, the AG will capacitate the Committee to look at the five items that should be looked for when reviewing the APP to ensure it is useful and reliable. These sessions will happen before the approval of the APP. Then the October meeting reflects on the audit outcomes including the performance information and how the department delivered on the proposed promises.

Meeting adjourned.

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