Public Audit Bill: workshop

Discussion
Mr B Nair (ANC) asked if the Auditor General, having perused Eskom's submission regarding applicable audit standards in sub clause (1), had any comments.

The Auditor General suggested that he would deal with the various submissions with relevance to the Bill, at a later stage.

Ms K Mothoagae (ANC) stated that legislation on irregular expenditure does not cover Parliament. There is no specific legislation which covers it in terms of the PFMA, and it appeared as though the PFMA covered Parliament, or did not, where it suited Parliament.

The Auditor General explained that the definitions for "irregular expenditure" had to be read in conjunction with Section 44 of the Bill, which covers the details of irregular expenditure, and what sanctions are applied if irregular or fruitless and wasteful expenditure is incurred.

Mr Woods felt it would be more appropriate to cross-reference the definition for "constitutional institution" to the Constitution itself, rather than to the PFMA.

On the cross referencing of "constitutional institution" to the PFMA rather than the constitution, Mr Botes explained that section 4 of the Bill is a very important one, as it lists those auditees who will be audited by the Auditor General. Not only national and provincial departments, but also constitutional institutions such as the legislatures, are also included. According to Clause 4(1)(b), all constitutional institutions will fall within the remit of the Bill.

Mr Woods further asked why the Office of the Auditor General had not found the necessity to provide a sanction against unauthorised expenditure in the Bill, and if that meant that the Auditor General would have "carte blanche" to incur unauthorised expenditure.

Mr Botes explained that Clause 42 (5) stipulates that "the Deputy Auditor General must (a) take effective steps to prevent any overspending" which relates to unauthorised spending in terms of the PFMA, and (b) (iii) "overspending of the budget" should be reported and will be dealt with in terms of financial misconduct set out in Clause 45 of the Bill. These stipulations therefore, provide for sanctions against unauthorised expenditure.

Although he accepted Mr Botes' explanation, Mr Woods felt there was a slight inconsistency in not including a definition for unauthorised expenditure.

Mr Botes stated that unauthorised expenditure related to overspending on a main division, or a sub-division of the vote. Because the Auditor General does not have a vote, defining unauthorised expenditure for the Auditor General in terms of PFMA terminology is therefore impossible. However, the provision that overspending must be reported, and has to be dealt with by either the Auditor General or the Audit Commission, provides for the existence of sanctions. Fruitless and wasteful expenditure in terms of the PFMA definition can apply to any institution, while unauthorised expenditure can only apply to an institution that has a vote that will be approved by a provincial or national legislature.

Mr Woods differed, saying it would depend on how unauthorised expenditure is defined.

Mr Botes further explained that in discussions with the consulting advocate who had also worked with the PFMA and the MFMB, the advocate had advised that defining a term such as unauthorised expenditure which is already defined in the PFMA, in another manner, would produce conflict.

The Chairperson suggested that the Committee would further deliberate the matter in their own interactions.

Mr Woods wanted to know why it was important to have a definition for "relevant legislature" in the Bill.

Mr Botes responded that in terms of Clause 21(2), the Auditor General "must submit all audit reports to the relevant legislature", or to a legislature with a direct interest.

Mr Woods felt it was superfluous to include a definition on "relevant legislature" in the Bill, since it was self-explanatory.

Chapter 2
Chapter 2 deals with the Auditor General himself, with Part 1 relating to his status and functions, Part 2 to his appointment and conditions of employment, and Part 3 to his accountability.

Clause 3 deals with the constitutional and legal status of the Auditor General, in order to contextualise his role.

Clause 4(1) reaffirms the constitutional mandate of the Auditor General. The administrations of the legislatures and municipal entities have been added to provide a clear mandate to all of these institutions. The term "accounting entity" has not been defined, as it is a catch-all term. In addition, the Constitution does not define it, and it would be incorrect to define the Constitution through an ordinary piece of legislation.

The aim of Clause 4(2) is to incorporate requirements of the PFMA into the Public Audit Bill, and it must deal with all audit functions within the Bill.

Clause 4(3) is aimed, inter alia, to ensure that the Auditor General has a discretionary mandate to audit all public entities, whether they are listed or not, and which received public funds.

Clause 4(4) clarifies that this clause supersedes other legislation. Any legislation amending this Bill should be provided to the Auditor General for comment.

Clause 5 is an extremely important clause, and has evoked much comment. The Preamble to the clause provides that the Auditor General may, at an agreed fee, and without compromising the independent role of the Auditor General, provide any service to an institution. No service which compromises the role and independence of the Auditor General should be entered into. Section 5(1)(a)(ii) enables the Auditor General to provide any advice and audit-related services which other supreme audit institutions provide, and to provide support and advice to the public accounts committees, as per their request. He reported that the international trend regarding the expectations of services provided by Auditors-General in regard to what they have traditionally done, and what they are increasingly expected to do now, is changing, while still taking into account the Preamble to the clause. There is an expectation that Auditors-General should be more proactive, rather reactive in their approach.

Examples of audit-related services are requests that the Auditor General perform auditing of the procurement process, or money transactions at the Reserve Bank (the Auditor General is not the auditor of the Reserve Bank), and an emerging trend where the Auditor General is asked to do certain evaluations on privatisation and public/ private partnership initiatives.

The Clause is not detailed in spelling out the activities in which the Auditor General may or may not become involved, as that may become too restrictive, and therefore unwise. The Auditor General felt it was more appropriate to include principles in the legislation, to guide the work activities of the Auditor General.

Some principles which the Bill does not include, but which the Auditor General recommended, are around the services in which the Auditor General should not become involved:
- any service provided by the Auditor General should not directly link to a policy decision based on the service provided.
- the Auditor General should never be involved in any work which would later require him to audit his own work.

In a clause of this nature, the issue of full disclosure is extremely important. Section 10(c) of the Bill itself requires the Auditor General to disclose all other services provided by the Auditor General. The intention of Clause 5(1) is to provide the Auditor General with a feasible mandate, to ensure the fulfilment of his Constitutional role. The intention is also that the Auditor General's mandate must be limited by checks and balances. For example, he must report on any services performed as per Clause 10(c). The mandate of the supreme audit institution needs to have some flexibility, so that the supreme audit institutions can respond to changing demands and needs.

Section 5(1) seeks to find the right balance between giving the Auditor General too much flexibility around audit-related services, and being so restrictive, that it is impossible to respond to changing demands, while at the same time, providing checks and balances in terms of disclosure in the Auditor General's annual report.

The Office of the Auditor General was therefore proposing some amendments in terms of principles to guide activities in which the Auditor General should not become involved. If some of those amendments seemed too broad in their scope, they would attempt to amend them further.

Section 5(2) indicates that the Auditor General is mandated to report on any matter within Clauses 4 and 5, to the legislature or relevant organ of state.

Part 2 relates to the appointment and conditions of employment of the Auditor General. It states that the President must determine the term of appointment of the Auditor General. According to the Constitution, such appointment must be for a fixed, non-renewable term between five and ten years.

Clause 7(2) ensures that there are benchmarks, peggings, and flexibility to compensate the Auditor General adequately and within reason. The international benchmark is that his compensation should be linked to that of the judiciary.

Clause 7(3), combined with Clauses 7(1) and (2), ensures that the Auditor General fulfils his mandate without fear, favour or prejudice, and has financial security.

Clause 10 requires the Auditor General to submit an annual report on all his activities, as Constitutionally required in terms of Section 181(5).

Discussion
Mr Steele ((DA) asked if the report of the Auditor General on the accounts and financial statements of institutions would include entities such as Section 21 companies established by municipalities for housing purposes, school governing bodies, and so forth.

Mr Woods asked for a definition "public purpose" in Section 4(3)((ii).

Mr Gerber asked if, according to Section 4(1), the institutions which the Auditor General must audit and report on, would include those institutions which were required by the Auditor General to be done.

The Auditor General responded that Section 4(1) says the Auditor General must audit and report on national and provincial departments, constitutional institutions, the administration of Parliament, all municipalities, municipal entities, and any other institution or accounting entity required by other national or provincial legislatures t be audited. If municipal entities were established in terms of Section 21 of the PFMA, then they would fall into that definition.

The legislation provides that the Auditor General must audit any institution, municipal entity, or accounting entity. This could provide for a catch-all situation, where the Auditor General could be inundated with auditing functions. To prevent this, clause 4(3) says "the Auditor General may audit and report" on the accounts and financial management of any public entity listed in the PFMA, and any other institution not mentioned in subsection (1). He is therefore not compelled to get involved in the auditing of these institutions.

Mr Botes explained that they had been advised the term "public purpose" should rather not be defined in the Bill. It had been taken directly from the Constitution, and it was inappropriate to define the Constitution in an ordinary piece of legislation. To determine the meaning of "public purpose", Mr Botes continued that each instance would have to be judged on its own merit. Two cases in point are the AIDS Trust, and a Tourism authority in one of the Provinces, which is not listed in terms of the PFMA, but is receiving money for public purposes. When public interest arose, the Auditor General performed an audit into the authority.

Mr Smith raised the matter that 4(4) states that any amendments to amend this legislation may not be introduced to Parliament without prior consultation with the Auditor General. This seemed to say the Auditor General has the final say over what appears in the legislation.

The Auditor General explained that his office often only learns about amendments to legislation which affects the office after it has passed through Parliament, and at a stage which is too late for the office to have any input into the amended legislation. This particular provision in 4(4) seeks to ensure that before an institution attempts to pass legislation through Parliament, they should first consult with the Office of the Auditor General, to afford them an opportunity to give an input to the legislation, and to track changes that are being made to the legislation. The Office of the Auditor General was open to any alternative suggestions which would obviate the problem posed by other institutions which amend legislation in this way.

Mr Steele asked if there was any requirement for an auditing statute of limitations for institutions about to be amalgamated or closed down.

The Auditor General stated that his office had not considered that particular situation in drafting the Bill, but that they would address the matter henceforth. Broadly speaking, however, it could be contained in Section 5(1), under various other services that are often requested from the Office of the Auditor General such as facilitating privatisation and public-private partnership initiatives. In the main, the issue had not been legislated for.

Mr Benjamin explained that when an institution closes down or amalgamates, it is part of the normal process to perform an audit of the organisation. In instances where the Auditor General has selected not to be the auditor of that institution, the auditors appointed by the institution will perform the audit. However, the Auditor General always has the option, should he deem it to be in the public interest, to be involved in the winding down or amalgamation process of the institution.

Mr Woods asked, with regard to Section 5(1)(b), to whom the Auditor General was authorised to make comments on responses by auditees on audit findings. He also asked, in an attempt to understand the need for this provision, what would have prevented him previously from making such comments.

He further asked for some rationale on Section(2)(b), which states that the Auditor General must be compensated on the same level as the judiciary.

Mr Bell felt that the changes which the Office of the Auditor General were recommending would be needed by the Committee before Thursday's sitting of the Committee. In response, the Auditor General said his office had planned to package their recommended changes with the comments that would come through from the Public Hearing. They would attempt to have it ready for the Committee by Thursday morning, at the latest.

Mr Botes explained that in the MFMB process, there had been a proposal that there should be a provision in the PFMA that enables the Auditor General to comment, especially on the municipalities and what they had done with regard to the audit findings, how they had responded, and how they had actioned any of the concerns. Because the Public Audit Bill is intended to capture all the functions of the Auditor General in one Act, it had been agreed that provision would be made in this Bill. In the main, the intention of the provision was to enable the Auditor General to comment on the adequacy or otherwise of responses arising from, for example, a SCOPA recommendation, or in the case of the municipalities, whether their responses may have adequately addressed the issues that were raised.

Mr Woods felt that the provision needed more clarification, since it did not make it clear to whom comment should be made.

The Auditor General responded that this issue had been debated extensively with the task team of the Audit Commission as to what the role and function of the Audit Commission should be, and this Bill has been drafted on the basis that

Mr Botes stated that the Audit Commission serves as an advisory body to Parliament, in order to provide and regular oversight. In that capacity, it would give various instances of advice to the National Assembly, or in this case, to the President in regard to the Auditor General's compensation. The benchmark for compensation on the same level as the judiciary is an international one, which seems to be the most common benchmark used internationally. Even though the Office of the Auditor General had initially felt that the Auditor General as a professional should have been benchmarked against the audit and finance profession, this had become very difficult to do.

Mr Botes stated that the Audit Commission serves as an advisory body to Parliament, in order to provide and regular oversight. In that capacity, it would give various instances of advice to the National Assembly, or in this case, to the President in regard to the Auditor General's compensation. The benchmark for compensation on the same level as the judiciary is an international one, which seems to be the most common benchmark used internationally. Even though the Office of the Auditor General had initially felt that the Auditor General as a professional should have been benchmarked against the audit and finance profession, this had become very difficult to do.

Chapter 3
Chapter 3 deals with the audits by the Auditor General. Clauses 11 to 23 are applicable to audits performed by the Auditor General.

Clause 16 provides for search and seizure powers, which are necessary for forensic audits. Although these powers have been assigned to other constitutional institutions, they have not been assigned to the office of the Auditor General in current legislation.

Clause 21(3) has been added to enable the Auditor General to publish his own audit report if a report is not tabled timeously, thereby enabling him to always be in a position to comply with his constitutional obligations.

Clauses 24 to 28 deal with audits of institutions by auditors in private practice.
Clause 25(1) ensures that the auditor appointed is accredited and registered with the Public Accounts and Auditors Board.

Discussion
Mr Woods noted that clause 12(c) provided that people with non-accountancy qualifications could be called in to assist in the performance of an audit. He asked for examples of audits in which people with non-accountancy qualifications might be called in.

The Auditor General responded that engineers, economists, or legal people might be called in to give opinions on various matters, and they would be necessary for only portions of the audit.

With regard to clause 13(2)(b) that, in setting standards the Auditor General must take into account the capacity of the Auditor General and the accounting profession to comply with those standards, Mr Bell asked if this meant that lower standards would be accepted due to a lack of skills available.

Mr Botes said that as the Accounting Standards Board sets standards for the generally recognised accounting practice for the public service, there would also have to be a concommitant building of capacity by the auditors. The public sector is generally moving towards a more commercialised approach, and therefore the financial statements, and disclosure requirements, are becoming far more onerous. It would not necessarily mean that as from day one, the auditors appointed by the Auditor General, and the standards that he sets, would have to be according to first-world, international standards.

On the search and seizure provisions, Mr Woods asked, apart from the Arms Deal, how many times the Auditor General had the need to make use of search and seize powers. When in pursuit of a matter which had obvious criminal elements to it, he asked at what point the Auditor General would decide that it had become a matter for the National Directorate for Public Prosecutions. Lastly, according to clause 16(2), an authorised auditor was authorised, without a warrant, to approach a night watchman on a premises, to gain entry for purposes of searching and seizure. It seemed that there was room for things to spiral out of control, and in the event of there being serious consequences, the decision to go ahead with the exercise might prove to have been irresponsible. Making reference to "reasonable grounds to believe that a warrant would … be issued", he said this could be a very subjective decision. He felt that these provisions in clause 16(2)(a) and (b) were a little too "loose".

The Auditor General responded that if his office was going to be doing work of an investigative nature, they would require search and seizure powers "quite often". The absence of such powers causes the quality of probing work in investigations to be "watered down". In the past, it often took a long time to lay hold of necessary documents in this type of work.

Regarding how far the Office of the Auditor General would take a criminal matter, they do not have full-blown power to deal with criminal matters. It is useful to be able to hand over matters for further handling, which the Office of the Auditor General has in the past done quite extensively. Quite often, those agencies, such as the Public Protector or the NDPP, have had to do some more groundwork, as a result of the Office of the Auditor General not being sufficiently empowered.

He further stated that the "looseness" of the provision in clause 16(2)(a) was covered to some extent by clause 16(2)(b), which provides that there must be reasoonable grouonds to believe that a warrant would have been issued, had it been sought. He said that an internal process would be established in the Office of the Auditor General to ensure that the person responsible for performing the search and seizure would be a responsible person, and that the Auditor General be given prior notification of such action.

Mr Bell agreed that the Auditor General should be given powers of search and seizure. However, he felt that Mr Woods' reservations regarding the dangers of such action was valid. The definition of the "person in control" should be re-considered.

Mr Kameldien explained that this provision referred to a situation where the Auditor General was present on the premises, and possessed evidence that would necessitate the laying of criminal charges. If the Auditor General were to leave the premises to obtain a warrant, there might be opportunity for the evidence to be destroyed or disposed of. According to benchmark legislation, the best practice is that in the absence of sufficient time to obtain a warrant, a search of the premises is allowed. He suggested solving the problem by replacing "or" in clause 16(2)(a) with "and".

With regard to the qualification for the entering and searching of a premises or vehicle in terms of Section 16(5), Mr Steele asked if there should not also be a qualification for the inspection and questioning of a person (Section 15(2)(c), in terms of Section 35 of the Constitution.

The Auditor General asked to hold that question over for thought, to be able to address it effectively later.

Mr Woods felt the provision in Section 16(4) that, "The Auditor General or such an authorised auditor is entitled to assistance from the South African Police Service" suggests that the SAPS is obligated to give that assistance. He wanted to be sure that, that provision would be consistent with the law.

The Auditor General agreed that this provision may well place an obligation on the SAPS. Mr Kamedien stated that the provision had been included on the advice of a drafting consultant, who believed it to be a valid clause.

Mr Smith responded that the word "entitled" presented a problem, since it almost constituted an instruction to the SAPS.

With regard to Section 20(3), Mr Gerber felt this provision was a standard requirement, and could not understand the necessity for such a provision. There was a similar provision in Section 28.

Mr Botes agreed, saying that a number of commentators had mentioned this in their submissions, and had argued that there should be alignment between Section 20 and Section 28. The Office of the Auditor General was in agreement, and would make a proposal to that effect.

The Auditor General stated that if the provision in Section 20(3) is important, because it provides that the Auditor General "may" produce reports on an institution's resources. If that provision were to be made mandatory, it would place an enormous strain on his office, and at an enormous cost. At the moment, the office is performing selective audits.

On Section 23(3), Mr Bell felt this provision to charge interest on overdue accounts should be made mandatory, to encourage institutions to pay for services rendered by the Office of the Auditor General.

On Section 27(3)(b), Mr Woods questioned the provision that an auditor could attend audit committee meetings, and be remunerated for such attendance by the institution.

Mr Benjamin offered that auditors attended such meetings for the benefit of the client, to assess audit risks. If risks can be appropriately determined upfront, the time required to execute the audit can be significantly reduced. For that reason, it made sense to charge the client to attend audit committee meetings.

The Deputy Auditor General, Mr Terence Nobembe, dealt with Chapter 4, on the internal administration of the Office of the Auditor General, which focused on the office of the Deputy Auditor General, and any other staff members referred to in Section 34. He stated that the Auditor General himself is in overall control of, and ultimately accountable for, the administration of the office. It also ensures that the Auditor General has a Deputy Auditor General, as well as other staff to support him in accounting for the administration of the office.

Clause 31 provides that the Auditor General, after having consulted with the Audit Commission, must appoint the Deputy Auditor General. It also sets the term of office at no longer than five years, with a renewal term of no more than five years.

Clause 32 provides that the Deputy Auditor General is the head of administration, even though the final accountability, according to Clause 30, rests with the Auditor General.

Discussion on this section was held over for the following day, and the meeting was adjourned.