Auditor-General of South Africa on work of institution, Public Audit Act & related matters: workshop

Standing Committee on Auditor General

13 September 2019
Chairperson: Mr S Somyo (ANC)
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Meeting Summary

Mr Kimi Makwetu, Auditor-General, Office of the Auditor General of South Africa (AGSA) provided an induction session for the Committee.  He briefed Members on Sections 20 and 5 of the Public Audit Act (PAA) and clarified the differences between a clean audit, adverse opinion and a disclaimer. A clean audit speaks to the fair presentation of financial statements, compliance with applicable legislation and reported performance against predetermined objectives. An entity may not receive a clean audit if it failed to adhere to these three points. An adverse opinion would be issues based on misleading financial statements. A disclaimer refers to the auditor’s inability to express an opinion due to limitations in the scope of work needed to be done.

Mr Makwetu spent quite some time explaining the importance of understanding Section 20 of the PAA.

Due to the amended Public Audit Act, additional reporting requirements by the AG were introduced, namely: suspected material irregularities referred to public bodies for investigation; any remedial action taken as a result of failure to implement the AG’s recommendations made in respect of material irregularities; any certificates of debt issued for failure to adhere to the AG’s remedial action

AGSA considered its journey through the years, and the need for the PAA amendments was driven by concrete examples of how audits have been concluded over the past ten years at the national, provincial and municipal level respectively. There is a significant number of non-compliance, non-adherence to legislation or non-compliance and the lack of consequence management.

Irregular expenditure has been increasing over the years at all levels of government. There is clear evidence that audits were becoming a useless exercise because things were not changing due to a lack of consequence management.

The PAA amendments would give the AG more ‘teeth’ to make recommendations, referrals and issue certificates of debt to Accounting Officers. Material irregularity would enhance the work of auditors immensely. However, it may come with its own challenges. Some of the challenges are extreme and life threatening. Examples of incidents reported since May 2018 include Emfuleni Municipality in Gauteng where one team member was shot at a guesthouse. In Tshwane, audit team members were held hostage by a contractor who was demanding payment from the municipality. And, in eThekwini Metropolitan Municipality, one team member received a telephone call threatening him and his family. Surveillance devices were also found in eThekwini at the auditee’s premises in April 2019.

Mr Makwetu appealed to the Committee for individuals threatening auditors to be invited to account before the Committee.

Members asked questions about strengthening measures of safety for auditors, certificate of debt, engagement with private firms that audit on behalf of AGSA, the number of interns at AGSA, measures that could be taken to make the AG’s job easier, capacity with the introduction of new PAA amendments, bribery of auditors, management reports, and the effectiveness of the internal audit function.
 

Meeting report

Opening remarks

The Chairperson welcomed everyone present and announced apologies from members that could not attend.

Briefing by the Auditor General South Africa

Mr Kimi Makwetu, Auditor-General (AG), Office of the Auditor General of South Africa (AGSA) encouraged more interaction with the Committee considering the changes in its mandate. He said that the interactions would only occur four times a year, but hopefully more interaction would take place with the amendments to the Public Audit Act (PAA).

A clean audit opinion referred to the achievement of the fair presentation of the financial statements; compliance with applicable legislation and reported performance against predetermined objectives. An entity could adhere to the requirement for fair presentation of the financial statements, but not necessarily adhere to the other requirements.

An adverse opinion indicates that there is more than one area where the auditors have a problem – misleading financial statements.

A disclaimer means that even after the information was supplied, the auditors were not able to express an opinion due to limitations in the scope of work that the auditors needed to do.

Section five (s5) of the PAA gives the AG discretionary powers to conduct audits. The discretionary audits would be conducted after careful assessment and consideration of the scope of work. The AG may express or provide roughly 1000 audit reports.

The AG’s audit committee consists of independent Members. The Members must be approved by the Standing Committee on Auditor General (SCOAG).  
The PAA provides for an appropriation from the state, but the AG pursues the billing option by issuing invoices to the auditees. During the fourth Parliament, there was a consideration on making use of the appropriation from the state. The counsel that was provided back then was to stay with the billing option. The option has enabled the AG to bring the independence of his office on board in a sense that AGSA does not report to the Executive. Secondly, the financial independence was also enabled. Competent people and systems remain a priority.

On augmented accountability reporting requirements, these have been added on the reporting requirements due to the PAA amendments. The additional reporting requirements include: suspected material irregularities referred to public bodies for investigation, any remedial action taken as a result of failure to implement the AG’s recommendations made in respect of material irregularities, and any certificates of debt issued for failure to adhere to the AG’s remedial action. The PAA did not prescribe a reporting format yet because it was still being developed.

On interactions with the Committee, the AG proposed that discussions on the annual report include the report of the audit committee and the retention of any surplus; the discussion of the strategic plan and budget to include annual audit directive and confirmation of the appointment of the external auditor.

Auditors that audit the AG are by default disqualified from being part of the long list of auditors to audit work on behalf of the AG. Many of the AG’s statutory auditors are often faced with tough economic decisions where they could earn more through contract work as opposed to earning a fixed fee for a number of years remaining as a statutory auditor for the AG.

Public Audit Act amendments
AGSA considered its journey through the years, and the need for amendments was driven by concrete examples of how audits have been concluded over the past ten years at the national, provincial and municipal level respectively. There is a significant number of non-compliance, non-adherence to legislation or non-compliance and a lack of consequence management.

Irregular expenditures have been increasing significantly over the years. There is clear evidence that audits were becoming a useless exercise. Things were not changing due to a lack of consequence management.

The extent to which there are indicators of possible abuse of public funds is something that was previously overlooked. The concept of’ material irregularity’ will allow the auditors to report on matters relating to abuse of public funds. The amendments encourage auditors to go deeper and further in looking at various transactions, especially the suspicious kind. For example, a municipality was appropriated R21.7 million for building infrastructure to accommodate sports and recreational activity. The amount was verified by the auditors, but when the auditors went to physically check the sports field, they only saw a fence. The introduction of reporting of material irregularity will assist reporting irregular expenditure.

Mr Makwetu said that he decided that it would be difficult to roll out the material irregularity issue at once because the instruments were not yet ‘sharpened’. It is something that has been experienced already.

According to the amended PAA, once a recommendation on material irregularity has expired, it becomes a binding remedial action. There have been instances where some recommendations have been contested, but that is a normal exercise of one’s rights.

The concept of a certificate of debt is also introduced in the PAA amendment. That certificate would be furnished to the Accounting Officer (AO) of the department or entity where the material irregularity took place.

The material irregularity amendment lends itself to all sorts of interpretations and assigns to the office responsibilities that do not fall within the office.  Consequence management remains the role of all those charged with oversight. The consequence management part of the exercise includes employing competent people in the right positions. It is not only just about money.

Disclaimers may be referred to an investigative body. A disclaimed opinion would be subject to a referral.

If an AO is made aware of an irregularity such as non-compliance, fraud, theft or a breach of fiduciary duty, the Public Finance Management Act (PFMA), Treasury Regulations and instruction notes typically prescribe the following steps to be taken:

 

  • Perform a preliminary investigation to determine the facts and collect information on what caused the transgression, who is responsible, and whether a financial loss was suffered, or will be. Upon which the recommendations have been made, the accounting officer must respond to the recommendations. However, the responses would be subject to an assessment by the Office of the AG.
  • Prevent any losses or further losses.
  • Institute a formal investigation if there are indications of fraud, corruption or other criminal conduct. If confirmed, take further action such as reporting the matter to the South African Police Service (SAPS).
  • Recover any financial losses from an external party.
  • Take steps against the responsible official, including a financial misconduct investigation, and
  • Recover any financial losses from the responsible officials.

Threats and intimidation
There is concern regarding sporadic instances of threats and intimidation against auditors during their course of duty. It would be better if the Committee would invite the people that are implicated in these instances where auditors were injured during the execution of their fiduciary duty. The Committee needs to take a stern and firm approach on this matter. The risks have not reached out-of-control levels. Since May 2018, there have been attacks on auditors in Emfuleni Municipality in Gauteng during October 2018 when one auditor was shot at a guesthouse; in the City of Tshwane, also during October 2018, audit team members were held hostage by a contractor who was demanding payment from the municipality; in Moretele Municipality in the North West, a staff member of the auditee had said that an auditor was killed because he had raised a with the municipality’s financial statements; in eThekwini Metropolitan Municipality, during May 2018, a member of the audit team received a telephone call threatening him and his family. Surveillance devices were also found in eThekwini at the auditee’s premises in April 2019.

A memorandum was sent to the Committee informing them of entities which the AG does not audit. There are people who are funded by the South African Reward Association. They have made some nasty statements that AGSA was captured because the AG did not make findings on the National Arts Council (NAC). Mr Makwetu suggested that the Committee should invite those individuals to the Committee to account for their statements and explain. He added that such statements have a corrosive effect on institutions like AGSA, and such, statements cannot be taken lightly.

Discussion

Ms C Seoposengwe (ANC) wanted to know about the role of internal auditors and the extent to which they are held accountable. There were several occasions where the AG had indicated that there was gross corruption in several municipalities. Ms Seoposengwe asked why there was a long waiting period in attempting to address these matters.

Ms N Hlonyana (EFF) said there are municipalities that came with disclaimers and their own private auditors. She asked if the AG meets with private audit companies to get the reason why disclaimers were being issued to certain municipalities repeatedly, and perhaps blacklisting audit companies that appear to encourage corruption.

Ms Hlonyana asked what amendment was need with the legislation to make the AG’s job much easier.

Ms Hlonyana asked how many interns were employed at AGSA.

Ms E Spies (DA) asked if the management reports can be used to identify incidents of fraud.

Ms Spies asked if the AG requires more resources in terms of human capacity and other resources.

Mr J Mamabolo (ANC) said he appreciates the work of the AG and assured him that the Committee would support his efforts to fight corruption.

Mr Mamabolo asked if the AG came across a situation where auditees bought clean audits.

Ms S Van Schalkwyk (ANC) shared her concern around the buck stopping with the Accounting Officer. She is aware that some Accounting Officers have fixed-term contracts. Some of the contracts will be ending in November and October, and the Committee has not received their audit outcomes yet. Ms Van Schalkwyk asked what would happen to those repeat recommendations if the Accounting Officers leave office before steps are taken to hold them accountable.

Ms Van Schalkwyk asked if the AG has sufficient resources to efficiently and effectively perform the duties financially and most importantly, safely.

Ms Van Schalkwyk asked the AG for suggestions that can be implemented to strengthen their audit work.

Ms Van Schalkwyk asked if AGSA’s retention strategy was adequate to keep its staff, and what mitigating plans are in place regarding recommendations that were not adhered to by auditees.

Responses

Mr Makwetu said that the internal auditor is part of the machinery of the entity. The Accounting Officers need to budget for that function. Sometimes the internal audit function is in-sourced and in some instances, there is a shared responsibility of that function with external audit firms.

Mr Makwetu said that for the internal audit to be effective, they need to have a programme that must provide external auditors a sufficient level of scrutiny internally to the extent that when the reports are issued to the AO are acted on adequately. If the internal reports are not acted on adequately that destroys the essence of internal audit function.

Mr Makwetu said that in a number of State-Owned Enterprises (SOEs), one would see that there is no shortage of the internal audit function, but many of them remain in the state they are in due to the environment in which the internal audit function operates.

Mr Makwetu said that the total amount spent by municipalities on consultants was roughly R900 million. Some of this amount could have been genuine, but the fact remains that the amount is huge. Some consultants arrive at a municipality where proper records were not kept, and they cannot create figures where proper information was not provided to them. They end up being given the run-around, and that exercise is not cheap.

Mr Makwetu said that one of the municipalities in Limpopo was spending within the range of R12 million for internal support. The bill becomes too expensive, and you end up not understanding what the amount is for because the opinion remains unchanged. There is no internal support for that service provider.

Mr Makwetu said that he meets with audit firms when it comes to the work done on behalf of the AG. However, sometimes it is not their fault that entities do not improve. They operate in an environment where disciplines requiring people to produce information are not adhered to.

Mr Makwetu said that in most instances the AG does not engage with interns due to time constraints. However, there are other programmes that the AG engages students on. That information will be provided in the Annual Report.

Mr Makwetu said that management reports are an official communication from the auditor to management to bring the deficiencies in internal controls to the attention of management. It is management’s job to deal with those deficiencies in internal controls. The Report is a document that helps management, but it ought to be available for oversight as well so that the Committee is aware of management’s progress in implementing the recommendations in the report. The report should not be confidential as is the case in some instances.

Mr Makwetu said that the level of capacity identified thus far was really to support the advent of the new amendments to the PAA. As far as the teams conducting audits, there was no need to multiply them. The addition of the material irregularity is an enhancement of the audit exercise. Human capacity is already experienced enough to detect various issues when conducting the audits and much quicker, which means they are likely to arrive at material irregularity quickly.

Mr Makwetu said that resources at AGSA are currently being evaluated, and this happens on an on-going basis.

Mr Makwetu said that outstanding audits have increased due to many auditees struggling with going concerns. For example, for South African Airways audit, AGSA has not signed on the previous financial years’ audits because it is waiting for the fiscus support.

Mr Makwetu said that in terms of bribery, there was an instance in Gauteng where someone wanted the auditors to look the other way. However, as Auditors and Charted Accountants, one ascribes to a code of ethics and conducts. One would have to decide for themselves when such instances arise because the consequence could lead to loss of their license to trade in the profession and possibly even banned. There are internal review processes to check whether the auditors have arrived at appropriate conclusions.

Mr Makwetu said that the code of professional conduct is very important to be adhered to. Auditors do understand that they are endangering their lives and career when they accept bribes.  

Mr Makwetu said that the binding recommendations usually follow the Accounting Officer. This means that if the recommendations were issued to the AO at ‘Entity A’ and then the Officer moves to Entity B, those recommendations and certificate of debt issued while at ‘Entity A’ will follow that individual to ‘Entity B’.

Mr Makwetu said that AGSA has taken steps to bring awareness to its staff members on issues regarding safety. Internal awareness programmes have been initiated. AGSA relies on the existing law enforcement authorities and its visibility around the premises of the auditees when audit teams are conducting their work. This is not a matter that should be taken lightly, and staff members have been advised to also report threatening jokes or jokes that are clothed in jest. They should be recorded and reported. A full detailed analysis on this would be included in the Annual Report, which the Committee will engage on in October 2019.

Mr Makwetu said that the removal of Chief Financial Officers will remain a recommendation if individuals in those positions are not competent to carry out their fiduciary duties.

The Chairperson expressed thanks for AGSA’s presentation in informing the Committee of the developments. Issues brought to the attention of the Committee will be looked into.

Meeting adjourned.
 

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