Public Audit Bill: deliberations

Public Audit Function

21 September 2003
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Meeting report

AD HOC COMMITTEE ON AUDITING FUNCTION

AD HOC COMMITTEE ON AUDITING FUNCTION
22 September 2003
PUBLIC AUDIT BILL: DELIBERATIONS

Chairperson:
Dr Z P Jordan (ANC)

Documents handed out
Proposed changes to the Public Audit Bill: by Dr G Woods (IFP)
Draft Public Audit Bill - working draft as of 19 September 2003
Public Audit Bill - draft of 23 September 2003
Opinion by Rose-Innes: Functions of Audit Commission In Relation to Auditor General

SUMMARY
The Committee expressed concern that certain public accounts are classified as special and are therefore closed. It was urged that care must be exercised to ensure this arrangement does not take such matters out of the public domain for no apparent reason. The Committee heard that there are measures in place to ensure that on the one hand departments are obligated to account to Parliament whilst on the other hand operational issues of privacy are taken out of the public domain. In his explanation of what constitutes a special account, the Auditor General explained that some of the issues involved in these accounts go beyond intelligence matters - some touch on international security defence and others are of a highly sensitive commercial character about which the state could be held civilly liable if it were to divulge such privileged information.

Also discussed were:
Clause 16 Searches of premises, vehicles and persons
Clause 47 Establishment of Standing Committee on Public Audit Continued existence
Clause 66 Regulations
Clause 23 Audit fees

MINUTES
The Chair updated members on the outstanding issues flagged in the last meeting. The legal team had been tasked to check on the status of auditing subsidiary government entities and also to solicit information from the Joint Standing Committee on Intelligence on the status of Clause 22 Audit reports on confidential, secret or classified accounts. The Committee needed to discuss the status and composition of the proposed Audit Commission. The Committee would hold two further meetings: 23/9 and 25/9 in order to finalise the Bill.

Clause 22 Audit reports on confidential, secret or classified accounts
The Chair asked the Auditor General to give a brief background to Clause 22 in order to enlighten members regarding its origins.

Mr S Fakie, the Auditor General, explained that Clause 22 emanates from the old Section 46. He noted that it is not easy for the Auditor General to go it alone without consulting other agencies in order to fully understand the nature of the national and security interests that are at stake.

The Chair said he had met with his Joint Standing Committee on Intelligence counterparts where he had raised members' concerns on the implication of Clause 22, in particular the need to disclose the reason for the unauthorized expenditure. That Committee had promised to interrogate these matters thoroughly and get back to him. He insisted that information on the reasons for the unauthorized spending should at least be revealed to that committee.

Mr Fakie noted that in deliberating on these issues the Committee must make sure that on the one hand, departments are obligated to account to Parliament but that it must be taken into account that operational issues of privacy are taken out of the public domain.

Mr Fakie proposed that Clause 22(b) should provide that "may after consulting the President, the Minister of Finance, Intelligence and the Cabinet member responsible for the account to exclude matters that touch on sensitive security interests". He further proposed that Clause 22(2)(1) should be amended to delete "does" and replace it with "must" to remove the discretion and make it obligatory.

In reply to Dr Woods (IFP) asking if the special defence fund that has been talked about fell under the intelligence-related matters, Mr Fakie said that it did.

Dr Woods sought to know what goes through the special defence account.

Mr Fakie pointed out that SAPS has a similar account.

Dr Woods expressed concern that certain accounts have been declared secret noting that this arrangement could take matters out of the public domain for no apparent reason whatsoever.

The Chair said that to his best knowledge all accounts are interrogated and brought under scrutiny by the Joint Standing Committee on Intelligence.

Mr Fakie confirmed the Chair's observation noting that indeed it has been the practice for the Joint Standing Committee on Intelligence to scrutinize these accounts.

The Chair noted that Dr Wood's concern is the reason that these accounts are made available to a limited committee of Parliament and not to the full Parliament.

Mr Fakie said that he could not speculate on why these special accounts are kept out of the public domain, noting that this structuring is out of his jurisdiction and that indeed it is the legislature that has classified them as such.

Mr P Mosaka (Office of the Auditor General) explained that some of the issues involved in these special accounts go beyond intelligence matters. He noted that some touch on international security defence and others are of a highly sensitive commercial character about which the state could be held civilly liable if it were to divulge such privileged information.

Mr Fakie noted that the area of concern should be whether principles of accountability have been compromised in any way.

The Chair said that the concern is that if the President and the Minister of Finance are the only people with access to these reports, then a limited committee of Parliament - in this case, the Joint Standing Committee on Intelligence should be able to interrogate the report.

Mr Steele (DP) sought to know what the term "national interests" entail and whether there is a standard definition for this proposition.

Mr A Kameldien (Office of the Auditor General) noted that the issue of 'national interests' was a two-legged scenario as the onus is on the affected Department to convince the Auditor General that the matter in question is one that should be taken out of the public domain. He added that, on the other hand, the Office of the Auditor General is not in a position to determine whether or not a matter is of national interest, noting that in most cases it is a political decision.

Dr Woods laid out the main points of interest namely: the independence of the Office of the Auditor General, the interpretation of what constitutes the elements of national interest, the status of unauthorized expenditure and the due process of law. He pointed out that these fundamentals were crucial if one was to avoid a repeat of the infamous arms deal scandal.

Mr Bell (DA) wanted to know why the Cabinet member responsible for finance was always involved in issues pertaining to special accounts.

Mr Fakie admitted that he was not sure as to why this arrangement was structured as such but suspected that since all these special accounts are channeled through the National Treasury then it becomes imperative for the relevant Cabinet member to get involved. He assured members that there is definitely an element of engagement that take place between the ministers concerned. He added that he has never in his time as an Auditor General experienced restraint from reporting on matters on the basis of national interests. He therefore appealed to members to bestow due confidence in the Office of the Auditor General to carry out his duties without fear or favour.

Dr Woods insisted that it was important for members to catch a glimpse of what the special defence account entails so that an informed decision on its status can be processed.

Mr Mosaka noted that the special account covered military intelligence, defence top secret operations and military procurements.

Mr Bell referred to subsection 2 where it is stated that the Auditor General must report on wastage and wondered whether it meant every other type of wastage or only a limited type.

The Chair said debate on reportage of waste had been exhausted in the Standing Committee on Public Accounts (SCOPA) and that members were settled on the fact that SCOPA is the right forum at which to interrogate such matters. He added that he had been informed that the reasons for expenditure on what may be considered special defence is normally divulged to the Intelligence Committee and that therefore it means Parliament is intimately informed.

Mr Steele inquired whether there were standards for timeframes where matters could be made public even if it is for historical reasons only.

The Chair ruled Mr Steele out of order and appealed to members to stay focused on matters arising from Clause 22 and avoid turning this occasion into a catch-all opportunity.

Mr Fakie said that his Office had not checked on the international practice regarding timeframes.

Clause 23 Audit fees
Mr Tarr said that it would be a point of interest to have a feel on how the Auditor General's audit fee compares with market rates in the private domain.

Mr Fakie noted that members' concerns revolved around his Office's independence in order to be effective and explained that the concept operates at three basic levels - namely the legislative provision, the Constitution and at the financial level. Experience has shown that without the financial independence, his Office would be rendered a lame duck. He was pleased, however, to report that his Office has had adequate financing and appropriate administrative independence to carry out its constitutional mandate. He noted that this status has been significantly enhanced by the commercialisation of the Auditor General's functions.

In reply to Mr Tarr's query, Mr Fakie pointed out that his Office takes the markets rates and makes provision for an 18%-20% reduced rate for its services. He noted that this reduced rate is an important check and balance, which his Office settles for after interrogating its budget portfolio thoroughly. Although the rates are much lower, the Office spends more time on audits than private firms do and that the Auditor General's level of risk is very low. The downside is the provision for stringent debt collection measures which impacts negatively on its cash flow portfolio. However, the situation has improved since his Office started instituting recovery proceedings against defaulters.

Mr Mosaka reinforced Mr Fakie's remarks by noting that every year the Auditor General sits with Treasury to find out why surpluses arise and whether it would be necessary to put in place relevant checks and balances to curb this incident.

Mr Beukman (NNP) referred to Clause 23(1) and asked if the Auditor General sets guidelines on the rate of fees which private audit firms are required to charge.

Mr Fakie said that audit firms negotiate tariff rates with individual auditees and at present every department has an audit committee, which use the Auditor General's rates to negotiate tariffs with the private sector service providers.

Mr Beukman referred to Clause 23, which states "unless it is not practical to do so"
and pointed out that it could sometimes be practical but not necessarily in the Auditor General's financial interests to carry out the exercise.

Mr Fakie replied that where it makes no financial sense to carry out the audit exercise then such would not be a practical case, noting that the section only asks the Auditor General to apply his mind to determine whether it is practical or not.

Mr Beukman referred to Clause 23(5) and noted that it does not categorically state how the Auditor General would be paid and wondered how Treasury can guarantee payment to the Auditor General.

Mr Fakie replied that his Office has engaged extensively with Treasury as and when it gets involved in situations of non-payment. He said that Treasury's view on the matter has been that it is up to the department concerned to ensure that Treasury provides the relevant funds. Treasury does not normally guarantee such funds but that once the department makes the necessary request it would allocate the department an account from which to draw such funds.

Mr Bell averred that he does not understand why the Auditor General fails to charge interest on the outstanding fees and at the same time give a discount for early payment which was common practice among firms.

The Chair objected to Mr Bell's proposition noting that the money emanates from the taxpayer and that therefore it would not be in the interest of public policy to charge interest.

The Auditor General said that the issue of interest has been exhaustively discussed in the Audit Commission without any resolution.

Clause 16 Searches of premises, vehicles and persons
The Chair referred to Clause 16 and pointed out that Dr Woods has proposed that the entire section be deleted.

Mr Fakie said that he was happy if Clause 16(2), which has raised the controversy, is deleted but insisted that he needed subsection (1) for operational purposes. He explained that other state agencies have the power of search and seizure whilst his office did not have such a competence and this impedes on the ability of his office to ensure that the ethos of accountability work.

The Chair said he had spoken to the Justice Portfolio Committee chair who had advised caution lest the Committee trample on the constitutional tenets of a citizen's right to privacy. The Justice Portfolio Committee chair had informed him that even the prosecuting authorities did not have that power and wondered why the Auditor General should claim such powers. The provision would also put undue pressure on the Office of the Auditor General.

Dr Woods noted that the Auditor General does not have any capacity to carry out forensic work, which means it has to outsource this, which in itself raises questions of legality regarding such blanket search powers.

The Chair noted that the Auditor General has indicated that he could live without subsection 16(2), which makes a requirement for a search without a warrant, and that this section would therefore fall away.

Mr Beukman proposed that there should be some kind of report-back mechanism to show that the Auditor General has been involved in the audit of other government agencies.

The Auditor General objected to this proposition noting that it would put another unnecessary bureaucratic layer on his office and asked the Committee to bestow confidence in the Auditor General's ability to perform.

Clause 47 Establishment of Standing Committee on Public Audit Continued existence
Mr Tarr referred to Clause 47 and wondered why it was necessary to have an Audit Commission when Parliament is the only institution mandated to play the oversight role.

Dr Woods explained that matters of accountability and governance fall outside the Office of the Auditor General and that therefore the Bill as it is, would suffer identity crises especially on the issue of the functions of the Audit Commission. He tabled a draft amendment to replace Chapter 5 of the draft Bill.

Mr Tarr said that Dr Wood's idea is excellent but one must check on the urgency of the Bill to ensure that additional processes do not cause delay.

Mr Steele agreed with Mr Tarr and commended Dr Wood for a job well done but advised that it is prudent to check with the state law advisers on the constitutionality of the suggested amendments.

Mr Beukman noted that Dr Woods' draft is a fairly good move in terms of accountability but wanted to know how the proposed Commission would acquire the expertise with which to carry out its functions.

Mr Bell joined the chorus of praise for Dr Woods on what he called an excellent job, which he said, covers most concerns that had been raised by members.

Mr Fakie noted that Dr Wood's document indeed makes some plausible provisions that would revitalize audit activities but asked the House to check on the question of capacity and budget.

The Chair raised fears that the NCOP might fight the move since it takes matters outside the provincial purview. He also wanted to check on the downside of de-establishment of the current Audit Commission.

Dr Woods said that Clause 55(1) and (2) of his draft makes provision for mechanisms to keep the old commission in place until it is timely to disband it.

Mr Tarr raised concern regarding the timetable for implementing the new measures.

The Chair observed that the reality of the matter was that implementation can only take place next year but that the relevant law would be legislated nonetheless.

The Chair noted agreement on the view that Dr Wood's draft should replace Chapter 5 of the draft Bill. He asked the technical team to clean up the amendments and bring the final draft to the Committee for final approval.

Clause 66 Regulations
Mr Fakie proposed an addition to Clause 66 that would make provision for regulations to cover auditing standards, tariffs and other incidentals which measure he said would enhance transparency.

Dr Wood raised objection to this proposition noting that it would be an attempt on the part of the Office of the Auditor General to regulate itself.

Mr Fakie explained that the regulations would apply to other auditing firms as well.

The Chair agreed with the Auditor General that this measure is necessary in not only enhancing transparency but that it would also strengthen the Bill as it stands.

Meeting adjourned.

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