Public Audit Bill: deliberations

Public Audit Function

18 September 2003
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Meeting report

AD HOC COMMITTEE ON PUBLIC AUDITING

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

Chairperson: Mr V Smith (ANC)

Documents handed out:
Draft Public Audit Bill - working draft as of 19 September 2003
Evaluation of Comments by External Parties
Auditor-General's Response to the Southern African Institute of Government Auditors
Auditor-General's Response to Mr Willem Opperman

SUMMARY
The Committee deliberated on the Public Audit Bill. In the absence of a quorum, it was decided to proceed only with broad discussion on the Bill, and not take any decisions. The Committee deliberated around the independence and impartiality of the Auditor General, issues of confidentiality, the Audit Commission, and briefly discussed the financial management of the Office of the Auditor General. The Office of the Auditor General will engage with the Committee on these issues in the next meeting.

MINUTES
Referring to Clause (3), which provides that the "Auditor General may audit and report", Mr P Gerber (ANC) stated that all assets, companies and departments where the state has at least 50% ownership, should be audited by the Auditor General. The Auditor General should not have the choice to opt to audit these entities, although he could appoint an auditor to perform the audit on his behalf.

Mr B Bell (DA) agreed with Mr Gerber. He had already mentioned that all independent auditors' reports should go through the Office of the Auditor General.

Other members agreed that the Auditor General should perform the auditing functions for entities where Government is the major shareholder.

The Chair informed the members that for practical reasons, that could prove difficult.

Dr G Woods (IFP) was of the opinion that work that is outsourced by the Office of the Auditor General, should have the sanction of the Auditor General.

Mr M Tarr (ANC) suggested that replacing "may" with "must" could be unnecessary. In a situation where the Auditor General chooses not to perform an audit, the auditor appointed by the relevant institution must still be approved by the Auditor General, and his report must still be submitted to the Office of the Auditor General once the audit is completed.

The Chair commented that the word "must" would restrict the Auditor General from outsourcing. He was of the opinion that "may" was sufficient. He noted that Clause 4(3) of the Bill came from Section 188(2) of the Constitution, which states that "the Auditor General may audit and report" on the same matters of which Clause 4(3) in the Bill speaks. It would be unconstitutional to change this provision in the Bill. He ended by saying that the Auditor General must ratify the appointment of any auditor appointed to perform an audit on his behalf.

Mr Bell agreed that "may" was absolutely essential, but suggested that the Bill provide that all auditors' reports must go through the Office of the Auditor General.

Mr A Kameldien (Legal Adviser: Office of the Auditor General) said that reports of outsourced audits are already required to go through the Office of the Auditor General.

Mr Gerber appealed for a monitoring mechanism on outsourced audits. There must be a form of liasing between the Office of the Auditor General and the outsourced auditor, by way of reporting back on a regular basis.

The Chair noted Mr Gerber's comments, and asked him to formulate a proposal around them.

Mr Gerber was concerned that Clause 4(3) did not cover instances where the state was a shareholder in a particular entity. Subsidiaries should also be subject to audits by the Auditor General, which could be outsourced by his office. However, it was important for those subsidiaries to go through an auditing process by the Office of the Auditor General, as that shareholding belongs to the state, and there must be some form of control.

The Chair informed Mr Gerber that the Committee had been cautioned they could not change a constitutional provision, to which Mr Gerber responded that where a provision is not directly in the Constitution, it was advisable to obtain a legal opinion.

Mr Gerber further felt that the word "credible" should be removed from 5(1)(d).

Ms T Lenzie (Parliamentary Legal Adviser) interjected that this was more a political issue, and that including such a provision as proposed by Mr Gerber, may not necessarily be changing the Constitution.

Dr Woods stated that the Committee should ensure this legislation defines the scope of what the Auditor General does and does not do.

There was some debate surrounding the term "credible", and on what basis the Auditor General could determine the credibility of a complaint.

The Auditor General responded that the Committee could not continue to discuss the matter without infringing on the independence of the Auditor General. They should not become prescriptive. The Auditor General could also not be expected to investigate every complaint which came to him.

Mr Gerber stated that whether the word "credible" remained in the provision or not, the Auditor General would automatically have to determine if any given complaint is credible. However, he would be left open to criticism if the word remained.

The Committee agreed that the word "credible" was superfluous.

The Chair wanted to talk on the independence and impartiality of the Auditor General.

Dr Woods said that the Constitution placed great emphasis on the independence of the Auditor General. For that reason, it was important that the Bill was not in conflict with the Auditor General's independence, but rather in support thereof.

It was important to ensure both the financial and administrative independence of the Auditor General. Without financial independence, overall independence becomes vulnerable. To avoid the Auditor General being put into such a position, he was made independent of Treasury.

Because the Auditor General must be held accountable for his independence, it is necessary to consider the accountability arrangements of the Office of the Auditor General. The Bill must not give the Auditor General so much latitude that his independence is risked.

The reputation of the Auditor General is to be protected, since he must be beyond reproach. There is scope in the Bill for a relationship with the Executive, where the Auditor General will meet with them on a regular basis to discuss issues, which include the special Defence account. However, Dr Woods felt this matter should be discussed by the Committee, to determine how appropriate it was for the Auditor General to meet with the Executive. The Committee should also discuss whether it was appropriate for the Executive or National Treasury to request the Auditor General to perform services.

Dr Woods agreed with the Auditor General that it was part of normal process for an auditor to approach the auditee after the completion of the audit, to invite a response. However, when that auditee is Government, the Constitution calls on a separation of powers. He agreed that the Auditor General needs to have a relationship with management in Government. However, when he goes beyond management to the Executive, without disclosure being made as to what was discussed, that practice should be called into question.

Ms K Mothoagae (ANC) did not understand Dr Woods' point. She asked if the Committee was attempting to impose restrictive measures upon the interactions of the Auditor General.

Dr Woods explained that he was questioning if the proper "at arms' length" relationship between the Executive and the Office of the Auditor General had been captured. The Constitution stipulates that the Auditor General accounts to the National Assembly, and not to the Executive. Although those meetings with Cabinet are useful, Dr Woods said there could also be dangers in that, and the Committee should discuss the matter.

Mr Bell attempted to clarify that it was not so much the fact that the Auditor General was meeting with the Cabinet that constituted a problem, since that probably was essential. If these meetings were being secretly held, however, his independence may be at risk.

Mr Tarr referred to Clause 15(3)(b), which states that, notwithstanding the provisions of any other Act, a person must disclose any information they have. This did not appear to him to be very good lawmaking.

The Chair invited the Committee's input on Clause 22, with regard to the provisions surrounding audit reports on confidential, secret or classified accounts in Clause 22. The Office of the Auditor General had disagreed with IDASA's motivation for the removal of this provision, on the basis that this would put the Auditor General in a difficulty position to interpret national interest and the protection of sensitive information.

Dr Woods was not satisfied with the Auditor General's argument in this regard. In spite of the controversy surrounding the Arms Deal, it could not be said that this deal had been secretly made, since all the operations were "above board". Dr Woods had difficulty understanding the necessity for legislation like Clause 22. He asked what could be so secretive, that Parliament, and the public, could not know about, putting the national interest at stake. Although such legislation was permitted during the apartheid era, he felt it was out of place in the country's new democracy. He added that it was under the provision of Clause 22, that the Auditor General had taken the first draft of the Arms Deal Report to the Executive, without informing SCOPA about it. He believed the provision was worth challenging.

Furthermore, he said it was understandable that special provisions of this nature might "kick in" around times of war. Otherwise, it was unnecessary.

The Chair agreed with Dr Woods, saying that the Office of the Auditor General would have to convince the Committee of its reasons for retaining the Clause.

Mr Steele (DA) was concerned about the kind of oversight the National Assembly should have, in terms of reports given in terms of Section 22. He was concerned that Clause 22 contains no provision for reporting on what is in the national interest, to a body outside the Executive, such as a select committee of the National Assembly, or the Audit Commission, or any other determiners of what is in the national interest.

Ms Mothoagae noted that in trips undertaken by SCOPA to Europe and India, they had investigated the interactions of the Auditor General with regard to classified and public accounts there. They found that the Auditors General in those countries adopted a "closed book" approach, with very little transparency / disclosure regarding those accounts.

The Chair clarified that there was no motivation for the outright removal of Clause 22, but for further discussion on how accounting was being done to the National Assembly.

Ms Lenzie wondered if Clause 22(2) covered Dr Woods' concern. She did not believe that confidentiality was in relation to a relevant committee of Parliament. It should be in relation to the public in general. Parliament as an oversight body needs to have access to reports.

Both Dr Woods and Mr Bell were of the opinion that Clause 22(2) could cover Dr Woods' concern, but they were not sure.

Mr Tarr said that Clause 22(2) "goes quite a long way" towards addressing some of the concerns.

Dr Woods noted that he would be satisfied by a considered constitutional opinion, to inform the Committee on the pertinent issues.

To clarify Clause 22(2), Mr van Dyk (Legal Adviser: Office of the Auditor General) explained that sub-clause (1) "must not prevent the disclosure of any audit finding …" Sub-clause (2) is therefore an exception to sub-clause (1). Sub-clause (1) must not limit reporting regarding unauthorised, irregular, or wasteful and fruitless expenditure. Notwithstanding sub-clause (1), therefore, sub-clause (2) will be applicable.

Mr Bell said that the provision ended with the phrase, "but any such disclosure may not include facts, the disclosure of which would harm the national interest", which again is left open to interpretation. He felt that part of the provision should be removed.

Mr Kameldien explained the terms of the provision by saying that unauthorised expenditure would always be reported. However, the facts surrounding the unauthorised expenditure would not be disclosed, if that was considered to be in the national interest.

The Chair was not satisfied with the practice of reporting that unauthorised expenditure had been incurred, while at the same time withholding the details of that expenditure.

The Chair wanted the Committee to deliberate on the advisability of the Auditor General doing both consulting and auditing work at the same time, and how that would affect the independence of the Auditor General.

Mr Tarr had no problem with the Auditor General servicing an entity with consultancy or investigation work. However, if he was simultaneously auditing that same entity, that would be problematic.

The Chair asked if the Office of the Auditor General had made a distinction between a normal audit, and a special investigation audit, in the Bill.

Mr Kameldien responded that a special audit was not really a consultancy service. It had also not been defined in the Bill.

Mr van Dyk made reference to "special audit" in Clause 5(1)(d). He said although the term "audit" has been defined in the Bill, "special audit" has not been defined. It might be a good idea to make the distinction in the Bill, for the purpose of clarity.

Dr Woods asked if the "services" mentioned in Clause 5(a)(i) excluded special audits and forensic investigations.

Mr Bell felt that forensic and special audits needed to be separately defined, and that they required different reporting systems.

Mr Kameldien suggested that Clause 29(3) might be of assistance there. It provided that reports had to be tabled at the relevant legislatures.

Mr Bell accepted that, but he was considering the other routes which the reports had to go through.

Dr Woods said that it was often common practice for an auditor to express his opinions, and to make recommendations. However, those recommendations must never go beyond him recommending best practices. He must never make a recommendation that might lead to a business decision.

Mr C Botes (Centre Manager: Office of the Auditor General) stated that the work of the Office of the Auditor General was not to determine how something that was wrong needed to be fixed, but to identify what was wrong, and make it known for the benefit of legislature and management. Management is responsible for fixing the problem.

He furthermore referred the Committee to the additional three paragraphs in Clause 5(a)(i), (ii) and (iii). These sub-clauses make it clear that the Auditor General may never audit an issue in which he was involved through performing a service of a different kind. His audit should never result in, or relate to, policy formulation or implementation. If that should happen, full disclosure must be made. He reminded the Committee of the first page of all audit reports, which states that it is the responsibility of management to address the weaknesses identified by the Auditor General, and it is the responsibility of the Auditor General to identify and report on the weaknesses of the auditee.

Mr Botes explained that "special audit" is separate from the regularity audit that is published as part of the annual reports. However, the Auditor General may perform special audits, which could result from a forensic investigation, like the Transnet scrap metal issue. A special audit could also be a transversal audit of all the consultants across the public service. According to legal advice, in defining "special audit", any function which is excluded from the term, will not be allowed to be performed by the Office of the Auditor General.

Dr Woods was increasingly reassured that the changes that had taken place in the Bill, go to sufficiently addressing the concerns of the Auditor General's independence being threatened through conflicts of interests of services. Two remaining concerns were: (1) Clause 5(b), which could potentially contain a conflict of interest, and which would compromise the independence of the Auditor General; and (2) laws of search, seizure, invasion and access are very severe, especially in the democracy which South Africa is attempting to capture. In terms of Clauses 15 and 16, he was not sure that the Auditor General could be justified in seeking to have the full ambit of all the search and seizure powers that exist within the law, taking into account the volume of work his Office performs in that particular area. Since the Auditor General's forensic unit is very small, and he would have to outsource most of the forensic investigation work, he would be forced to delegate powers to search, seize, and invade, to external audit firms. That did not seem acceptable to Dr Woods.

The Chair noted that he had discussed Clauses 15 and 16 with the Chair of the Justice and Constitutional Affairs Portfolio Committee, who advised that the Committee needed to determine what the Constitution says regarding the power and role of the Auditor General. He said that investigative powers are vested only in the SAPS. He was not of the opinion that the Auditor General needed powers of search, seizure and invasion in order to get hold of evidence, before such evidence is tampered with. Should he be deprived of the evidence, he would then be entitled to claim that the evidence had been tampered with, because they were not enabled to obtain it in time. The Chair was uneasy with the extent of power which the Clauses would give to the Auditor General. He felt that the provisions were opening up the Auditor General to be used "as a political football", where he might be pressurised to use the powers which the Bill allows him.

Ms Mothoagae asked if the Committee should make a provision which states that, should the Auditor General be unable to obtain necessary information, he was then at liberty to contact other bodies that could assist with obtaining the information.

The Chair explained that the Auditor General's issue was with the timeliness of obtaining a document, before a person or entity under investigation had the opportunity to destroy such information.

Mr Tarr found it hard to believe that a department would put obstacles in the way of the Auditor General, to hinder him from moving onto their premises, in order to obtain information. Should he encounter difficulties in that regard, Mr Tarr wondered if the Auditor General could co-operate with the SAPS, who would obtain the necessary search warrant, and proceed to obtain the information.

Dr Woods referred the Committee to Clause 15, which stipulates that the authorised auditor has, at all reasonable times, full and unrestricted access to documents and assets. If he is denied that, he can get an interdict on the basis of this provision. If he is continually blocked from entering the premises, and he suspects a criminal motive, then he could approach other state agencies, such as the SAPS, to support him in procuring the information.

Mr Bell stated that Clause 16(2) provided the real problem, since it empowered the Auditor General to enter premises "without a warrant". That seemed excessive. If that provision were removed, the Auditor General had all the powers to appeal to the SAPS for assistance.

Mr Kameldien explained that a new sub-clause (a) had been introduced, to say that where services were outsourced, the "prior consent of the Auditor General or Deputy Auditor General is to be obtained".

The Chair responded that the Committee's concern was under what circumstances investigations would be required without a warrant.

Mr M Steele (DA) said that Clause 16(2) could be removed without necessarily compromising any of the other powers. It would then make a warrant obligatory.

Mr Botes said the matter would be decided by what Parliament and the Committee expects of the Auditor General, and how far they would want him to go in performing his function. The classical role is to audit and report, which could mean that if, in performing those functions, he found a "closed door", or destroyed documents, he would merely report that. In that case, the Committee's concerns would be justified. The Office had found increasingly in practice, however, that it would have assisted if essential evidence could have been gathered for use by the SAPS, or another appropriate investigating agency, so that a successful court case could have been entered into.

Dr Woods noted that most of the forensic work done in South Africa commercially by the "Big Five" audit firms are done very effectively, without resorting to special legislation to support them. The firms make use of existing laws, and when they hit stumbling blocks, they find ways to use the existing laws to go through the court systems, and get the SAPS involved, if necessary. The Office of the Auditor General, on the other hand, is a very small unit, and in relation to the big auditing firms, has a comparatively small load of forensic work.

Referring to Clause 20(2)(c), Mr Tarr said that much of the emphasis in the PFMA and the MFMA are on performance auditing. It was important to ensure value for money.

Dr Woods referred to the concept of performance auditing as the old, traditional one, which is still in practice. However, Government is moving into a new era, in which departments will run on performance systems, according to the PFMA. According to this system, departments will be run on measurable objectives. The Auditor General's emphasis will shift from doing a once-off value-for-money performance audit, to the auditing of performance information.

At this point, the Chair invited discussion on the Audit Commission. He asked Dr Woods, as a member who serves on the Audit Commission, to give some input here.

Dr Woods explained that Chapter 9 bodies are accountable to the National Assembly, which in turn sets up mechanisms to facilitate that accountability. The Audit Commission has been used, according to the Auditor General's Act, to serve as the accountability mechanism, even though they were not really a Committee of Parliament. The new Act allows the Commission certain powers, as the delegated accountability body. In his view, the Bill does not sufficiently capture the accountability function of the Audit Commission. Whereas the functions of the Audit Commission are essentially accountability functions, the Bill sets up the Audit Commission, and describes it as an advisory body, though not as an accountability body. The Audit Commission should be properly defined, in order for its role to be more clearly established.

Dr Woods continued that the Auditor General differs somewhat from other Chapter 9 bodies. The oversight role of Parliament is perhaps more dependent on information from the Auditor General than from any other source. Therefore, very special attention should be given to the accountability of the Auditor General. The effectiveness of the manner in which his office is run, reflects on the quality of Parliament's oversight.

Mr Gerber asked Ms Lenzie to draw up a proposal around the auditing of subsidiaries of Government, assuming it is decided that the Auditor General must audit such institutions.

Dr Woods felt the financial management of the Office of the Auditor General needed to be considered. The issue of accountability should also take into account how monies are raised and spent by the Office.

The Chair captured Dr Woods' concerns, for the Committee to consider, as follows: (1) Should the Office of the Auditor General be a cost centre, where he recovers just sufficient finances to function, or should he build up a healthy balance sheet? (2) Does the Office of the Auditor General require a surplus? How much should the surplus be? and for what purpose should it be used? (3) Should the Auditor General provide for the contingencies of his staff?

At the next session, the Office of the Auditor General would be expected to bring input around Clause 22, and around their commercialisation, amongst the other matters which had been put to it by the Committee.

The meeting was adjourned.

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