Auditor-General of South Africa 2018/19 Annual Report

Standing Committee on Auditor General

11 October 2019
Chairperson: Mr S Somyo (ANC)
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Meeting Summary

Annual Reports 2018/2019Public Audit ActPublic Audit Amendment Act

The Committee discussed the 2018/19 Annual Report of the Office of the Auditor-General (AGSA). The Committee received presentations from the Audit Committee and the AGSA in this regard. The Auditor-General was in attendance.

The Audit Committee expressed its satisfaction with the internal controls and the finance function of the Auditor General. It also expressed its satisfaction with the Chief Financial Officer in discharging her duties and responsibilities and the manner she did so. The Audit committee was satisfied that the external auditor, Crowe, was independent and not conflicted, as required by section 39(2)(c) of the PAA. It further recommended that the Standing Committee on the Auditor-General (SCoAG) reappoints Crowe as the external auditor.
 
The internal auditors concluded that while certain control procedures needed improvement, particularly in the area of information technology controls, the internal controls in place were largely adequate and effective with a risk rating of “medium”.  The IT control is a crucial area and there were concerns around that but the DAG and the AG strengthened the team with new recruits with substantial experience.
 
On financial performance, AGSA had a favourable cash balance of R723 million (2018: R664 million), including short-term investments with a margin of safety of 2.7 months. This is the highest since this measure was introduced and is close to the AGSA’s target of three months.
 
In his preliminary remarks, the Auditor-General highlighted that the AGSA has sufficiently broad mandate and full discretion in the discharge of its functions. Generally, it has unrestricted access to the information of the auditees with very limited exceptions such as the security cluster. The AGSA also had the right and obligation to report on the work. The AGSA also enjoys the freedom to decide the content and the timing of the audit reports. The existence of effective follow up mechanisms on its recommendations was strengthened by the amendments that were promulgated in April. The financial administrative autonomy and the availability of appropriate human material and monitoring resources are the lubricants that enables the AGSA to do the work that is required as an audit office.

The AGSA reported that in the period under review year it had conducted 23% more audits than in 2012/13. The audit outcomes for departments, public entities and municipalities had regressed. The financial and going concern matters remained a challenge at most of the auditees and specifically for a number of strategic SOEs.
 
The timeliness of audits decreases due to completion rate remaining below 90%; reports signed off late over the past two PFMA cycles; general report team forced to move deadlines to include the results for major departments and SOEs in the report; and a number of audits not meeting deadline for the 2017/18 MFMA cycle.
 
On financial performance, the AGSA enjoyed a healthy surplus of R71 million which is 2.1% of audit outcome and within the AGSA funding model target of 1% - 4%. Audit outcome targets were also achieved, despite losing R111 million of revenue to unbilled hours. R69 million (2018: R72 million) was the AGSA contribution to the fiscus because of budgetary constraints at auditees.

To the Audit Committee, Members asked about transformation at the external firm, the AGSA fees, and what intervention could be made in relation to the increasing level of debt. To the AGSA, they asked about the audit quality, outstanding debt by auditees, AGSA surplus, causes of incomplete audits, outreach programme and audit opinion contestations. 
 

Meeting report

The Chairperson allowed the Audit Committee to brief the Members in the absence of the Auditor General in order to express any issues or sensitive information that it would not otherwise express in front of the AG.
 
Remarks by  Audit Committee
Mr John Biesman-Simmons, Chairperson, Audit Committee, informed Members that overall it was very impressed with the organisational culture and structure of AG. Governance was held at the highest level and internal controls and the internal audit function was quite effective. The auditors did not express any discomfort or undue pressure when conducting their audit on the AG.
 
Members were satisfied with the input of the Audit Committee and invited the AG and his team to join the meeting.
 
Briefing by the Audit Committee on the Auditor General South
Mr Biesman-Simmons outlined the purpose, mandate, duties and terms of reference of Audit Committee. The Audit committee also provided assistance to the Deputy Auditor-General (DAG) in fulfilling her responsibilities as the accounting officer of the organisation. The Committee was also in compliance and adhered to the King Code of Governance (King IV) as well as the Public Audit Act.
 
The Audit Committee consisted of four Members which were previously appointed by the DAG in terms of Section 40 of the PAA. With the new PAA amendments, the AG would now appoint Members of the Audit Committee to ensure that independence was maintained.
 
The overview of the activities undertaken during the performance period included:
-Revision and approval of the internal audit charter
-Review of the audit of predetermined objectives and the integrated annual report
-Appointment of internal auditors
-Revision of own terms of reference
-Revision and approval of the strategic risk profile
-Examination and review of the annual financial statements (AFS); and
-Guided the establishment of a whistle-blowing mechanism
 
The external auditor must be independent of its client in order to provide an independent opinion. The vast SMMEs that could be contracted to audit the AG were already doing audits on behalf of the AG; therefore, leaving the pool of available auditors very small for the Audit Committee to choose from. The Audit Committee had issued the tender four times in the year under review to get auditors. The firm that was acquired had a very high B-BBEE level but commitments were made to ensure that in the next three years it was lowered to at least level two. The B-BBEE score has since improved from level seven to level four.
 
Upon evaluating the annual financial statements and integrated annual report, the Audit committee considered various key focus areas from going concern, accounting treatments internal controls, compliance with the IFRS and PAA, amongst others. It then concluded by recommending to the DAG that she sign the integrated annual report and the accompanying financial statements of the AGSA’s financial performance for the year ended 31 March 2019.
 
The internal auditors concluded that while certain control procedures need improvement, particularly in the area of information technology controls, the internal controls in place are largely adequate and effective with a risk rating of “medium”.  The IT control is a crucial area and there have been concerns around that but the DAG and the AG strengthened the team with new recruits with substantial experience.
 
The Audit Committee initiated a procurement process that led to the appointment of Ngubane & Co. as the outsourced internal auditors for a period of three years, commencing with the year ending 31 March 2020. It is a black-owned multi-disciplinary professional firm that was established in 1995.
 
As for the external audit, the Audit committee was satisfied that the external auditor, Crowe, is independent and not conflicted, as required by section 39(2)(c) of the PAA. In accordance with its terms of reference, the audit committee recommends that SCoAG reappoints Crowe as the external auditor in accordance with section 39(1) of the PAA.
 
With regards to risk management and the effectiveness of internal controls, the committee considered the information presented to it. Nothing came to its attention that would alter the conclusion that, while certain control procedures needed improvement, the internal controls in place are largely adequate and effective, with an overall risk rating of “medium”.
 
On the assessment of the Chief Executive Officer and the finance function; the committee is satisfied that the CFO, together with the resources and expertise within the finance function, are suitably qualified and have the requisite skills and experience to fulfil their roles in the AGSA.
 
In terms of local government debt, the continued increased in local government indebtedness to the AGSA is of concern to the audit committee. The SCoAG is requested to provide further support to the AGSA in its negotiations with the National Treasury. Local municipalities struggle to pay off their audit fees.
 
On financial performance, the AGSA had a favourable cash balance of R723 million (2018: R664 million), including short-term investments with a margin of safety of 2.7 months. This is the highest since this measure was introduced and is close to the AGSA’s target of three months.
 
The President’s assent of the Public Audit Excess Fee Act, 2019 is another step closer to funding excess fees of financially distressed auditees as a direct charge against the National Revenue Fund. AGSA will be able to charge the NRF from 1 April 2020, as proclaimed by the Minister of Finance.
 
The Audit Committee recommended that the Committee take note of the integrated annual report as tabled and approves the re-appointment of the external auditor, Crowe Johannesburg.
 
Discussion
Mr Z Peter (ANC) wanted to know whether the Audit Committee had conducted any due diligence to ensure that it addressed transformation and secured the appointment of people appointed to enhance this. Secondly, with the increasing level of debt, what intervention would the committee recommend to the SCoAG?
Mr J de Villiers (DA) wanted to know how the SCoAG would effectively assist the AG.
 
Ms E Spies (DA) wanted to know whether the AGSA’s fees were very high. Hence, the auditees were unable to pay their audit fees.
 
Auditor General’s Comments
Mr Kimi Makwetu, Auditor General, indicated that he would conduct himself as a unitary board. When you are appointed as the AG you are not told that you are a board all by yourself, so you meet with yourself and interact with yourself and other people get to do the work. At this point he would interact with the Committee on the part of being the unitary board structure if one looks at the PAA carefully.

He noted that this was the first year of interaction on the Annual Report with the current committee, and it was therefore important to assert several principles that guided the institution.
One of those is the principle of independence. Independence of the head of the institutions as well as other Members of the institutions was paramount. The AGSA goes through a process to confirm its independence from the people it audits and that is still in place as one of the key fundamental and foundational elements of the work done by the AGSA.
 
The AGSA has sufficiently broad mandate and full discretion in the discharge of its functions. The mandate in the PAA is sufficiently broad. Generally, it has unrestricted access to the information of the auditees with very limited exceptions such as the security cluster.
In addition, the team had to ensure that an appropriate and effective statutory framework existed.
 
The AGSA also had the right and obligation to report on the work. If Members wanted to appreciate this, the Auditor-General of Somalia only got this right this week. If this was not possible, the work is as good as not being done.
 
The AGSA also enjoys the freedom to decide the content and the timing of the audit reports. Hence, this week the Office of the AG was coming in and out of portfolio committees.
 
The existence of effective follow up mechanisms on its recommendations was strengthened by the amendments that were promulgated in April.
 
Lastly, the financial administrative autonomy and the availability of appropriate human material and monitoring resources are the lubricants that enables the AGSA to do the work that is required as an audit office. So this is a foundation that makes it possible for the AGSA to report on anyone without being constrained in doing its work.
 
It was important to anchor the Annual Report on these points and it was important that people understood that the AGSA was responsible for carrying out a statutory mandate.
 
Briefing by the Auditor General South Africa on its Annual Report
Ms Tskane Ratsela, DAG, AGSA, took the Members through the presentation and highlighted that in the period under review the AGSA had conducted 23% more audits than in 2012/13. The audit outcomes for departments, public entities and municipalities had regressed. The financial and going concern matters remained a challenge at most of the auditees and specifically for a number of strategic SOEs.
 
The timeliness of audits decreases due to completion rate remaining below 90%; reports signed off late over the past two PFMA cycles; general report team forced to move deadlines to include the results for major departments and SOEs in the report; and a number of audits not meeting deadline for the 2017/18 MFMA cycle.
 
On financial performance, the AGSA enjoyed a healthy surplus of R71 million which is 2.1% of audit outcome and within the AGSA funding model target of 1% - 4%. Audit outcome targets were also achieved, despite losing R111 million of revenue to unbilled hours. R69 million (2018: R72 million) was the AGSA contribution to the fiscus because of budgetary constraints at auditees.
 
Mr Makwetu added that there was a matter that ought to be on the hand over report from the previous committee. The matter relates to a pending court case regarding the post-retirement medical benefits of former employees of the Office. The matter has progressed to a point where it was now ready to appear in court. Lastly, as far as the section 4(3) is concerned, there is a growing expectation that as the auditing office we must audit everything but the reality is that there are always limitations to that. The ultimate outcome of it is that the AG would not be able to audit every publicly funded institution. The majority of the auditees were of significance to the public purse. This expectation may cause serious problems and perhaps this conversation may be deepened in order to temper that expectation.
 
The Chairperson said a paper on that was needed because there were also challenges in the inclusion of some of the SOEs the AGSA was now auditing, mainly Eskom.
 
Mr Makwetu replied that he was involved recently in a conversation about Eskom. The firm that is currently auditing Eskom needs to commit about 270 auditors which tilted towards auditors that were experienced. It is already a mission to obtain that number of auditors with the required experience in the South African context. A detailed report will be put together and submitted to the Committee around this matter.
 
The Chairperson thanked the AG for the inputs and the work done by the Office.
 
Discussion
Mr Biesman-Simmons responded to the question about transformation in the external firm. The firm came to the realisation that it needed to focus on transformation and it was investing in socio-economic issues and investing in recruiting individuals from previously disadvantaged backgrounds. The firm finds it very difficult to retain staff, especially at a senior level and it was difficult for the firm to compete with the big companies as well as SOEs and government departments. The firm understands very clearly where the SCoAG stands on the matter as well as the AGSA.
 
The AGSA has undertaken and encouraged significant debtors to ring-fence  amounts owed by the debtors in arrears and pay those off over a period of time. The AGSA has handed over some of the debtors to attorneys to pursue the debt owed by the local municipalities and other debtors.
 
In order to support the AG practically, the SCoAG could have negotiations with the National Treasury and be part of the discussions in recouping some of the debt or repayments through the National Revenue Fund.
On fees, the rates charged by the AGSA has a significant discount compared to the rates by the private companies in the market and they are very reasonable.
The Chairperson said the Committee would consider the proposals made by the Audit committee on the re-appointment of the external audit firm.
Ms S Van Schalkwyk (ANC) said that there is often a tendency of criticising when there are problems to an extent that Members are viewed as the opposition to the entities. She commended the AGSA for the job well done with the excellent performance amidst the tough economic conditions.
 
She was worried about the audit quality and that cautiousness needs to be exercised to ensure that the quality level did not deteriorate. She asked whether there were any plans or measures that were being implemented to ensure that the declining quality of audits was mitigated.
 
On the outstanding debt by auditees, she was concerned about the public entities and SOEs that now owed audit fees. She sought some insight on the root causes of that trend. She suggested that it would be of benefit if the external auditor would be tracked in terms of transformation so that Members were brought into confidence in that.
 
Mr Z Mlenzana (ANC) said that the AG should put the request for appropriation in writing and motivate for the retention of the surplus. He was happy about the reasoning behind retaining the surplus, particularly around cost-containment measures. Spending has to be informed and Members could see the fruits of that at AG.
 
He wanted to know how the AGSA made a surplus with such an extreme level of debt from auditees. Lastly, on the audits that were not concluded; is there any law or legislation that applies to the incomplete audits?
 
Mr de Villiers commented that the successful training programmes by the AGSA were critical and the Office should be proud of the work it does in that space. A lot of the revenue was generated through local government auditees and it is difficult to find competent Chief Financial Officers to run those local governments which are mainly the ones owing the AGSA money and failing audits. It would be helpful; perhaps, if a lot of the training done could be focused on placing good trained CAs back into local government positions.
 
Mr B Mamabolo (ANC) wanted to know whether the AGSA team also conducted its outreach programmes through social media platforms. Secondly, on the audit opinions, does the AGSA come across instances where the audit opinions are contested to an extent that they are taken up to court and whether the Office had the resources to fight those cases in court.
 
The Chairperson wanted to know how the AG looked into resolving matters regarding contestations and where auditees refused to pay the audit fees because it is contesting the opinion.
 
Ms Bongi Ngoma, CFO, AGSA, said that in the 2017/18 financial year alone, the AGSA was owed about R650 million against a revenue of R3.2 billion. In 2018/19, the debt was at R744 million against revenue of R3.46 billion. The debt as a percentage of revenue was at about 20%, so about less than a quarter of the revenue remain owing. The number has been maintained due to the collection efforts that the AG embarked on such as the payment arrangements with auditees. The bulk of this debt is in the local government debt which translates to about 30% of the debt owed to the AGSA. The AGSA negotiates with the local government and sign up the ring-fencing agreements.
 
On the provision for doubtful debt, the trend over five years has moved from a risk of 25% to 18% - meaning in the R744 million, only 18% is at risk, that is attributed to all the efforts that have been put in place.
 
On the R71 million surpluses, this means that the audit income collected was above the operating expenses by R71 million which was close to break-even. The funding model allows the AGSA to use the surplus to fund the capital acquisition and tools for the auditors to be able to do their work.
 
The DAG said that the Office was also concerned about the audit quality and the risk it poses to the credibility and the reputation of the office. Actions are being taken to get back to much higher levels of audit quality and this was not taken lightly. The AGSA is driving better disciplines on the management of the audit process. One of the problems found contributing to the low audit quality is the tendency of the auditors to allow multiple adjustments to the financials that were submitted in the first instance. It helps auditees to get unqualified opinions but it comes at an immense cost in the audit quality.
 
The critical thing is to get the auditees to prepare their books and use the time they have to prepare their financials and be able to hand over auditable financial statements and close to what should be final. By doing that, auditees need to strengthen their internal controls. The risks that come with the AFS submitted by auditees translate to the low audit quality.
 
Oversight could assist in this space by keeping this issue on the table on a consistent basis. The PFMA requires that accounting officers ensure that internal controls were in place in order to effectively deliver on the mandate. The role of the CFOs, the Audit Committees and internal audit function need to be consistently looked at to ensure that the controls that support the credibility of financial statements were prepared.
 
The individuals that the AGSA trains, some of them stay and many of them leave and go to the public sector. 
 
Mr Makwetu said the outreach work is a deliberate plan that was introduced many years ago to sensitize people on the work that the AGSA does. From 2009 to 2012 the AGSA visited every one of the 278 municipalities physically. Secondly, there were many people who were interested in the work done by the Office and we met with them and engaged with them. We have probably engaged with about 90% of the universities across the country. Through these engagements we also meet with the students and interact with them on the work that the Office does. The Office does not spend much money on marketing because its visibility makes it possible for students to apply. So there is a direct benefit on the outreach programme. Banks have also invited the Office in some of its engagements and the Office has asked banks to help train some of its people to acquire technical knowledge required by public institutes with complex financial instruments. The AGSA has used the partnering arrangements ad it has assisted in many ways.
 
On the audit opinion contestations, there are auditees that believe that the Office was giving them opinions because it was on the same side as their enemies. The objective is to assist the auditees identify risks and loopholes in their internal controls so that they can perform better. Some of those contestations the Office takes them as they come and deal with them as they come.
 
On the outstanding audits, it was mentioned this week at the Public Enterprises committee that sometimes it was good to be on track with the accountability cycle. The auditor must sign off the accounts of this year within the prescribed period so that everybody that has an interest in that institution has the fresh knowledge about it. So that institution is not allowed to delay the finalisation of accounts. The reality is that we do not want to enter into a period where there is no accountability. So our role is to try and persuade the boards and the management to provide their financial statements. It is always best to give them the space to write the books in the best way they understand so that they can take accountability. Some of them do not want the story to be told through the financial statements due to a number of issues such as going concern or financial health risk. It may also be reasonable for the auditor to allow the entity to have that space but it is an area that needs to be watched. For example, the Office has not received the accounts of SAA for two years. It is a large entity which would then require a lot of memory when conducting the audit.
 
The Chairperson thanked the AGSA for the Report. He stated that it should not be taken lightly that the number of audits issued had dropped as well as the increase in the number of outstanding audits. The Report provided an indication of a good scope of work and the Committee would still consider the Report and provide feedback. Otherwise, the Committee was happy with the AG’s work and it is committed to supporting the AG in delivering its mandate.
 
The meeting was adjourned.


 

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