Audit Outcome 2018/19: briefing by Auditor General

Public Accounts (SCOPA)

23 October 2019
Chairperson: Mr M Hlengwa (IFP)
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Meeting Summary

Parliament’s Standing Committees on Public Accounts and Appropriations were told that the key message from the 2018/19 audit outcomes of government departments and state-owned entities (SOEs) was that preventive controls, strong consequence management and an effective monitoring culture were still lacking.

Of the 432 entities that were audited, 100 had received unqualified audit opinions with no findings, or “clean audits. The audit opinions for 182 were unqualified, with findings. Eighty-six received qualified opinions, four received adverse opinions and there were disclaimers of opinion at 11 entities. Financial statements for 49 entities had not been submitted by the cut-off date of September 2. Seven of these were SOEs.

Annual fruitless and wasteful expenditure decreased from R2.57 billion to R1.42 billion, but total annual irregular expenditure increased from R50.97 billion to R61.35 billion.

There were concerns about the quality of financial statements submitted for auditing. Of the departments which received unqualified audits, 31% received them only because they corrected misstatements identified during the audit.

Information technology (IT) was an area that required “prominent attention.” 88% of auditees had weak IT controls which increased the risk of fraudulent transactions; and 73% had weak IT security which made them vulnerable to cyber attacks.

Among the root causes of the lack of improvement in audit outcomes was a lack of urgency by managers and oversight bodies in responding to risks flagged by AGSA. Other causes were prolonged instability and vacancies in key management positions, and inadequate consequences for dereliction of duty.

The hearing was told that AGSA’s mandate had been extended to allow it to take action against accounting officers who failed to act on material irregularities identified in audits. Certificates of debt could be issued against them if they ignored AGSA’s recommendations.

Meeting report

The Standing Committee on Public Accounts (SCOPA) and the Standing Committee on Appropriations (SCA) were briefed on the results of audits conducted by the Auditor General of South Africa (AGSA) at national and provincial government departments and some state-owned enterprises (SOEs).

Mr Kimi Makwetu, Auditor General (AG), told the Committees that the Public Finance Management Act (PFMA) required accounting officers to use resources in an effective, efficient and transparent manner. They had to implement internal controls to prevent and detect irregularities and financial misconduct. The key message from the 2018/19 audit outcomes was that preventive controls, strong consequence management and an effective monitoring culture were still lacking.

Of the 432 entities that were audited, 100, or 23%, received unqualified audit opinions with no findings --so-called “clean audits.”

The audit opinions for 182, or 42%, were unqualified, with findings. This meant that, while their financial statements were found to be credible, there were weaknesses in internal controls leading to fruitless and wasteful expenditure and irregular expenditure which, Mr Makwetu said, would “raise your hair.”

Eighty-six, or 20%, received qualified opinions with findings about anomalies in their financial statements and asset registers.

Four received adverse opinions with findings, and there were disclaimers of opinion at 11 entities whose financial records did not make sense.

Financial statements for 49 entities had not been submitted by the cut-off date of September 2. Seven of these were state-owned enterprises (SOEs).

Mr Makwetu gave a breakdown of the audit outcomes for provincial government departments and the key messages to be gained from them:

  • The Eastern Cape government was making progress in financial management, but greater effort was required to sustain this progress.
  • The Free State had made a good effort to deal with disclaimers of opinion, but overall accountability was still a concern.
  • Emerging trends at Gauteng Province were concerning. Disclaimers were increasing and clean audits were reducing.
  • KwaZulu-Natal (KZN) was showing progress, but greater effort was required to trigger stronger outcomes.
  • Limpopo Province was showing an encouraging trend, but more work was required before this could be regarded as sustainable.
  •  Mpumalanga Province needed to be watched closely.
  • The Northern Cape had made no major strides, and the situation there “could still be slippery.”
  • In the Northwest Province, there had to be greater effort and focus in order to shift the audit outcomes.
  • The Western Cape showed a “solid, consistent pattern.”

Mr Makwetu raised concern about the quality of financial statements submitted for auditing. Of the departments which received unqualified audits, 31% received them only because they corrected misstatements identified during the audit. This raised questions about the quality of interim reports presented to portfolio committees overseeing government departments. Accounting officers should proactively address risks and not rely on auditors to identify material misstatements for them to correct at the end of the financial year.

AGSA was currently responsible for auditing audited 14 SOEs. The audits found them to be in a “poor state.” Eleven audits were completed by the end of September. Results were:

  • Armaments Corporation of South Africa (Armscor) - unqualified audit opinion with findings. Irregular expenditure of R3.7 million.
  • Central Energy Fund - unqualified with findings. Irregular expenditure of R20 million.
  • Land and Agricultural Bank of South Africa - unqualified with findings. Irregular expenditure of R140 000.
  • South African Post Office - qualified with findings. Irregular expenditure of R183 million.
  • South African Forestry Company - qualified with findings. Irregular expenditure of R129 million.
  • Development Bank of Southern Africa - unqualified with findings. Irregular expenditure of R400 000.
  • Airports Company South Africa - unqualified with findings. Irregular expenditure of R264 million.
  • South African Broadcasting Corporation - qualified with findings. Irregular expenditure of R351 million.
  • Denel - disclaimer of opinion. Irregular expenditure of R217 million.
  •  Independent Development Trust - qualified with findings. Irregular expenditure of R30 million.
  • South African Express Airways - disclaimer of opinion. Irregular expenditure of 156 million.

Audits still outstanding were those of South AfricanAirways (SAA), the South African Nuclear Energy Corporation and the Trans Caledon Tunnel Authority. It was not known when the SAA audit would be finalised. Those of the other two entities should be completed by the end of October.

The audits of some SOEs had been delayed because of difficulties about their status as going concerns. During 2018/19, the total government exposure to loan guarantees issued to SOEs was R328 billion. He said guarantees and bail-outs increased the budget deficit and led to higher borrowing costs and a risk of downgrades by ratings agencies.

Mr Makwetu gave a breakdown of the financial health of auditees, excluding SOEs, which indicated that 9% were in a vulnerable financial position and might not be able to continue with operations. Another 36% had a budget deficit. Departments did not budget for legal claims against them, and this resulted in successful claims being paid from funds earmarked for service delivery. More than half of the auditees took longer than 30 days to pay their creditors. The average payment period was 55 days.

Annual fruitless and wasteful expenditure decreased from R2.57 billion to R1.42 billion. Among the causes were interest on late payments (R240 million, or 28%) and litigation and claims (R160 million, or 19%). The remaining R450 million was caused by, among others, cancellations of accommodation and trips and damage to vehicles.

Total annual irregular expenditure increased from R50.97 billion to R61.35 billion. Irregular expenditure of previous years had not been properly dealt with. There should be an investigation followed by condonement and the recovery or write-off of the expenditure. The top five contributors to irregular expenditure were KZN’s health and transport departments, Gauteng’s health and roads and transport departments, and the national Department of Water and Sanitation.

Mr Makwetu said government’s information technology (IT) was an area that required “prominent attention.” 63% of auditees had weak IT governance practices; 41% of IT projects did not meet expectations; 88% of auditees had weak IT controls which increased the risk of fraudulent transactions; and 73% had weak IT security, which made them vulnerable to cyber attacks.

There were several root causes for the lack of improvement in audit outcomes:

  • There was a lack of urgency in responding to AGSA messages about addressing risks and improving internal controls. At fault were accounting officers and senior management -- political leaders and oversight bodies such as public accounts and portfolio committees.
  • Instability and prolonged vacancies in key positions caused a capacity gap.
  • Inadequate consequences for officials who deliberately or negligently ignored their duties. If they were not held accountable, such behaviour could be seen as acceptable and tolerated.

In order to improve preventative controls, AGSA was assisting accounting officers to conduct status of records reviews, during which trial balances would be scrutinised to provide an early warning of risks.

Mr Makwetu said AGSA’s enforcement powers had been extended by legislative amendments which had introduced the concept of material irregularities. These included non-compliance or contravention of legislation, as well as fraud, theft or breach of fiduciary duty that was likely to result in material financial loss or misuse of public resources.

If an accounting officer did not deal adequately with material irregularities, AGSA’s expanded mandate allowed it to take three possible courses of action. It could refer the irregularities to a public body for investigation; it could itself perform an investigation; and it could make recommendations on actions the accounting officer should take. If the actions were not implemented by a stipulated date, AGSA could take remedial action and issue a certificate of debt against those responsible for the material irregularity.

So far, 28 material irregularities involving R2.81 billion had been identified in 12 completed audits. He said the level of cooperation by accounting officers in these “scary interventions” was comforting. Most accounting officers would appreciate being informed if they were at risk of a material irregularity and a certificate of debt.

Discussion

Several Committee Members welcomed the initiative of checking trial balances regularly to pick up early warning of problems.

Mr M Dirks (ANC) suggested that this process should be compulsory for all municipalities and government departments.

Mr S Somyo (ANC) asked how many of the auditees made use of this assistance.

Mr A Lees (DA) said irregular spending was on the increase. Such spending would remain on the books until it had been investigated and condoned. Accounting officers were slow in obtaining condonation. There appeared to be no consequences for failing to deal with old irregular expenditure issues.

He referred to SOEs which delayed their annual reports because there were doubts about their status as going concerns. Could the AG not table his audit reports ahead of their annual reports? Why hold back when the SAA’s 2018 annual report was more than a year late and becoming a useless document?

Mr Lees asked how the Standing Committee on Public Accounts (SCOPA) could be reassured that the audit fees charged by AGSA were fair and competitive with private-sector auditors. He suggested that AGSA was in a non-competitive position and its fees were extremely high.

Mr O Mathafa (ANC) commented that there did not appear to be standard governance structures for municipalities. The way in which they were managed changed as their political leadership changed. He asked what AGSA could do to help accounting officers to implement remedial action.

Mr B Hadebe (ANC) referred to the fact that many departments’ financial statements had to be corrected by AGSA. He was concerned that quarterly reports considered by Parliament’s portfolio committees might not be credible.

Ms D Peters (ANC) asked whether the oversight performed by Parliament assisted AGSA’s work. She asked what effect outstanding reports had on the financial statements for the following year.

The Chairperson said the question of portfolio committees scrutinising quarterly reports was raised regularly, but loopholes in the process resulted in SCOPA “receiving a mess” at the end of the year. He asked whether audit committees were taken seriously, given the “laissez faire” attitude to internal audits in departments. It was a concern that four of the five departments with the most irregular expenditure were in the provinces. This raised concerns about the effectiveness of the provincial SCOPAs.

On the failure of some entities to submit annual reports on time, the Chairperson said this was “fast becoming normalised” at SAA, and should not be allowed to continue.  

AGSA’s response

Mr Makwetu said his office had “reached out widely” with its offer to assist with status of records reviews. He said internal audit committees should encourage accounting officers to use the service.

Irregular expenditure was growing because of a lack of consequences for those responsible. The expenditure would be flagged by AGSA, there would be engagement with SCOPA, a report would be tabled, resolutions would be adopted -- and the next year there would be even greater irregular expenditure. “How loud can these voices be? Can they be even louder?” he asked.

Outstanding annual reports affected auditors’ ability to start an audit for the new year. The new financial statements had to have an opening balance, and this could not happen if they had no idea of the previous year’s closing balance. AGSA could not submit its audit report ahead of an outstanding annual report which had not been signed off. Mr Makwetu pointed out that when AGSA said SAA had not submitted a report for 2018, it meant that SAA had not completed its financial statements. “The statements must tell a story. We must satisfy the owners of the assets that the story is credible. We cannot force ourselves into the story,” he said, adding that supervisory authority lay with Parliament.

On the question of AGSA’s audit fees, he told Members that there had been huge investments in AGSA’s capacity. The number of chartered accountants employed had grown from around 70 to 700. He reminded members that the fees paid by departments ultimately came from the National Revenue Fund, whether they were paid through invoices or by appropriation. AGSA trained and produced large numbers of accountants, many of whom found employment elsewhere in the public service.

Mr Makwetu said AGSA would prepared to have broader engagement with the portfolio committees overseeing government departments. Scrutiny by them of quarterly reports would be very helpful.

The Chairperson thanked Mr Makwetu for attending the meeting and ended the hearing.

Committee matters

The Chairperson asked Members to remain for a report back by him on the non-attendance of the Minister of Cooperative Governance and Traditional Affairs at a meeting held the previous day to consider the debt owed by Eskom to municipalities. He had reviewed the official correspondence between the Committee and the Minister, and he was satisfied that the Committee had done everything it should have done in arranging the hearing. The Committee would set another date and he expected the Minister and a full complement of officials to attend the meeting. Eskom was firmly in the purview of the Committee, and it would deal with all aspects of the municipal debt.

The meeting was adjourned.

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