The Standing Committee said it was impressed by the report it received from the Office of the Auditor- General (AG) on its 2019/20 performance. It was also pleased to hear from the AG’s audit committee that the overall control environment and risk management processes were satisfactory, which meant that the system of internal controls at AGSA was adequate and effective to provide reasonable assurance that its business objectives would be met.
During the discussion, Members asked whether some of the experiences learnt from COVID-19 could be used under normal circumstances. They also wanted to know about the mitigation strategies for the Office’s control deficiencies and the R4.9 million special audit reserve funds. The Committee expressed optimism at the prospect of seeing an increasing percentage of black-owned firms being appointed as AGSA’s external auditors, and urged it to address the bad debts issue.
The Committee agreed to retain AGSA’s current external auditors for the 2019/20 financial year, and recommended that background information be supplied to it on the reasons for the existence of the special audit reserve funds.
The Chairperson apologised for the delay in the starting of the meeting, which due to some technology issues. He welcomed the Office of the Auditor-General’s delegation team.
Ms Tsakani Maluleke, Deputy Auditor-General, apologised for the absence of Mr Kimi Makwetu, the Auditor-General.
Mr John Biesman-Simons, Chairperson of Audit Committee, AGSA, remarked that the state of governance at the Office was impressive. He assured the Committee that things were going very well at the Office.
Mr N Singh (IFP) said that he was pleased to hear the Office of the AG’s confidence in its performance. He sought clarity on whether the appointment of external auditors would be discussed at this meeting.
The Chairperson responded that the Committee was not there yet. The agenda of this meeting was to evaluate the conduct of the Office of the AG and look into its areas of governance, as well as any other issues that the Office wished to inform the Committee about.
AGSA 2019-20 Integrated Annual Report
Mr Biesman-Simons briefed the Committee on the purpose and mandate of the audit committee, providing details of its current composition.
The audit committee’s key focus areas included overseeing internal audits, external audits, evaluation of the annual financial statements, the review of external audit transformation plan, as well as the review of risk management processes at AGSA. More details of the external audit transformation plan were provided. He reported that the AG struggled to find auditing firms that met the compliance requirements, since most black-owned firms and black female-owned firms were working with AGSA where it could not do the audit.
The key decisions at AGSA which he was recommending to the Committee for approval were the re-appointment of external auditors, and the transfer of R4 964 000 from its special audit service reserve to its general audit service reserve.
Mr N Singh (IFP) asked the AG’s delegation to explain how it planned to mitigate its control deficiencies. He said that the Auditor-General’s office should set the standard very high for its own audits.
Did the AG’s office have any plans to address the bad debts issue, given that it needed the fund for its daily operations?
He was uncertain about why the special audit reserve had been set up in the first place. In response to the Auditor-General’s request, he wanted to know why it should be transferred to its general audit reserve.
Ms Carol Roskruge Cele, a member of the AG’s audit commitee, responded that although the office had a few isolated areas that required operational improvement, she was confident that the standard of the control environment had not deteriorated overall.
Mr Biesman-Simons added to that the Auditor-General’s office had a tracking log that was used to compile any issues that came up in the management reports. The issues would then be addressed. He reported that currently the issues in the tracking log had either been cleared or were work-in-progress. As far as he could remember, he had not heard of any issue that had been raised that had not been attended to.
He said he could not provide much useful information on Mr Singh’s question about the bad debts issue. As an audit committee, they had three meeting per annum, and each meeting lasted for about four hours. The audit committee very much performed an oversight role, and did not do any audit work.
He said the special audit reserve had been set up before he was appointed, so he was not privy to all the details. It could have been set up for the purpose of ensuring sufficient funds to pay for special audits. He supported the proposal to transfer it to the AG office’s general reserve.
AGSA reported that the bad debts of last year had been manageable, and the amount this year had decreased, mainly as a result of COVID-19 and the lockdown. Regarding slow payers, the AG’s office had been assisting municipalities to make payment plans.
The AG Office’s proposal to retain the external auditor received support from the Committee after it was assured by the audit committee that Crowe JHB was independent and was not conflicted in any way, as required by section 39 (2) of the Public Audit Act. The Committee also agreed on the transfer of the special audit reserve to the general reserve.
However, Mr Singh needed more background information on the special audit reserve, cautioning the Committee that the fund may be needed in some scenarios, like having to perform audits that they would not normally do.
Ms Maluleke said that the special audit reserve had been around forever. The AG’s office had its own annual audit programme which it used to allocate resources and funds. The transfer would therefore not impede any special audits that might crop up. The office had done that already, without using that special audit reserve. She suggested leaving the special audit fund as it was, and allocate the fund in some transparent way for special audits in future.
Ms C Seoposengwe (ANC) wanted to know if the audit committee had not been affected by COVID-19 related budget cuts, like other departments had been.
The Chairperson responded that the Auditor-General’s office did not receiving funding from the fiscus. It was dependent on tariff charges for its operation. Those tariff charges were collected mainly from local governments, which was why some Members were concerned with slow payers.
Ms Maluleke commented that a more severe impact was being experienced by the Office’s client auditees, and this would indirectly affect its revenue. The Office was already planning on how much it could charge and collect from its clients, and would inform the Committee in due course.
Mr Biesman-Simons endorsed Deputy Auditor-General’s proposal on the special audit reserve.
The Chairperson expressed his appreciation for the AGSA team’s presence at the Committee.
AGSA Annual Performance Report
Ms Maluleke briefed the Committee of the 2019/20 Annual Report of the Auditor-General South Africa. She described how the Office planned to continue its work to enhance its power. It had successfully implemented the first phase of the Material Irregularity (MI) process in accordance with the Public Finance Management Act (PMFA).
39 material irregularities had been identified, which had amounted to a R4 billion financial loss. Within the 39 irregularities, 12 (31%) were related to unfair or uncompetitive procurement processes amounting to R 634 million, resulting in the overpricing of goods and services procured. Two irregularities (5%) involved unfair procurement processes resulting in the appointment of suppliers who did not deliver, which had cost over R2.2 billion. Other material irregularities involved payment for goods or services not received, payment for poor quality work, invoices or claims not paid on time, and unbilled revenue.
The 2018/19 local government overall outcomes showed six material irregularities which had amounted to R 25 billion financial loss, of which R3 billion was known and R22 billion was estimated. A breakdown of the losses was provided to the Committee.
Ms Maluleke said AGSA’s strategic goals were value-adding audits, visibility for impact, viability, vision and value-driven, and financial viability.
She highlighted AGSA’s performance and the methodology used in auditing the COVID-19 fiscal package, which amounted to a huge R500 billion. The overall observation was that the performance of local governments was regressing, which emphasised the need to put in more effort to assist local governments.
She said AGSA had witnessed an increasing number of audits, but had seen a relatively small increase in staff and audit fees. Because of this, it may have slipped a bit in the timeliness of completing its auditing work.
She stressed the importance of the audit methodology it used, and said the integration of different audit lines had helped to increase the quality and the value added to its audit work, enabling it to do more with fewer resources.
It had rapidly increased the number of state-owned enterprises (SOEs) audited over the past five years. The figure had grown from six to 14, as of the latest financial year.
It was important to advertise preventative control to increase AGSA’s visibility in the public domain. It was also building collaboration with other sectors of society.
Ms Maluleke briefed the Committee on AGSA’s staff composition and its trainee auditor schemes. The goal was to drive transformation in the process as well.
As of the 2019/20 financial year, it had accrued a surplus of R190 million. According to section 38(4), the AGSA could retain a surplus after consultation with the National Treasury, and with the Committee’s approval. It had consulted with the Treasury in August 2020, and therefore requested its approval to retain the surplus of R190 million to fund the loss of revenue it incurred during the lockdown period. In the first four months up to July, it had suffered a deficit of R261 million, which might not be recovered in full.
Mr Singh commended the Office of the Auditor-General for having presented a very good report. Although it was commendable that the office had a revenue surplus due to its “working smart” work ethic, he believed that it should not detract them from collecting bad debts from local governments. He believed that there was need to put pressure on National Treasury.
Commenting on the outsourced audit work that amounted to R686 million, he said that although 51% of that that audit work had been paid for services provided by black-owned firms, there was a need for an increase in that percentage.
He asked the Auditor-General’s office to provide specific reports on certificates of debt so that the Committee and general public could be aware of them.
He commended the excellent job that the office had performed during COVID-19, and asked whether the same methodology could continue under normal circumstances.
The Chairperson said he had noticed AGSA’s new way of dealing with audits, specifically the COVID-19 related audits. He asked what sort of lessons it thought were valuable and transferrable from this experience that could enhance the functionality and responsiveness of it and auditees.
Ms Maluleke responded that the current surplus was largely due to no salary increases and no bonuses for the employees, which was not sustainable in the long term.
She acknowledged the fact that bad debts continued to plague the Office of the Auditor-General. She was optimistic of the support received from the National Treasury. With the amendment to section 23 of the Public Audit Act, AGSA would be able to access funds from debtors, which would then give it more flexibility to do its work. However, she anticipated it would struggle to collect fees from small auditees.
AGSA would look into the issue of increasing the percentage of black-owned auditing firms. She thought that 52% was worth bragging about.
She would provide a report on the certificates of debt to the Committee.
She affirmed that there were lessons which AGSA had learnt from its handling of the COVID-19 scenario. It had benefited greatly from its integrated audit lines, and anticipated more integrated audit lines in future. It was looking to establish an integrated team comprising skills from information system auditors and performance auditors, as well as regularity auditors.
Ms Maluleke also recognised the importance of comparing and looking across datasets in its work. The South African Social Security Agency (SASSA) grant and the Unemployment Insurance Fund (UIF) payments had provided it with an opportunity to experience comparing data across beneficiaries, to identify loopholes and to strengthen systems, so it would have to do a lot more to work on that.
She emphasised the importance of deploying internal auditors much more effectively in government departments. It would be more effective if internal audits were regularly communicating to the accounting officers.
The Chairperson asked the Committee Members if they agreed to allow the AGSA to retain its revenue surplus.
The resolution was not adopted after a Member said this issue should be discussed exclusively among Members.
The Chairperson agreed.
The meeting was adjourned.
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