In a virtual meeting, the Committee convened to deliberate on and adopt the 2019/20 Annual Report of the Auditor-General of SA (AGSA).
The Committee Members discussed the need for a transformation plan to be provided by the AGSA’s external auditors, and asked AGSA to provide a plan on how it intended to offset its costs, and to fundraise to some extent, particularly as it was auditing more state-owned enterprises (SOEs) which had a questionable ability to repay it.
Concern over the quality of auditees’ financial reports, which were sometimes withdrawn after being submitted, was raised as needing to be addressed, as this could impact on the AGSA’s credibility. Since the country’s trust in dealing with the scourge of corruption rested to a large extent with the AGSA, it was felt that it should work to maintain this trust.
The report was duly adopted.
The Chairperson commented that one of the Committee Members was hospitalised, and that the Committee wanted to wish her well. Ms S van Schalkwyk (ANC) was recuperating in hospital.
Ms C Seoposengwe (ANC) said that she had been in hospital for three weeks, but she would contribute when she could.
Report of the Standing Committee on the Auditor-General on the Integrated Annual Report of the Auditor General for the Financial Year 2019/20
Mr Peter-Paul Mbele, Committee Secretary, said that the Content Advisor was offering to give a quick overview of the report in order to jog Members’ memories on key aspects which were part of their deliberations.
Mr Xolisile Mgxaji, Committee Content Advisor, said he would begin with section six of the report, because sections one to five presented a summary of the issues, and sections two to six had already been thoroughly dealt with.
Committee Observations and Findings
1. The Committee had noted the improvement of the broad-based black economic empowerment (B-BBEE) score of Crowe Johannesburg, the external auditors, from Level 7 when the Committee appointed them in 2019, to Level 4 since then. The goal was to reach Level 3 in the 2020/21 financial year, as per its transformation plan.
As part of the appointment of Crowe JHB, the Standing Committee on the Auditor General (SCOAG) had recommended that the audit committee should furnish it with progress reports on a quarterly basis on the implementation of its transformation plan, as this had not happened during the 2019/20 financial year.
2. The Committee noted that the AGSA had generated a surplus of R190 million, which was more than the R27.7 million, which was budgeted for during the 2019/20 financial year. The Act required the SCOAG to approve the surplus to be retained by the AGSA, or partly paid to the National Revenue Fund. Since the Office of the AG had utilised the previous year’s surplus, it had requested SCOAG’s approval to retain the current surplus.
3. The issue of the special reserve fund was set aside to fund special investigations and audits from which AGSA may not be able to recover costs from special auditees. The budget for the fund had never been increased from about R4.9 million since 2015/16. The former audit commission had suggested to AGSA that this fund not be increased before it sought SCOAG’s guidance. The amount allocated to a special reserve fund had remained constant over the years, because guidance had not been sought.
4. The amounts owed to AGSA had increased from R744 million in 2018/19, to R931 million in the 2019/20 financial year. This was in stark contrast to the declining trends which were experienced in the previous financial years. Local government was the main contributor to this debt, but there was also a notable growth trend of outstanding debts from state-owned enterprises (SOEs).
On the SOEs’ debt, the Committee had expressed concern at the new trend when viewed against the financial sustainability of the SOEs. He felt that the recommendations needed to reflect suggestions on how this new trend of SOEs owing AGSA should be addressed.
5. The Committee noted with concern the non-achievement of a key performance target: to ensure the high quality of its audits, especially as it was not the first time the AGSA had failed to achieve this target. The target was not reached in the 2014/15, 2015/16, 2018/19 and 2019/20 financial years, and the Committee was concerned with the impact this might have on the credibility of audit outcomes. In the 2018/19 financial year, it had explained the non-achievement as being due to it suddenly taking over large and complex SOEs that had previously been under KPMG. These were exigency instances, which AGSA had not planned on taking over. However, no reason for non-achievement in the 2019/20 financial year was given in its annual report.
6. The Committee normally favours the AGSA’s involvement in auditing large SOEs. AGSA directly audits 14 of the 21 public entities listed in Schedule 2 of the Public Finance Management Act (PFMA) -- large and complex SOEs. A concern was the act that auditing such entities may drain AGSA’s resources due to a continuous need for intensive training and learning for staff in preparation for a take-over of large entities. Recommendations on this point would be needed.
8. It noted that despite the fact that there were no material findings in the AGSA’s audit, there were a number of control gaps that were identified. Some audit findings remained unaddressed, primarily because of inadequate capacity and capabilities with information technology, which continued to need support and leadership
Flowing from its observations regarding the 2019/2 Integrated Annual Report of the AGSA, the Committee drew up the following recommendations
1. The Committee recommended the appointment of the current external auditors, as they had shown an improvement in their transformation plans. The audit committee must furnish the Committee with a progress report on their transformation on a quarterly basis, as it had agreed to.
2. The Committee supported the retention of the R190 million surplus generated in 2019/20 as a general reserve.
3. Considering the increase in the request for special audits, if further consideration was given to the country’s slow economic growth prospects and its financial impact thereof, there was a high possibility of an increase in special audit requests. It therefore recommended that AGSA communicate any challenges it encountered when increasing the number of audits of large and complex SOEs. It recommended that the fund should be given extra allocations for the 2021/22 budget.
4. The AG should consider extending its current collection strategies to the SOE’s debtors, and should enter into ring-fencing agreements with SOE debtors to ensure that outstanding debts were paid.
5. The Committee recommended that AGSA should submit mitigation plans to correct the persistent non-achievement of performance targets, to ensure high quality of its audits, and to target to achieve 80-90% adherence to quality standards of audit engagements. Mitigation reports should be submitted by 31 December 2020.
6. It welcomed the efforts of the AGSA to expand its audit portfolio, especially with large and complex SOEs. In this regard, it recommended that AGSA communicate any challenges it encountered to the Committee for assistance when auditing large SOEs.
7. It felt that the AG should fully implement the status of records review, to ensure early warning signs regarding financial management auditees were communicated in time to curb resistance to accepting audit outcomes from the AG.
8. The Committee recommended that the AGSA should develop an audit action plan to deal with the identified audit findings, and submit it to the Committee for monitoring its implementation.
9. The Committee noted with concern that the commitments made by the National Treasury during the consultations prior to the passing of the Public Audit Act, with regard to the funding of the additional powers to AGSA, had still not materialised. It had been agreed then that the funding for this purpose, to the tune of R50 million, would be allocated to the AGSA during the 2019/20 financial year. The Committee thus recommended that the National Treasury facilitate this outstanding payment with immediate effect.
Mr Z Mlenzana (ANC) said he thought Mr Mgxaji was jogging his memory. He longed to see the action plan before him, as in its communication with the AGSA, it would like to present a projected shortfall. He did not raise this to contest the report, but because he noticed that the country’s trust in dealing with the scourge of corruption rested with the AGSA. Secondly, he wanted the need for closure to be noted on the realisation of the transformation plan, and asked what needed to be done for it to be realised. He did not contest the report, but merely asked about what it should do going forward.
The Chairperson said that the Member owed it as well, since he was a party to the appropriations Committee which had argued strongly for funding for AGSA.
Mr Mlenzana said that without trying to take words out of the Chairperson’s mouth, he had said that what he and Mr Mgxaji were referring to and waiting for was a full plan, with a projected shortfall. This could be started at any level and would give Parliament an idea of how much should be appropriated to AGSA.
Mr Mgxaji said that before he forgot, he wanted to deal with the issue which had just been highlighted. Mr Mlenzana’s concern related to a resolution that had been taken. When the Bill was adopted by the Committee, an agreement had been made in the presence of the AGSA and National Treasury. The AGSA had been presented with a projected and costed plan of how much the implementation of the Public Audit Act could cost it. There had been an agreement that the Act would be implemented in a phased in approach. It was further agreed that in order to implement the Act, the fiscus needed to appropriate or give AGSA R50 million. This was where the issue of the R50 million came from. It was not as if AGSA was requesting new funding. This money was meant to be given in the 2019 financial year. This was a matter which had been agreed upon and was contained in the minutes of the Bill’s adoption. This was where the issue of the R50 million came from, and it was not a case of the AGSA starting to request new funding, as the request had already been submitted and agreed on.
He said he could also tackle this issue of the transformation plan, if required.
The Chairperson said that there was no disagreement on this factor. He felt the SCOAG needed to up the game, because the early fiscal requirement would be in a somewhat constrained environment because the country was facing such a challenging and steep downward trend in terms of a negative surplus. This kind of deficit spoke to the fact that there was a need for Treasury to dig deeper and look into other avenues. Sometimes, South Africa became a victim of un-costed consequences from legislation that had been passed by both Houses. Government therefore needed to create a way to assist and advance commitments of funding. When one looked into the AGSA’s real work, particularly during the period of the lockdown, one wondered how funding the AGSA would enable it to cover its expenses, even during its ordinary functions.
Mr Mlenzana was correct in saying that the Office of the AGSA was relied on enormously in the high demand for the fight against corruption. It would surely see more of this in the second part of the AGSA’s report, which should come out in the next week. All of this provided reasons for why the government should continue to support its work. In the report, this fact needed to be over-emphasised when speaking to the issue of funding for the AGSA. This was complicated by the fact that a number of auditees were not going to be able to meet the payments required for them to be audited. Intervention through the fiscus became very critical in these cases. This point needed some emphasis when going to Parliament. Out if this, perhaps the Office of the Speaker of Parliament would be able to communicate directly with Treasury on this aspect, while SCOAG’s colleagues in other Committees also pushed for this. Mr Mlenzana was right in saying that the AGSA must be able to present a plan on its mitigation of costs, as well as fund-raising to some extent.
Another area not to overlook was quality. The AG had referred to the fact that a number of auditees would make submissions in their financials with the intention being to comply. After this period, auditees would seek a kind of withdrawal, where they would look into the details of the report. These occurrences hampered the qualitative effect of how the AGSA met its own commitments and targets. The 2019/20 financial year had seen a number of auditees looking into the quality of their own statements -- even engaging consultants, though quality did not improve. It was well and good to emphasise that if the financials should be submitted at the end of September, the subsequent withdrawal of the report should be looked into by the Office of the AGSA in order to ensure the correct standards.
If these two issues could be addressed, the litigation aspect after audits were released would also be reduced, as it was primarily a matter of financials.
Mr O Mathafa (ANC) said that the Chairperson had summarised the matter well and moved the adoption of the report.
The Chairperson asked whether the report tabling was agreed, with the areas it highlighted so that they sank in when the report was adopted.
The Members seconded the adoption of the report.
The report was duly adopted.
The Chairperson concluded by thanking Members, saying that the present Members who were sick were an inspiration.
The meeting was adjourned.
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