The Standing Committee on the Auditor-General convened virtually, and Members were briefed by the Auditor-General of South Africa (AGSA) on its integrated Annual Report for the 2020/21 financial year. The Committee also received a report from the Audit Committee that conducts oversight over the AG’s office.
The Committee appreciated the positive report from the Audit Committee, which indicates that the system of internal control over financial reporting and the risk management processes is adequate and operating effectively in the office of the AG.
The Committee commended the AG for obtaining a clean audit and demonstrating a clean administration. The Committee noted the AG’s ability to manage its debtors’ book, but it was concerned about the R1.085 billion that is still owed to some national and provincial departments, local government and statutory and other debtors. The Committee was committed to finding ways to assist the AG with resolving this non-payment.
The Committee will continue to exercise oversight of the commitments made by management in response to the organisational risks and improvements in the control environment, with particular focus on the IT control environment. The Committee was satisfied that it has adequately discharged its responsibilities as outlined in various statutory and other governance documents during the current financial year.
The Chairperson welcomed everyone to the Standing Committee and the agenda was adopted.
Presentation by the Audit Committee
Mr John Biesman-Simon, Chairperson of the AGSA Audit Committee, greeted Members and said that he was the only member of the Audit Committee present in the meeting. This period was characterised by immense changes, during which the organisation and the country continue to live through the COVID-19 pandemic. The pandemic and its unprecedented impact required the organisation to adjust its operations to ensure its sustainability. The AGSA has accordingly overseen the organisation’s preparedness to respond to and mitigate associated risks, whilst maintaining continuity of operations. During this period, the organisation also lost a sitting AG, the late Mr Kimi Makwetu.
All members of the committee are independent of the AGSA and have, in accordance with their statutory responsibilities, attended all committee meetings. Further, the members affirmed their independence at each meeting, and that they are free of any conflict of interest in discharging their statutory duties throughout the reporting period. The committee accordingly conducted its affairs and discharged its responsibilities to enable it to conclude on activities. This was to ensure that the system of internal control over financial reporting was adequate and operated effectively. Risk management processes were adequate and effective, and the organisation has the necessary resources and financial expertise to perform its duties.
The Audit Committee is involved in the sourcing of external auditors to conduct external audits and to evaluate financial statements. The committee assessed the external auditor’s independence and recommended their reappointment to Scoag, who appoints the external auditors annually. The committee is satisfied that Crowe JHB (Crowe) is independent and not conflicted in any way and has conducted the external audit for the 2020/21 financial year under the direction of the engagement partner, Mr Raakesh Khandoo.
The committee considered the audit approach and audit risks in approving the external audit plan. The committee also reviewed the financial statements and agreed with management that the AGSA is a going concern. Furthermore, the committee considered the management report received from Crowe, and reviewed the audit report on the annual financial statements and the audit report on performance against predetermined objectives. The committee met separately with the external auditors, without management present, to ensure that the quality, credibility and effectiveness of the external audit process were maintained at all times. It received confirmation that no pressure was put on them to suppress any findings nor were any scope restrictions placed on their work.
Having reviewed the management representation letters addressed to Crowe and providing input on the annual financial statements and the integrated Annual Report, the committee recommended to the DAG to sign the annual financial statements and the AG to sign off the integrated Annual Report and its individual components.
Even though the financial results were not what the committee planned for, the committee was pleased by the efforts of the AGSA to reduce the deficit and to improve the collection of debt, as well as the initiatives undertaken to manage revenue, costs and cash flow, and to secure the organisation’s sustainability. The deficit would have been much higher had the leadership team not been proactive in introducing new strategies and tactics to lead the organisation during these difficult times. The establishment of the central nerve centre is one of the strategies employed to efficiently manage and rapidly respond to the operational and financial impact of the COVID-19 pandemic.
In terms of the internal audit, Ngubane are the internal auditors of the AGSA. Ngubane completed the second year of their contract period. The committee reviewed and approved the annual internal audit charter and considered reports from Ngubane on the internal audit work performed throughout the year, and their annual written assessment, which concluded that the internal controls in the areas tested are satisfactory, which means that they are adequate and effective. Ngubane highlighted that manual processes are both adequate and effective, however, the controls around information technology (IT) processes need improvement and they can only be assessed as partially effective.
The committee responded by requesting the AGSA to re-consider its information technology (IT) strategic plans and structure in the IT environment. This was presented to the committee at a special meeting held on 15 June 2021. The committee also requested a follow-up on the IT security audit review on items reported, the results of which were presented to the committee on 4 October 2021. Nine of the 12 critical findings were resolved, but further work is required on the unresolved findings. The committee also met separately with the internal auditors without management present to ensure that the independence, quality, credibility and effectiveness of the internal audit process were maintained at all times, and received confirmation that no restrictions nor pressure were put on them to suppress audit findings.
The committee is assured that, considering the work done in the current year by Ngubane, the overall governance, risk management and control environment in place at the AGSA is adequate and is operating effectively, while recognising that there is room for improvement in controls around IT, as referred to earlier.
The Risk and Ethics business unit is responsible for coordinating the risk management function in AGSA. In accordance with its terms of reference, the committee was kept abreast of organisational strategic and business risks, as well as those posed by the impact of COVID-19 and the PAA implementation. The committee is satisfied with its oversight of the adequacy and effectiveness of risk management processes employed throughout the financial year by the organisation to manage risks to an acceptable level.
The committee assessed the finance functions and the chief financial officer (CFO). The committee considered the composition, experience and skills set of the finance function, as well as the performance and expertise of the CFO, and is satisfied that those were appropriate to fulfil their responsibilities. The committee also noted that the CFO has recently moved to a new role within the organisation. The committee thanked her for her commitment to her role and responsibilities, and wished her all the best as the Head of Audit: National, whilst still acting as CFO. It was further noted that the CFO had received the public sector CFO of the Year award from the African Women Chartered Accountants (demonstrating the wealth of talent and once again raising the bar of excellence for the AGSA with this prestigious award).
Due to the observations of various assurance providers and the related reports presented to the committee, the committee resolved to identify the IT environment in which the organisation operates as a key focus area, considering the significant influence and impact that the function has on the overall internal control environment. Two special Audit Committee meetings were held to focus on the strategic direction and operations of the function; the committee was satisfied that comprehensive and executable plans exist within the organisation to enable improvements within this key focus area. The committee will continue to pay attention to this area to ensure that it positively and constructively contributes to an improvement in the system of internal control of the organisation, while being responsive to the ever-changing environment in which the organisation operates.
The committee will continue to exercise oversight of the commitments made by management in response to the organisational risks and improvements in the control environment, with particular focus on the IT control environment. The committee is satisfied that it has adequately discharged its responsibilities as outlined in various statutory and other governance documents during the current financial year.
(See attached presentation for further details.)
The Chairperson welcomed the report presented by the audit committee chairperson of the AGSA. The details on work done indicate the skill and competency of the Committee. The areas that need reviewing and need to be looked into are the appointment of external auditors and the areas of debt and risk mitigation. The AGSA needs to attend to the appointments and the level of vacancies.
Ms C Seoposengwe (ANC) said the presentation from the chairperson of the AGSA audit committee was clear. She requested that the AG present the integrated Annual Report - most discussions will emanate from the report.
The Chairperson agreed that the report is detailed and quite clear, and other matters will be dealt with following the AG’s presentation. He congratulated the AG on the award received, and said that this indicated that the AGSA is competent and skilled in core operations. The Committee will also consider furthering the depth of the AG’s independence in its work, particularly in the areas that have led to risk mitigation. The Committee will also look at areas relating to operational capability, especially the scale of internal appointments and the commitment of its staff to work in a manner that contributes to the highest standard of work, as the AG’s office is doing. The AGSA must strengthen its information technology (IT) structure in the IT environment.
Mr Biesman-Simon responded that the AG sets the target for the three-month reserves to pay auditees to carry out work. He thanked the Committee and the AGSA on the work done.
The Chairperson expressed his appreciation to the committee of the AGSA and welcomed the Deputy Auditor-General, who was attending the meeting for the first time.
Presentation by the Auditor-General
Auditor-General, Ms Tsakani Maluleke, greeted all and briefed the Committee on the AG’s integrated Annual Report for the 2020/21 financial year. The period under review was a challenging time, with the pandemic, the lockdown and audits being carried out. The AGSA lost members within this period, one of whom was the late former AG, Mr Makwetu. These challenges in the period under review led to organisational change and leadership change. Despite the numerous challenges, the AGSA performed well and demonstrated impressive resilience. Team AGSA is made up of people that are patriotic and ready to serve by showing dedication and professionalism. As part of the accountability report it is important to look at progress made on implementing enhanced powers. The AGSA expanded the MI definition to include any non-compliance with, or contravention of, legislation, fraud, theft or breach of fiduciary duty that resulted, or is likely to result, in a material financial loss. The AGSA also implemented the enhanced powers at 146 auditees (89 PFMA and 57 MFMA) and continued driving the resolution of MIs identified in previous cycles. These were selected on the basis of their portion of the government expenditure budget, their history on irregular expenditure, and whether they are key contributors to government priorities. The AGSA ensures a fair spread over the internal audit business unit.
The outcomes of MIs were considered and followed up on. 75 MIs with an estimated financial loss of R6.9 billion within the PFMA were found and 96 MIs with an estimated financial loss of R 2 billion were found in the MFMA. These MIs occurred in the areas of procurement and expenditure management.
She highlighted that the same messages will be sent and the same recommendations will be given when audits, real-time audits and MI processes are conducted. The same messages will be sent about accounting officers needing to attend to preventative controls to strengthen the internal control environment and internal control needing to play its part. The same messages will be sent about executive authorities providing oversight and rules of legislation. These messages remain valid as they all have a role to play in the accountability sector.
1 065 audits were conducted in 2020/21. It is important to mention that smaller organisations and agencies are audited but this is not required in the audit report. The report highlights sustainable solutions that are required to prevent accountability failures; in some areas a “quick fix” will not turn the situation around and some problems will require further attention to prevent failures. The report also speaks to the consequences for accountability failures and notes that there are opportunities for progressive and sustainable change. The AGSA officially took over the Transnet audit in October 2020 after a two-year transition and continued to use limited capacity in the Eskom audits focusing on high-risk and high-public interest areas.
The AGSA is utilising measures to improve on audit quality. This year the AGSA was subjected to 58 audit files to conduct post-issuance quality review and obtained an 81% compliance rate with quality standards against a target range of 80% to 90%. In the process of improving audit quality, the AGSA focused on enhanced technical analysis, conducted transversal root cause analysis with specific corrective actions, and supported new and acting engagement managers. To improve the quality of audit engagements, work was conducted on audit quality indicators (AQIs), which provide an early warning of potential threats. The audit quality of the AGSA was 72% in 2018/19, 76% in 2019/20 and 81% in 2020/21. The AGSA will continue to improve on this upward trend, and will stabilise and strengthen the internal system that supports generating quality audits. This will ensure that the audits maintain a high quality and should speak to the work of the office of the AG.
The AGSA introduced innovation to drive efficiency to focus on ensuring that the AGSA only touches information once, using technology to increase its efficiency and increasing audit assurance without doing additional work.
Real-time audits were conducted, which ensure real-time input followed by real-time corrections and real-time oversight by the legislatures. Three special reports were received by the stakeholders. The reports highlighted risk areas, which included irregularities, poor controls and systems, and indicators of potential fraud. 37% of accounting officers and executive authorities acted by implementing the recommendations. The AGSA will consider making real-time auditing and reporting an integral part of its audits, especially for key government programmes where it can prevent abuse and programme failure.
Given the fundamental business and operational changes in response to the pandemic, the budget had to be revised and the revised forecast had to consider the current realities. In addition, calculated sacrifices had to be made to reduce the deficit. There is impairment on debtors and the provision increased to R198 million, with 70% of debt within local government.
Despite low collections, reprioritised projects and other related challenges caused by the pandemic, the AGSA takes pride in the talent, work ethic, knowledge, competencies, skills and professionalism of its staff. The strong legislative framework and funding model ensure that the office remains a viable and sustainable business. The office has a high level of professionalisation, and the number of CAs has grown by 88% since 2014, from 397 to 746. The office recruited 248 trainees because of the impact of the pandemic. The AGSA exceed its CTA target of 80%, recruiting 231 (93%) trainees that had already attained their CTA.
The office prioritised IT projects and renegotiated contracts to save precious resources. This involved introducing and enhancing remote working platforms and enabled automated internal processes. The office enabled remote access to data and successfully relocated the ICT infrastructure to the new head office.
The process owners strengthened the internal control environment. The IT governance framework and other policies and procedures reinforced IT processes and aimed to manage IT vulnerabilities.
The Committee commended the AG for obtaining a clean audit and demonstrating a clean administration but expressed its concerns on IT matters within the office of the AG and the impairment on debtors.
The Chairperson said the liquidity of the AGSA is key and everyone needs to assist with the matters that lead to debt. The Committee appreciated the report on the real time audits and MI processes.
Mr O Mathafa (ANC) sought clarity on the use of private firms in conducting work and the amount the office of the AGSA spent in the 2019/20 financial year. He noted a reduction in the amount spent in the year 2020/21 compared to 2019/20 and asked what the reason was for the reduction in the work performed by private firms.
Ms Maluleke replied that there is a deliberate effort to drive efficiency within the office. All the work to be done cannot only take place within the office of the AGSA – efficiency must be maximised. This ultimately leads to the reduction on work performed by private firms. It is about organising the office differently to get the very best out of the teams.
Ms C Seoposengwe (ANC) said the report indicated impressive work done by the AGSA. The impact of the visibility of the office is good and the country is aware, and Parliament knows that more rigorous processes must be in place when it comes to oversight of state-owned entities. The findings by the AGSA being used by the Special Investigating Unit (SIU) is commendable. The Committee would be interested to see the outcomes of these investigations, that is what South Africa needs. The work conducted by the AG is commendable and the office of the AGSA is recognised on different platforms and levels and represents the country well – this comforted the Committee. The Committee must support and aid with the debt collection. She asked about the aspect of security of the office of the AG.
She noted that title deeds in the human settlement department were slow in some areas. The situation of title deeds needs a multi-disciplinary approach to be implemented. Some departments are not playing their role in terms of the final stage of the title deeds.
Ms Maluleke thanked Ms Seoposengwe for the compliment. The number of instances [of threats on security] has decreased but the office is not complacent and continued to watch the security aspect. The threats are not always physical but depends on the nature of intimidation. There is a fine line between debating between management and the auditor and then intimidating the team. This is the area the office is more worried about currently. While not taking anything away of physical security threats, more intimidation of the AGSA teams was seen. The office of the AGSA reminds and educates Accounting Officers and Chief Financial Officers about the value of an independent audit opinion. It is important to maintain the credibility and independence of that work. It is about saying to the Accounting Officers, good audit outcomes have to be earned. The audit team cannot be pressurised because of one audit finding. The journey is about building institutional controls to ultimately earn good audit outcomes and to sustain it.
Debt collection remains an issue for the office. The office of the AGSA is working hard to drive collection and is aware that there are significant pressures on budgets. The office is more efficient but has to find ways to ensure debt was managed. Currently, the office is speaking to the Executive Authorities where collections are difficult, to formulate proper responses on individual audits.
The areas of title deeds is picked up in audits. The office will have a look at it at a level of recommendations that can ensure efficiency to get these title deeds done.
Ms S Kopane (DA) congratulated the office of the AG on a job well done, especially under the COVID-19 pandemic conditions. She noted the AGSA planned to achieve a target of between 80% and 90% on ICT projects to implement the ICT strategy. However for the 2020/21 financial year, only about 77% of ICT projects were implemented. The reason for this non achievement included the delayed finalisation of the ICT strategy and retention of ICT employees. This resulted in a high turnover in IT infrastructure. She asked for the AG to provide a mitigation plan aimed at this non-achievement. She said a clean audit does not mean good governance and good service delivery.
Ms Maluleke said leadership is a challenge in achieving the ICT targets. The office was not able to retain the applicable leadership within the ICT business unit. The right leader attracts the right talent to be monitored and supervised properly. The office is trying different ways to sort out this aspect. At the EXCO level, there was a recent appointment of a Chief Technology Officer. The EXCO is the apex leader of the organisation, and this appointment helps ensure there is someone responsible fulltime on ICT matters. This entailed sorting out the operations within ICT environment and the ICT strategy going forward. This appointment will provide leadership and stability to shape the work in the business unit appropriately. Key talent in the ICT business unit depends on the leadership and this is one of the mitigations the office put in place.
The non-achievement of the ICT targets was also because the office had to shift the focus and needs to audit remotely. Some of the strategic projects would not have talked to the pressures of the COVID-19 pandemic.
It is important that people understand what a clean audit report is. The report demonstrates the integrity of the institution and its commitment to accountability and transparency. When an organisation has this clean report, only then can the organisation assess if people have performed. A clean audit report does not indicate performance; it means one can rely on the information in the report to assess performance. The AGSA must drive awareness to drive the right conversation on audit outcomes and the right actions towards institution-building.
The challenge is to make sure the audits and reports are shaped in a way that it facilitates conversation and helps people see the link between what was done and said with regard to service delivery. The AGSA is working and refining on the message and the way audits are conducted. It is to ensure the user of the report understand the purpose of the audit.
Mr Z Mlenzana (ANC) said the office of the AGSA has done good work. Non-payment also dictates poor financial management; why not develop a debt recovery plan for the clients? It would have been good to see in the report the impact and account of the injection made by National Treasury towards the AGSA. This would have been good for the Committee to see, particular work that was conducted and to make recommendations to National Treasury going forward.
Regarding the matter of security, what is the relationship between the AGSA and the SAPS? The Committee encourages the AGSA and the SAPS to work together. There are intelligence services support available from SAPS. It is important to assess impact versus the audit outcomes because in reality, a clean audit does not mean good clean service delivery.
Ms Maluleke responded that when an audit is conducted, there is a link between what is happening on the ground and what is in the report. To conduct oversight, one looked at the books and tracked the details to see what was actually done. More oversight is being conducted to improve audits and this message.
Ms V Mente (EFF) said a prior proposal was made on debt recovery that audit fees should be within the allocated amounts of the entities and goes directly from National Treasury to the AGSA. Was this proposal attended to and implemented by the institutions? There are security threats regarding the conducting of audits – she relayed the example of a female auditor escorted by SAPS. There is more to auditing than crunching numbers - high level security should be provided for auditors in order [for the office of the AGSA] to reach its targets. This ensures an environment where men and women [working for the AGSA] are comfortable. With the high level of corruption, no one wants to be audited. She thanked the AGSA for making it clear, through the reports, what was going on and where there were incidences of corruption. She stressed the issue of budget allocation should be addressed to deal with the debt.
Ms Mente said the audits of municipalities by private firms assisting the AGSA should not take place. Members understood why this was happening but private firms should not be working for the AGSA. There must be a plan to ensure the AG takes over fully to avoid possible corruption or conflict – the history of this has been experienced.
The Chairperson responded and said the matters raised will be responded to by the AG at an appropriate time in terms of the development of a plan and proposal to National Treasury. This also includes the involvement of external auditors.
Ms Maluleke said the security aspect is still being worked on. There was no increase in physical threats – this might be due to work done remotely. The intimidation towards audit teams is however a concern. It is important to advocate for the work of the office of the AGSA in the public sector and ensure there was regard for the work of the AGSA. The office also needs to work on this itself.
The proposal for funding was worked on on the basis of the newly amended section 23 to put forward to National Treasury, at an early stage, what the office struggled to recover from distressed municipalities. The AGSA put to National Treasury a bill of R133 million - only R 70 million was received due to affordability.
Realtime audits was conducted and the office of the AGSA said it was able to recover R67.98 million out of the R145 million and National Treasury was approached to cover the shortfall. The office of the AGSA did not get the funding. The AG will be coming to the Committee to talk about the new strategy and proposals to get the input and advice from Members around funding and the use of private firms. She looked forward to the discussion.
The Chairperson indicated that the Committee would convene at an appropriate time to look at certain interventions such as debt-related costs and Treasury’s role to ensure the office of the AGSA was more empowered internally. The Committee would also look at further the independence of the AGSA to conduct the work of the office, matters of risk mitigation and operational capabilities in terms of the scale of appointments in the office of the AGSA and other functionaries to contribute to the high standard of work of the institution.
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