Committee Legacy Report; Oversight collaboration with institutions supporting democracy: AGSA support to Committee

Meeting report

AGSA briefing on Committee induction plan

Officials from the office of the Auditor-General of South Africa (AGSA) said that the briefing session would include insights from 2023 onwards, covering reports not yet tabled, as well as discussing the vision and mission of the entity. Its vision and mission were directly tied to its constitutional mandate discussed in chapters nine and three of the Constitution of the Republic of South Africa. The vision of AGSA included strengthening democracy through public auditing efforts, while its mission aimed for it to be recognised as the supreme audit institution (SAI) in the public sector.

The constitutional mandate of AGSA was threefold:

• strengthening constitutional democracy,
• securing the well-being of the people, and
• contributing to effective, transparent and accountable governance across all state organs.

AGSA discussed the accountability ecosystem, which illustrates the interconnected workings of all levels of government. This includes oversight committees and portfolio committees. AGSA provides oversight of Parliament, which includes the following activities:

• Oversight, using audit reports on material irregularities.
• Oversight of progress made by public bodies, using reports tabled on progress with material irregularities.
• Holding executive authorities accountable.
• Following up on actions taken against officials who have transgressed.
• Obtaining reports on investigations into irregularities/transgressions.
• Annual follow-ups on previous commitments made by accounting officers.
• Assessing the need for corrective action to address shortcomings.
• Assessing the training and support provided to officials.

Overall Portfolio Outcomes

The five respective possible outcomes of an AGSA audit were s:

• Unqualified opinion with no findings (clean audit). Such audits were free of material misstatements and produce reliable financial statements.
• Financially unqualified opinion with findings. Such audits were either free of material misstatements or contained material misstatements that could be connected by the auditor.
• Qualified opinion. Such audits provide the same challenges as those with unqualified opinions with findings, but also lack credible financial statements.

• Adverse opinion. Such audits provide the same challenges as those with qualified opinions, but contain so many material misstatements that the auditor disagrees with almost all amounts and disclosures in the financial statements.
• Disclaimed opinion. Such audits provide the same challenges as those with qualified opinions and cannot provide the auditor with evidence for most amounts and disclosures reported in the financial statements.

During their annual audits, the AGSA examines financial misstatements for material misstatements and fair presentation, seeks reliable performance information, and compliance with legislation and regulations.

Stagnation in audit outcomes during the Sixth Administration

The audit outcomes of the Department of Small Business Development (DSBD) had remained relatively stable during the 6^th administration. In 2022-2023, it had received a financially unqualified opinion with no findings, while the Small Enterprise Finance Agency (SEFA) had regressed to an unqualified opinion with findings. Its audit regression was attributed to incorrect accounting valuation. Furthermore, the performance information submitted by SEFA during this time was deemed neither credible nor accurate.

The DSBD had performed well against its medium term strategic framework (MTSF) indicators during the 6^th administration, achieving three out of six indicators in the 2021/22 financial year, and four out of six indicators in 2022/23. However, 47% of the Department's annual performance plan (APP) targets had remained unmet for 2022/23, and SEFA had not met 38% of its performance targets for the same year. This poor performance was caused by continued vacancies in key positions of the Department, a low uptake of departmental initiatives, and the quality of applicants' submissions.

The root causes of this poor performance were twofold. Firstly, senior management at SEFA did not address previous deficiencies relating to oversight of the financial reporting process and related internal controls. Secondly, senior management at the Small Enterprise Development Agency (SEDA) had experienced instability, with most positions occupied by acting incumbents.

AGSA advised the Committee to monitor the implementation of the following recommendations on a quarterly basis:

• Enhancement of the annual financial statement (AFS) review process at SEFA.
• The implementation of processes to ensure that reported information was supported reliably.
• Ensuring the filling of key vacancies in a timely manner by the accounting officer of the DSBD.

Portfolio Performance

AGSA acknowledged that many strides had been made in the support of small businesses as of 31 March 2023. The set target of 100 000 supported businesses had been exceeded, and the Department had supported 132 572 businesses through SEDA and SEFA. This support included financial and non-financial measures. It noted that the goal of committing at least 50% of both national and provincial development finance institution (DFI) financing to small, medium and micro enterprises (SMMEs) had still not been realised.

Digital hubs and incubation centres had surpassed the goal of 100 by 2024, and 121 of these centres/hubs were already operational. In the 2021/22 fiscal year, a localisation policy framework and implementation programme for SMMEs and cooperatives was developed, approved by Cabinet and adopted. Public sector procurement of 1 000 designated local products and services from SMMEs was in progress, with 807 items on track. Support for start-up businesses owned by youth had doubled from the annual target, reaching 22 357 supported businesses.

Financial management and compliance

The most common areas of non-compliance were the quality of financial statements, and the quality of performance information.

Upon reflection on the nature of this non-compliance, it was noted that the quality of the AFS and credible performance information remained a key area of concern. AGSA had also noted a slow management response to deficiencies in compliance with key areas of legislation. This problem applies to both SEDA and SEFA. AGSA noted that the presence of a good consequence management culture within the portfolio did not negate material misstatements in the AFS submitted by SEFA. The AGSA attributed the problems mentioned at SEFA to deficiencies in senior management’s handling of previous deficiencies and its lack of process.

The recommendations of the AGSA were:

• The implementation of the audit action plan should be monitored by the executive authority and Portfolio Committee.
• Enhancement of the AFS review process was needed.
• Processes that ensure reported information is supported reliably should be implemented.

The AGSA noted that key financial management issues were transversal in nature. These issues included continued non-compliance with laws and regulations, and submission of annual financial statements containing material misstatements. In turn, these issues may make procurement less competitive, fair, transparent, and cost-effective. Furthermore, transversal issues lead to decision-making based on inaccurate information and reliance on auditors to identify misstatements.

Material irregularities

AGSA said the definition of material irregularities (MIs) was any non-compliance with, or contravention of, legislation, fraud, theft or a breach of a fiduciary duty identified during an audit performed under the Public Audit Act that resulted in or was likely to result in a material financial loss, the misuse or loss of a material public resource, or substantial harm to a public sector institution or the general public.

The process of reporting and responding to MIs had various objectives, which included fostering a culture of accountability, protecting resources, enhancing public sector performance and an ethical culture, and strengthening public sector institutions to serve South African people.

The process of responding to material irregularities contained several steps. These were notification and response; decision and follow-up; appropriate action taken, or not taken; and the invocation of AGSA’s power where necessary.

Resolution of MIs

If AGSA stepped in, the process would contain the following steps: Referral to a public body; recommendations in the audit report; remedial action; certification of the debt process; or a combination of all of these.

AGSA reported that no material irregularities had been noted within the Small Business Development portfolio.

Dispute resolution mechanism

The goal of the dispute resolution mechanism was manifold, such as:

• Reaffirming AGSA’s mandate;
• Multiple opportunities for the auditee to be heard;
• Professional resolution;
• Solidifying the role of the engagement manager;
• Classifying a dispute if the engagement manager could not resolve the matter;
• Enhancing timely resolution;
• Being applicable to signed/unsigned reports related to auditing;
• Accountability and responsibility through dispute resolution.

AGSA said disputes arose because of divergent legal interpretations, divergent applications of accounting standards, the desire for a clean audit, and the need for procedural fairness.

The scope of AGSA covered audit disagreements, complaints, and MI disputes.

The dispute resolution process started with the engagement manager. This individual would resolve disputes with technical support and National Treasury (NT) involvement where appropriate. If the auditee remained dissatisfied with the engagement manager’s resolution, the matter would be escalated to the head of the portfolio (Tier One). If the auditee was still dissatisfied with the resolution after this step, the matter was escalated to the Head of Audit (Tier Two). This step led to the final outcome. All three steps of this process were supported by technical support divisions within AGSA and external stakeholders.

The final decision was delegated to the heads of audit by the Auditor-General (AG). A matter may be escalated to the AG before a judicial review. The AG was otherwise involved through citation as a respondent in court proceedings.

See attached for full presentation

Discussion

The Chairperson noted that the presentation had been extensive, and that Committee Members now had the opportunity to pose questions to the presenters.

(Unfortunately, poor audio quality prevented the capture of the discussion)

Members were told that revenue not collected would be written off as bad debt, specifically related to loans at SEFA. If the client did not pay their loan and applicable interest within three months, that loan would be subject to a write-off.

It said that many audit-related problems at SEFA were exacerbated by vacancies in key posts, and that filling these posts would have to be a priority for the Department.

Committee Legacy Report

The Portfolio Committee’s Content Advisor said he would discuss the Legacy Report by discussing each recommendation made to the 7^th Parliament. The report consisted of two sections -- the executive summary and the main body. However, the executive summary would not be discussed during the meeting, as all the information in the summary was also covered in the main body of the report. The executive summary spanned pages 2-6 of the report.

The Content Advisor noted that all the parliamentary portfolio committees had lamented their respective departments’ lack of response to the recommendations made by the committees throughout the 6^th administration.

The Content Advisor noted that the Committee was pressed for time, and therefore requested to be allowed to skip over the recommendations in the report.

The Chairperson asked Committee Members for their input on which parts of the Legacy Report to discuss.

Mr H Kruger (DA) proposed that the Committee specifically discuss the recommendations, as that was the most important part of the report. The other Committee Members concurred.

Recommendations

The legacy report of the sixth administration included the following recommendations:

• Development of a system for facilitation of executive responses to Committee recommendations.
• Timeframes for Committee recommendations.
• Improvement of cooperative governance through cross-sectoral meetings.
• Recommendation of more budgetary support to the Department and its two departmental entities.
• Increased oversight visits.
• Monitor the implementation of the Budgetary Review and Recommendations Report (BRRR) recommendations.

The Legacy Report noted that the Committee should consider undertaking more frequent and thorough oversight visits to relevant beneficiaries throughout their term. The Committee had undertaken only one fact-finding mission during the 6^th Parliament. This was highlighted as a key issue to address.

Discussion

Mr Kruger noted that the Committee’s efforts to eradicate red tape for small businesses should start as soon as possible. He proposed that the Committee should consult the Speaker or the Secretary to start the process of forming an ad-hoc committee for eradication of red tape. Red tape was a significant challenge to businesses, and while officials cited COVID-19 as the reason for businesses going under, red tape was the more likely culprit.

(Unfortunately, further discussion was inaudible and could therefore not be captured)

Chairperson's closing remarks

The Chairperson commented that it was very important for the Minister or Deputy Minister of Small Business Development to attend Committee meetings. While it was acknowledged that the Minister attended Cabinet meetings in Pretoria on Wednesdays, the Deputy Minister did not have to attend those meetings. It was important to request the Office of the Minister to attend the meetings, as it would not be acceptable to meet for an entire year without the Minister attending. She added that the Committee would follow all the correct formal procedures to ensure the Minister’s presence at Committee meetings.

The Chairperson thanked the Committee Members for their time and efforts.

Committee minutes

The Committee considered and adopted minutes of previous meetings.

The meeting was adjourned.