Briefing by AGSA on 2023/24 Annual Report and the audit committee report for 2023/24

Standing Committee on Auditor General

01 November 2024
Chairperson: Mr W Wessels (FF+)
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Meeting Summary

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Auditor-General of SA

The Committee convened to be briefed by the Auditor-General South Africa (AGSA) on the 2023/24 Annual Report and the AGSA audit committee report for 2023/24.  

The presentation of the audit committee’s report to Parliament is a statutory requirement in the Public Audit Act 25 of 2004. The Committee was concerned about the continuation of the existing external auditor who has undertaken this task for a seven-year period. Members felt this was too long and the external auditor’s independence could be compromised. The risk assessment indicated that the only risk identified was cyber-security; however, there was an increasing debt owed to AGSA by the municipalities and entities it audited. Why had this not been identified as a key risk in the report? Why could the money not be appropriated to AGSA directly for the purpose of paying for the audits? Members noted the surplus that had been accumulated. Is it possible that AGSA is over-charging for audits? Is AGSA over-charging for its audits to produce a surplus? It was important to find a balance between the surplus and what was being charged, especially to struggling municipalities.

The Annual Report showed that the AGSA training program had produced 700 Chartered Accountants in the last three years. Members recognised this as a remarkable achievement that would further serve the industry in the future. They hoped that the CA’s(SA) would be able to go into the municipalities that were underperforming.

The Committee expressed frustration about entities and organisations praised for achieving unqualified audit opinions on their financial statements, but still had significant findings on other matters. Members felt it was misleading for struggling entities to receive an unqualified audit opinion by reporting their wrongdoings, as this created the impression that the entity was doing well when, in fact, all it had done was correctly report its wrongdoings.

Members were impressed by the potential of real-time audits to unveil issues as they were happening rather than after the fact. The Annual Report stated that AGSA has extended its scope in this regard. What was the impact of real-time audits and did they comply with current audit standards? What lessons could the AG point to regarding the implementation of real-time audits?

Meeting report

The Chairperson welcomed Members and officials from the Auditor-General South Africa (AGSA). He apologised for the delayed start. 

The purpose of the meeting was to consider a briefing on AGSA’s 2023/2024 Annual Report. This was an important part of the Committee’s work. The Committee would receive a presentation by the AGSA audit committee and a presentation by AGSA. 

Apologies were received from Ms N Hlonyana (EFF), Ms E Spies (DA) and Mr L Montana (MK).

The Chairperson said Mr Montana had been discharged and would be replaced by a new Member from MK. He welcomed Mr S Mwali (MK) to the Committee.

The Chairperson invited the audit committee to present. It was practice that the officials from AGSA be excused while the Committee engaged with the Audit Committee. AGSA would be recalled once the engagement with the audit committee had been concluded.

AGSA audit committee report
Ms Grathel Motau, chairperson of the audit committee, presented the audit committee report which is based on the requirements of section 40(6)(a) of the Public Audit Act 25 of 2004 (PAA). [Please see the electronic presentation for full details].

The external auditor, Crowe JHB, was reported to be independent and not conflicted in any way.

The committee reviewed the external audit report on the annual financial statements. AGSA had obtained an unqualified audit opinion. Ms Motau summarised the activities of the committee which are governed by terms of reference.

SNG-Grant Thornton were the outsourced internal auditors of AGSA and have completed the second year of the three-year contract. Information Technology (IT) was an area of concern – the controls were adequate but only partially effective due to new vulnerabilities that were identified based on an environment review conducted during the year. The risks posed by the weaknesses in the IT security environment are receiving further attention.

Regarding risk management, the committee was satisfied with the oversight over the adequacy and effectiveness of risk management processes employed by the organisation throughout the financial year to manage risks to an acceptable level.

See attached for full presentation

Discussion
The Chairperson thanked the audit committee for the presentation and invited Members to engage with the presentation and share any questions of clarity.

Mr S Subrathie (ANC) expressed his concern regarding the continuation of the existing firm of auditors. After seven years, familiarity with the firm had grown. He believed that there were risks to independence. Was the audit committee certain that independence had not been compromised after seven years? Should there not be a change in firms? Has the audit committee explored other options? He was extremely concerned about independence being compromised. The risk assessment indicated that the only risk identified had been cyber-security. However, the legacy report indicated that there was an increasing debt owed to AGSA. [Slide 39 of the AGSA Annual Report presentation] showed that 37% of the debt book was older than 120 days. This risk had not been identified. Was the uncollected debt not viewed as a risk or concern? He commended AGSA for the performance in terms of financial statements, and in terms of the surplus and the cash resources that had been reported. The concern of limited cash resources was no longer an issue. Was AGSA over-charging fees? Why was there such a huge surplus? As this was translating to cash at the bank, this meant that there were good collections. Why had cyber security not been marked as a problem? This issue has been highlighted by the chairperson of the audit committee for the past three years. When would this be addressed? Would the matter be taken seriously once all information was sabotaged or stolen? In a digital age, this could not be condoned. He proposed that the issue of cyber security had to be tightly managed with a regular report until the issue was adequately addressed. The Committee had a duty and a responsibility to ensure that the information the AG had access to was protected and not compromised. Had the audit committee reviewed the unmet non-financial targets? Did the audit committee have a mandate to review non-financial indicators? He was concerned about two indicators, specifically one regarding ethics, and one of the competency of staff. He was concerned because the AGSA should be an institution with the highest level of ethics, integrity, and competency. Why had AGSA not done what had been expected?

Mr A Beesley (Action SA) said he noted that there was a rotation for the external audit. He requested further explanation. He was surprised that the debt owed to AGSA had not been included as a key risk.

Response
Ms Motau responded to the questions regarding the external auditors. She agreed that independence was of utmost importance. It was of essence, that the audit committee should have an auditor that was independent at all times. It was the view of the audit committee that Crowe was the correct firm. The audit committee had checked other firms, and generally, once a firm/auditor had surpassed seven years, they should be rotated out. After seven years, independence was considered to be compromised. As an audit partner, it took approximately three years to get into an understanding of the organisation. Only in the last three years, was there value from the audit partner. The audit committee was comfortable. It was a requirement that as one auditor [a partner in Crowe] rotated off, a new partner should be brought on. The audit committee had discussed that the same audit firm had been utilised for seven years and asked whether it was appropriate to go back into the market and review what was available in the market. Only a few companies could perform an external audit for AGSA. Many big firms had a conflict of interest because they worked on behalf of AG. As a result, there were only a few medium tier firms that were able to conduct audits. Even some medium tier firms did advisory work for the AG. When appointing in 2017, the committee found that the pool was very limited. The external auditor was a local firm being empowered and the audit committee was comfortable that the firm had sufficient expertise and had spent a sufficient amount of time on the work of AGSA.

Ms Motau responded to the question of why the audit committee had not identified the recoverability of debts as a risk. This had been done as part of the financial statements. The audit committee was required to assess whether the debt would be recoverable, by when it would be recoverable, what the pattern had been, and what this area would look like moving forward. The audit committee was comfortable that the amount presented in the financial statements was fairly presented. In addition, the auditors identified this as one of the audit risk areas. The findings had been insignificant. Management had presented their assumptions, and the audit committee and the external auditor reviewed these assumptions and came to the same conclusion. The risk had been noted, but the risk had been addressed. The reason why the cyber-security risk had been highlighted was because it had emerged as a key risk in the internal audit.

Ms Carol Roskruge, member of the audit committee, AGSA, provided further insight into the matters raised around cyber-security, non-financial indicators and risk and ethics. Oversight was performed quarterly. One of the key issues that had come up was IT security. IT security was on the rise, within South Africa and globally. Hackers were busy and there were always new tricks emerging which is why it was important to stay ahead of the game. This was an area where monitoring was occurring. IBM released a study in 2023 which explained that for any one incident, it costs approximately R53 million to recover. This was a very expensive exercise and the aim was to be proactive to prevent breaches and incidents from happening. Government was becoming more involved and was regulating the area. AGSA was highly focused on this area and there was a great deal of commitment and drive to correct some of the matters that were coming up. AGSA’s efforts were two-fold, the first was to have mitigating controls in place (short term), and the second was to have the digital strategy to address matters sustainably (long term). During the year under review, the audit committee had a few initiatives underway. The audit committee and AGSA were trained by industry experts on cybersecurity. AGSA was also rolling out ISO standards, which were information standards for information security management. The ISO standards would help assess and identify information security risks more timeously, implement risk management processes and promote a culture of continuous improvement. The skills of the audit committee had been augmented through the recruitment of an IT professional. The key themes coming out on cyber security were around excessive use of weak passwords, passwords being acquired via social engineering, ineffective patch management, ineffective and inadequate vulnerability management and domain accounts not being disabled when people left the business. There were controls being put in place, such as multi-factor authentication, ensuring that people in the organisation follow identity and access management procedures, enforcing use of strong passwords, a drive for user education making people aware of best practices, teams had begun deploying patches on a monthly basis to update servers, and there was a focused drive to ensure apps were secure. Systems were in place to address all these matters. These were monitored on a quarterly basis. These were interim controls. The internal audit function did follow-ups to keep the audit committee informed on whether these mitigating controls were effective. In the long term, these matters had to be closed for the AG. The digital strategy was underway. There are rapid technological advancements – for example, machine learning, artificial intelligence, and robotics. The digital strategy aimed to take advantage of these aspects and the opportunities that presented an opportunity to modernise the organisation’s aged infrastructure and to close some security gaps. The digital strategy that was underway had six components: 1) addressing the audit software program; 2) automating and unifying platform for audit processes and portfolio management; 3) modernising infrastructure; 4) enterprise resource planning (ERP) solutions to help the organisation on a day-to-day basis; 5) intelligent automation of business processes; and 6) utilising and protecting data. Over the past few years, the organisation spent time putting foundational capabilities in place. Over the next two years this would be scaled to full automatisation.

Ms Roskruge responded to the questions regarding risk and ethics. AGSA was a supreme audit institution (SAI) and the credibility of AGSA was critical. Together with management, the audit committee developed and implemented a strategic ethics programme, which was a blueprint to create an integrated ethics posture for the organisation and ensure that there was a sustainable posture on ethics. The strategy was informed by a very proactive approach driven by leadership, values and principles of the organisation. To supplement the strategy, there was an ethics policy in place and a complaints management policy to safeguard the organisation and put standard operating procedures in place. These policies were reviewed on an annual basis. AGSA did an ethics maturity assessment. It had moved from an AA rating to an A rating. The presentation [see slide 44 on the Annual Report] indicated that AGSA was still in the top quadrant. However, moving from AA to A was a shift down and was being taken seriously by the organisation. Some of the matters that the audit committee observed that impacted the shift in rating were issues around work-life balance, reward and recognition, timeous communication, and consistent application of policies and accountability and consequence management. Some of the good things that came out of the report, was that AGSA held a very good reputation and was very committed to what was being done. A plan was being put in place, and the audit committee was informed of the plans to address the gaps around the ethics maturity assessment. In 2023/24 there were no ethical breaches that had been brought to the audit committee’s attention. The committee’s risk and ethics team scanned the environment on a regular basis. There was also a very good declaration system in place and the rate of declarations was 98% over 2023/24.

Ms Roskruge responded to the questions regarding indicators of non-performance. The audit committee did monitor these indicators on a quarterly basis. At the end of the period, a sustainability audit was performed by Crowe – the external auditor. This reviewed how AGSA performed in terms of economic indicators, social indicators, cultural aspects, disclosures around stakeholder management and employees, etc. Crowe also ensured that all the key sustainability indicators, which were non-financial, were prepared according to Global Reporting Initiative (GRI) principles. During the year under review, the audit committee did not receive any significant matters that had been raised in terms of non-financial indicators.

The Chairperson thanked the audit committee for their response and asked Members for any follow-up questions.

Ms V Mente-Nkuna (EFF) said that under section 40 of the PAA, the audit committee was required to brief the Standing Committee on any other concerns that it had. She was uncomfortable with the audit committee’s satisfaction with governance in AGSA, particularly in terms of capacity. The audit committee stated that AGSA had the appropriate resources to perform its duties. However, the audit committee also stated that the reason it was recommending that Crowe had to continue was because many other audit firms did business with AGSA through doing audits where AGSA was unable to. This was an indication that AGSA did not have capacity to cover all the required audits and had to outsource. There needed to be work to ensure that AGSA was alone in the space and was not assisted by private companies. Corruption has escalated to high levels and there were high levels of intimidation. AGSA has extended its scope and is now conducting live or real-time audits. AGSA also made comparisons to determine value for money. This took AGSA’s work beyond paper and showed work on the ground. This required AGSA to acquire and absorb a lot of auditors. AGSA had a programme where auditors were being trained. This initiative gave hope to young, upcoming auditors. However, for as long as private companies were in the space, government was not taking charge of the space and working to eliminate corruption. Money had to be followed immediately, not after the fact – this would better enable AGSA and government to stop these activities. What was the audit committee’s view on this? What advice did the audit committee have for AGSA in terms of curbing corruption and taking over the space?

Ms Mente-Nkuna referred to the receivables. There was a system of municipalities that had to pay AGSA, and often it was the case that municipalities did not pay AGSA. What advice did the audit committee have regarding the appropriation of these funds? Should the funds be appropriated to municipalities to pay AGSA? Why could the money not be appropriated to AGSA directly for the purpose of the audits? There were financial issues in municipalities that prevented them from making payments to AGSA. How could these funds be appropriated? How could the Standing Committee advise Parliament to appropriate funds in a way that allows AGSA to access the funds and eliminate the situation whereby AGSA has a massive outstanding debt due to municipalities that were unable to pay? If this situation persisted, and the outstanding debt grew it would impact the ability of AGSA to fulfil its mandate.

Mr Subrathie said that a part of the audit committee’s duties was to tend to and support the appointment of the auditor. The particular firm would be beginning its eighth year. He appreciated the circumstances and the explanation that larger firms were compromised. It could not be true that there was no other firm able to do the audit. The independence of an auditor is crucial. He felt that after serving for seven years, the current auditor should no longer stay in place. It was part of the audit committee’s responsibilities to confirm the retention of the surplus. Was AGSA over-charging to produce a surplus? It was important to find a balance between the surplus and what was being charged, especially to struggling municipalities.

Mr K Madlala (MK) noted the explanation of why the auditor was in place for seven years. He felt that seven years was too long. Was any scientific study conducted that demonstrated that the first three years were needed to understand the business and the last three years to provide meaningful input and to see valuable outcomes? He was not convinced by the explanation provided. He felt that there were other auditors who were able to perform the audit. AGSA and the audit committee should test for the position so that the Committee could better understand the situation and consider the recommendation.

Mr Mwali said that there should have been a succession plan in place before reaching the seven-year mark. It is clear that AGSA and the audit committee were aware that there should be a rotation. It was clear that the Standing Committee was not comfortable to rotate the audit partner and retain the audit firm. During the third or fourth year the audit committee should have put a succession plan in place. He recommended that going forward the audit committee should consider a succession plan during year three or four. He noted that getting a new auditor, especially one who would be independent and have the necessary capacity, was a tedious exercise. It was too late to begin looking for another auditor in the seventh year. The municipalities were struggling for many reasons. If the bulk of the entity’s receivables was from municipalities, the audit committee should raise a recommendation that the appropriation go straight to AGSA. For statutory audits, the funds should be directed to AGSA rather than to the municipality to pay AGSA. If the funds could be redirected to AGSA, this could eliminate the outstanding debts and prevent the increase of this debt.

The Chairperson said that it was clear that the Committee was not comfortable with approving Crowe as the auditor. It was important to consider what would happen if the Committee did not approve Crowe.

Ms Motau responded to the questions regarding the re-appointment of the auditors. Every year it was a requirement for the audit committee to make a recommendation for the approval of an auditor. This had been done as required. The audit committee went through a thorough and detailed process to make a recommendation to the Standing Committee to approve Crowe for a certain period of years. Currently, AGSA was in contract with Crowe as a company. The contract expired in 2028. The normal processes were followed and Crowe had been approved as an auditor. However, on an annual basis, the audit committee was required to undergo another process to ensure that the auditor remained independent and competent. These processes had been followed. The audit committee was satisfied that Crowe was independent. The audit committee followed the market practice on this issue. The rotation policies of big and small firms, as approved by the Independent Regulatory Board for Auditors (IRBA), indicated that mandatory firm rotation had been approved. Seven years was normally acceptable in the market. The audit committee noted the Standing Committee’s remarks that seven years was a long time and ran the risk of compromising independence. She said that this was more likely with an individual auditor and less likely with a firm. The audit committee was comfortable and confident that Crowe’s independence had not been compromised. Gary [Kartsounis who was proposed as the new engagement partner] was involved in the audit previously, but had not been involved in the last seven years and thus, his independence was not impaired. The process that was undertaken to recommend the appointment of the auditor to the Standing Committee up to 11 January 2028 had been done, and the Committee had approved the appointment. The audit committee requested that there be an annual approval of the auditor.

Ms Motau responded to the question of whether AGSA had sufficient capacity to do audits. The audit committee had referred to being able to support the business. This was limited to AGSA [itself] and whether they would be able to produce information that enabled the business to make the appropriate decisions and whether they had sufficient capacity to produce the financial management accounts, financial statements, integrated reports, etc. Due to the nature of the business done by AGSA and the scope of the businesses in South Africa, it was impossible for AGSA to be able to do everything themselves. Hence, AGSA had to rely on and outsource to other accounting firms. The scope was so wide that AGSA had no choice but to outsource. It was important to manage any risks that came with outsourcing. The audit committee was not aware of any risks, and no significant risks were reported to the audit committee on this matter.

Ms Motau responded to the question regarding the receivables. The audit committee was guided by what the International Financial Reporting Standards stated. The standards indicated that the data had to be accurate, related, and recoverable to be signed off by the auditor. The audit committee had done this process to ensure that if AGSA recorded an amount of what a municipality owed, it was satisfied that the money was owed and was recoverable. If there were any doubts about recoverability, processes would have been gone through and only the amount that that was accurate and complete would be recorded in the financial statements. That is how the amounts in the financial statements had been reflected.

Ms Motau responded to the question of whether AGSA was over-charging. When considering this it was important to compare with what was being charged in the market, considering the fact that the work AGSA was mandated to do was very different.

Ms Roskruge said that it was difficult to determine if AGSA was over-charging. These were very challenging times, with slow economic growth, lack of prudence in spending, and struggles to collect outstanding debt from municipalities and state-owned enterprises (SOEs). There was no incentive to over-price. AGSA’s financial gains were a result of improving AGSA’s productivity. AGSA had pulled back work from contract firms and was now conducting this in-house. When contract firms were used, there was no lever to increase the prices and therefore the low margins were accepted. Bringing work back in-house did assist in terms of margins. AGSA has been driving cost optimisation initiatives across all business units. This has been fruitful. AGSA had also enhanced its debt collection strategies and was working much closer with organisations indebted to AGSA to make them understand how important auditing was and how important debt recovery was.

The Chairperson thanked the audit committee for the responses. He requested that the Committee conclude on this matter and move on to the next presentation.

Ms T Bila (ANC) said that she was happy with the explanation regarding the auditors that had been presented. She supported the renewal of the auditor but indicated that the audit committee had to begin looking for a new auditor after 2028.

The Chairperson thanked the audit committee for the presentation and engagement. AGSA was invited back into the venue.

AGSA 2023/24 Annual Report
Ms Tsakani Maluleke, Auditor-General of South Africa, presented AGSA’s 2023/24 Annual Report. [Please see the electronic presentation attached for full details].
 
In terms of strategic goal 1: Shift Public Sector Culture, AGSA achieved 100% of its Key Performance Indicators (KPIs). In terms of strategic goal 2: Insight, AGSA achieved 100% of its KPIs. In terms of strategic goal 3: Influence, AGSA achieved 67% of its KPIs. AGSA achieved 83% of its KPIs on strategic goal 4: Enforcement.

AGSA achieved a net surplus of 7%.

R364 million was owed to AGSA by state-owned companies and entities.

AGSA has produced a total of 2 017 Chartered Accountants (CA(SA)) since the start of the AGSA trainee auditor scheme [in 2000] – 700 of which were produced over the last three years.

Discussion
The Chairperson thanked AGSA and invited Members to engage with the presentation.

Mr Beesley said that the Municipal Finance Management Act (MFMA) audit outcomes [on slide 29] were shocking. He recalled sitting in the eThekwini Council and the mayor would stand up and say that there was an unqualified report and everyone was proud and impressed, yet there were several findings. Was there any way to change the language around this? For example, there could be a line item called ‘Corruption’ and because it was disclosed properly, it would be okay. He felt that this missed the point. It had to be shocking for AGSA to see these issues. Enforcement was a big angle but he did not see AGSA addressing this as only two certificates of debt for material irregularities had been issued to accounting officers [see slide 25]. He was surprised that the corruption and maladministration going on did not cause more certificates of debt to be issued. There was a genuine lack of consequence management. More than 50% of AGSA’s debt was current to 60 days. The terminology should be changed to state that “Half of a billion over 30/60 days’. He requested an update on where this was currently. AGSA should not be too hard on a pass rate of 50%. He commended AGSA for the 700 CAs that had been produced. This was a major achievement. AGSA has played a pivotal role and the CAs that had been produced would play a pivotal role in government moving forward. He was hopeful that they would be able to go into the municipalities that were underperforming.

Ms Mente-Nkuna asked that the list of material irregularities (MIs) be sent to the Committee because the Committee’s primary function was to enforce implementation of service delivery and oversight. If the Committee was not aware of where the MIs were, they would not be able to assist AGSA in enforcing the recommendations.
had come before the Standing Committee on Public Accounts (SCOPA) with a similar outcome. Most people were aware of the financial situation of OR Tambo and yet they had reported an unqualified audit outcome. This had shocked her. Was this an issue as a result of the accounting standards? It should not be that entities reported and declared wrongdoing and then were able to get an unqualified audit opinion. The categorisation of findings had to be relooked at as it was misleading. She referred back to the incident with SCOPA and OR Tambo and said that Members had been misled until they delved into the issue and had picked up all of the findings and areas of wrongdoing. There was a debate on the accounting standards, and AGSA had an ongoing dispute with the Road Accident Fund (RAF) regarding the accounting standard. AGSA had to address this issue, even if it included potential amendments to legislation. Curbing corruption had to move at a faster pace than how things were being done. Corruption could not be curbed in OR Tambo when Members were misled to believe the entity was doing well. It should not be deemed okay for entities that engage in corruption and misappropriation of funds to be given unqualified audits because they reported instances of wrongdoing. AGSA had reported missed targets. What was the reason for these missed targets? What factors contributed to this? How could the Committee assist in this regard?

Mr Madlala believed there was a correlation between the high number of MIs and the poor financial statements received by AGSA. This has been an issue for years. AGSA did not receive quality statements from auditees. What was the problem? Was it the complexity involved in developing financial statements, was it the timeframe for submission, or was it an unwillingness to submit proper documents? The officials in these entities were professionals who compiled financial statements on a yearly basis, and yet still did not get this right. What was the actual issue? If it was due to the complex nature of developing financial statements, was AGSA considering ways not to compromise the outcomes of the process while simultaneously making the process less complex?

Ms Bila asked what the impact of real-time audits was. Did current audit standards enable effective implementation of real-time audits? What lessons could the AG point to regarding the implementation of real-time audits? Could AGSA develop capacity to increase the provision of real-time audits for identified priority project implementation? Would AGSA consider increasing the auditing sample? What resource effect would this have on AGSA? What outcomes could be obtained from this?

Ms L Ligaraba (ANC) welcomed the AGSA’s efforts to rework the performance indicators so that they were more outcome-based, measurable and closely linked to their mandates. This was a critical area in strengthening the quality of impact assessments of public expenditure. Would the AG develop standards for outcome-based indicators to ensure government-wide implementation? Did the current auditing standards factor in a standard of quantifying and analytically determining an outcome of policy and programmes? How did the audit assess the linkage between performance indicators and expenditure? She referred to the Code of Conduct for Authorized Auditors, section 12 (3)(b) and asked how effective the system was in detecting a breach of the code of conduct by auditors. How did elements of interference with the audit impact the conduct of the auditors?  

Ms M Mofokeng (ANC) referred to non-financial performance. The target of achieving a quality rating between 80% and 90% had been missed, and a 69% rating was reported [See slide 35]. What factors were considered in assessing this area of performance? Was the assessment internal or external? Slide 45 referred to achievement of assessment of professional competence pass rate of 50%. What were the factors contributing to non-achievement of this critical indicator? What were the implications of the staff not possessing the required competence? Slide 43 referred to the ethics maturity level. What were the common dilemmas auditors faced in the course of the work [to maintain AA rating]? How did the AG monitor and assess breaches of the required ethical standards and accountability principles? What are the weaknesses of the AG in effectively managing audit engagements? This was a critical driver of enabling behaviour changes for a culture shift.

Mr Subrathie said he would have to leave the meeting slightly early for Friday Prayer. He would forward any additional questions to the Chairperson and AGSA. He commended AGSA for its performance and contribution to building a capable and ethical South Africa. Great emphasis was placed on the guidance and stewardship of AGSA. The Public Audit Amendment Act of 2018 (PAA Act) sought to grant the AG the necessary powers [to intervene when there were material irregularities]. AGSA ended the year with a 41% achievement for adhering to timelines on newly raised MIs, as opposed to the 60% that had been targeted.[Slide 24] Did the AG have sufficient capacity to respond to and manage irregularities in a timely manner as an additional mandate as a result of the PAA Act? If so, what were the plans to increase capacity to ensure AGSA achieved a higher level of eradicating Mis? Slide 26 showed successes banked of R3.47 million. Recognising that the audits are identified on a sample basis and thus far R3.47 billion had been recovered, this meant that there was a potential to recover more losses. In reality, there was a higher level of recoveries. A specific mandate had been given through the PAA Act – the first spoke to timeliness and the second spoke to quantum. How could the AG be further capacitated so that it could recoup more losses? It would be appropriate for the Committee to receive a report from AGSA in terms of how far they have gone in adhering to, or implementing, the amendment of the Public Audit Act.

AGSA Response
Ms Maluleke said there were two parts to this matter of timeliness. The first part was capacity. She did not think that AGSA needed significantly more capacity. More capacity has been built over the last few years. She understood Mr Subrathie’s perspective. This was an area of focus within AGSA, and she indicated it would improve over time. In terms of whether more could be recovered and whether more capacity was needed, she did not think so. AGSA was doing a complimentary piece of work that needed to complement what other people were doing. Sometimes it was best for AGSA to refer MIs to the Special Investigating Unit (SIU) who were well-positioned to pursue money that was being lost.

An example of this was the National Student Financial Aid Scheme (NSFAS), where AGSA raised an accounting issue about the lack of reconciliation between the NSFAS and the tertiary institutions. This was not being attended to and therefore AGSA was able to refer the matter to SIU and SIU was able to pursue the money. Similar work was done with the real-time audits, especially during the pandemic. AGSA was able to refer matters to the SIU and the Hawks. There needed to be consideration of how to get all other entities to do their part in terms of recovering the money. This included law enforcement, investigation bodies, and accounting officers. It was critical to get to the point where accounting officers could prevent problems and act timeously when issues arose, as by the time AGSA raised the matter or became aware of the matter it was often long after the incident had occurred. For example, there was an infrastructure project in the Free State where the procurement process resulted in a choice of a contractor already in business rescue. AGSA picked up such issues long after the fact – when money had already been paid and recovery had to be done. It was critical to get to the point where accounting officers were not able to get away with this. While focus was given to strengthening this in AGSA, attention should also be given to other institutions that were better at dealing with such issues.

She said AGSA would share the list of MIs with the Committee. She welcomed the Committee’s support in terms of oversight provided and assistance offered.

Ms Maluleke commented on the terminology of ‘unqualified audits’. She did not think that an unqualified audit opinion on the credibility of financial statements, “with findings” was an issue of definition. What has happened is that officials and members of Parliament have tolerated the other matters detailed as ‘findings’. The examples of eThekwini and OR Tambo spoke to the ongoing tolerance of other matters [raised in the findings]. When people dealt with audit reports from AGSA, it was often said that the entity had “an unqualified audit opinion” and that everything was fine. This encouraged AGSA to start focusing on oversight on other matters. These other matters were important. They were what led to the degradation of sanitation and infrastructure in eThekwini. She was excited that the Committee was on the same page as AGSA and that Members had picked up on how entities or organisations presented their audits. This issue had to be dealt with. There were issues of transparency because entities were not transparent about what they had done with the money but had submitted proper statements. When Parliament appropriated a budget into the custody of an entity, it was done with particular objectives, and entities were not transparent about what they had done. There needed to be a deeper review of the performance reports and compliance; this was why there was emphasis on this. The space the country was in demanded that there was no tolerance of “unqualified opinions with findings”. It was common that entities that received unqualified opinions stayed in this classification and did not improve. It was comfortable in the unqualified classification because oversight mechanisms were not concerned with the opinion. AGSA would continue to strengthen its messaging and delivery and give the Committee insight into what had been found. Increasingly, AGSA has been reviewing projects and has been able to depict the link between poor performance information and poor service delivery. AGSA would try to be as clear as possible so that the Committee could drive accountability.

In terms of enforcement, AGSA has yet to issue a certificate of debt (COD). The CODs in the presentation referred to CODs that had been considered. [See slide 24, and page 71 of the AGSA Annual Report.] AGSA had gotten an independent advisory committee to advise the AG on whether or not it was appropriate to issue a COD in particular circumstances. CODs had not been issued because by the time AGSA got to the point of issuing a COD, a few things would have happened: 1) the accounting officer had changed and this instability made it difficult for AGSA to get to the logical conclusion of the process; 2) accounting officers responded to MIs; and 3) to close some MIs the process needed to reach a point where the entity was able to get money back. It was difficult to blame an accounting officer who was new in the role and was not responsible for the MI; all that could be done was to continuously follow up.

She agreed that there was a lack of consequences. Some shift was being seen. It was very worrying that an accounting officer needed an MI and remedial action from the AG to discipline staff. This was worrying because the PFMA was very clear that the accounting officer was the one responsible for instilling discipline in the environment. Why did AGSA need to harass the accounting officer before they disciplined the staff? The PFMA was clear that there should be a building of internal controls – this was the role of the accounting officer. Why was an MI needed to compel accounting officers to do this?

There had been a question from Members on the link between quality financial statements and audit outcomes. In [entities subject to the] PFMA, things were improving because their financial reporting requirements were not as onerous – modified cash was not hard. The set of reporting requirements had been stable for a long time. The finance units tended to be stable. Internal audit and audit committees tended to be quite responsive. [For entities subject to the] MFMA [it] was slightly different. The reporting requirements were quite significant – Generally Recognised Accounting Practice (GRAP) was infinitely more complicated than Modified Cash Standard (MCS). It was appropriate to have GRAP, which was consistent with international financial reporting standards, in highly urban areas but less so in more rural areas. In terms of the public finance management system of South Africa, there had to be an acceptance that there was a need for differentiated financial reporting requirements for different entities without losing transparency. There were specific complexities that metros faced that were different from smaller municipalities. This may be a way to address issues in smaller entity’s without compromising transparency and accountability. She identified the problem as ill-discipline. There was no reason for people to be unable to put together financial records. Some of the qualification areas were about expenditure. When going deeper into the issue, it was because records were not provided for some expenditure items that therefore AGSA could not confirm what had been reported. Why would entities not maintain proper records when the law compelled this? This was a discipline issue. She noted that there may be a skills issue in terms of some very complex matters, but the biggest problem was ill-discipline.

Ms Maluleke responded to the question on the impact of real-time audits. AGSA did real-time audits during the pandemic and during flood relief. Real-time audits were still audits, however there was no wait for the end of the financial year. Internal auditors and accounting officers still had to do their work, however AGSA would continue to audit. This had been helpful because AGSA was able to get a quick sense of where the problems were, allowing accounting officers to address them – making the project more efficient and effective. This was not a sustainable way of doing this. It was critical that accounting officers built the controls they needed to ensure things ran well. The internal audit had to be there to view procurement processes quickly and ensure that things were running well. There had to be controls that allowed entities to fulfil their obligations. If AGSA built capacity to do real-time audits, the entity would begin to struggle with independence as it would be a part of the system constantly. Once or twice in the context of a big story or project was okay, however consistent real-time audits would compromise AGSA’s independence. There needed to be a drive to build capacity within institutions. Institutions that ran well were where the accounting officer had a good team of senior managers, a good internal audit function, and a good functional audit committee. This made for a well-performing institution.

AGSA used sampling so that it could come to a conclusion on whether or not information was credible. AGSA could use better technology to do more coverage.

On the issue of performance information, she said that it did warrant proper attention from the standard setters. AGSA did not develop standards; AGSA only confirmed whether somebody had complied with these standards. The people who prepared the standards were National Treasury, the Department of Monitoring and Evaluation (DPME) and the Accounting Standards Board (ASB). She agreed there was a need to worry about whether the performance information framework was well poised to get AGSA what was needed. Further, there needed to be investment in the skills that would prepare good, credible performance plans that could be used in making decisions in Parliament. When entities came to Parliament on a quarterly basis, Parliament should ensure that these reports were credible. This would depict instances where money was being spent but the target was not being achieved. It was AGSA’s observation that the quarterly reports were not characterised by credibility. It would take attention from the DPME, the offices of the Premier in the various provinces, Treasury and internal auditors to address this. When more auditing was done, it gave transparency to the problem whereby the target was not reached but the budget had been spent. AGSA was increasingly raising such issues. AGSA also raised some findings on key performance mandates that did not make it into the Annual Performance Plan (APP). This referred to specific items that were in the mandate of an entity but had been excluded from the APP. It was not AGSA’s job to judge performance, but rather to provide transparency so that Parliament could encourage better accountability.

She said she had not properly understood the question on the weaknesses of audit engagements. Did this have to do with AGSA’s ability to complete audits on time? AGSA had improved in this regard. Audits were sometimes delayed when there were disputes or because the submission was late, which compromised the timelines.

Mr Vonani Chauke, Deputy Auditor General (DAG), responded to the question regarding the debtors' book. If AGSA billed R4.5 billion a year, this meant an average of R500 million per month. The annexure in the presentation indicated that there were certain debtors who had long outstanding debt [to AGSA], with some going back two to four years. These were the ones that had to be dealt with urgently. A good amount of people paid AGSA on time.

On the matter of the professional competence pass rate, Mr Chauke stated that as it was a target that had been set, it was important that AGSA report on it. He agreed that becoming a CA was a difficult journey. The target had not been met because, during that particular year, the South African Institute of Chartered Accountants (SAICA) had allowed students to take the exam twice, as there had been a glitch in the system. People who had failed were very eager to do the test rather than waiting a year. This target has since been refined which was a much more practical way. When the SAICA results were released, there was a statistic of an institution with a 100% pass rate—but there was only one student in the institution! There had to be a balancing act of achieving a high percentage of performance and making a meaningful contribution to South Africans. Producing 700 CAs(SA) meant that people who may not have had the opportunity, now had the opportunity to become CAs. Some universities only allowed people who they knew would pass to proceed with the test. While AGSA did not meet its target in this regard, AGSA was proud of its achievements in this area. This area had to be continually assessed. This achievement was on par with country-wide achievement.

While it was acknowledged that the bulk of debtors were current, some had to be dealt with. AGSA had engaged with Treasury on how this could be addressed. Some invoices were at 24 and 36 months. These long-outstanding debtors were a major concern. There were also entities in financial distress who owed AGSA money. Some auditees paid on time. AGSA believed that this issue would be alleviated if financially distressed entities were addressed. AGSA had enhanced its debt collection strategy. This meant that if there was judgement against longstanding debtors, AGSA could find ways to enforce payment.

Regarding the quality of audits, IRBA (the Regulator) subjected audit firms to random quality assessments. AGSA was not subject to the Regulator, rather an internal unit not involved in the audits was utilised. This assisted the AG in ensuring that when an opinion was issued, it was of quality. Various activities were carried out to ensure quality. An indicator had been included to set a range for quality. Over the past few years, AGSA has done fairly well within this range. There has been a recent change in the auditing standards – International Standards on Quality Management (ISQM). When AGSA did its assessment this year, AGSA had achieved above the threshold. AGSA was pushing for better auditing software. The current software was not fit for purpose. Most areas that were picked up were around adequate documentation. New audit software would have a major impact on this. There were also other mechanisms of quality assurance. AGSA had an important philosophy in that if a target had been set, AGSA should assess itself against this target and consider how it could be improved. For example, regarding the target set for the pass rate, AGSA considered setting a high target for first-timers as it has been shown that it was easier to pass the first time. Providing support to enable people to pass the first time would reduce the backlog.

Ms Maluleke referred to the issue of quality. AGSA had done a deep dive to confirm that, in no instance, an audit opinion had been given incorrectly. The file may not have met AGSA’s standards of completion and documentation, but AGSA had been diligent in getting confirmation that the audit opinion was appropriate.

Mr Mwali thanked AGSA for the work it did. He said he had been a beneficiary of AGSA’s ‘contract work creditors’ (CWC) transformation. He commended the entity for this. This initiative has moved smaller [audit] firms from one scale to the next. He said that there was no attitude “to do the right thing”. The challenges highlighted by AGSA depicted that accounting officers were not competent to prepare financial statements. Sometimes, accounting officers outsource the preparation of financial statements to accounting firms. There should be emphasis on performance to avoid the situation whereby an auditee achieved an unqualified opinion and yet performance was weak. These two aspects did not correlate. He encouraged AGSA to place emphasis on performance information as this provided the true image of what was happening within an institution. The situation seemed to be that the auditor was capacitated to do the work, but the auditee was not capacitated to do the work. What was the attitude of the auditee when preparing for audits? The problems did not occur on the day of audit, rather problems existed in the recording of information for the whole year. The financial losses with regard to MIs were approximately R21 billion. AGSA was able to recover approximately R3 billion. How could the Committee strengthen this aspect and enable AGSA to recover more funds? Accounting officers had a bad attitude toward audits because they were aware that wrongdoing would be brought to light.

Ms Mente-Nkuna said that when the Committee had met with the AG at the beginning of the term, the Committee noticed that she had predicted the attitude of the seventh Parliament and had advanced in terms of countering Parliament’s attitude by implementing measures that spoke to a lack of progress over the 30 years of democracy and that there would be shifts in how things were being done. This included the implementation of real-time audits and comparing value for money. Moving forward, the issue was that if AGSA did not have sufficient capacity to do this, there would be significant problems. There could not be rhetoric without action. How would this attitude shift manifest itself? AGSA needed to provide a plan on how this would be done. She asked that the AG provide recommendations on what was needed for the plan to be realised.

Ms Mente-Nkuna spoke of the categorisation of wrongdoing. For example, if an entity listed its wrongdoing and how much money had been lost, it received an unqualified opinion because wrongdoing had been declared. This had to be fixed. There had to be a way of categorising these organisations in a way that truly reflected the situation.

The Chairperson indicated that AGSA would be given a brief opportunity to respond. Other items on the agenda would be deferred because the meeting had run over time.

The Chairperson referred to the COD. The problem was a lack of accountability. In his opinion, the change and instability of accounting officers should not defer a COD, even if the accounting officer was newly appointed. That person should have civil recourse to make a claim against the previous accounting officer. He suggested that AGSA get a legal opinion on this matter. It was often the case that changing the guard led to a lack of accountability.

Ms Maluleke said she was pleased that Mr Mwali had been a beneficiary of the CWC programme. AGSA was definitely interested in pursuing further the invitation to emphasise matters of performance. She understood the concerns of Members and would work to address the issues. In terms of providing better categorisation of findings, she requested time for AGSA to consider this issue. When selecting projects to be visited, AGSA deliberately prioritised organisations in the “unqualified” [audit opinion] category. This would allow for the identification of the ‘other matters’ and real issues. AGSA would work on better conveying instances of wrongdoings. AGSA would continue brainstorming ways of doing something differently. AGSA would share the list of MIs with the Committee so that the Committee could develop a better understanding of the issues and the Committee and AGSA could delve into the issue at a later stage and brainstorm.

Closing Remarks
The Chairperson thanked AGSA for the presentation and the engagement with the Committee. He commended AGSA for its good financial management and the performance of the institution, especially if there was always room for improvement.

The Chairperson said there had been changes in the programme. The Committee would not meet the following week and there were other meetings where the Committee may have to change dates due to mini plenaries. The next meeting would be 22 November.

The meeting was adjourned.

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