Department Audit: Auditor-General’s briefing

Meeting report

HOME AFFAIRS PORTFOLIO COMMITTEE
14 March 2006
DEPARTMENT AUDIT: AUDITOR-GENERAL’S BRIEFING

Chairperson: Mr H Chauke (ANC)

Documents handed out:
Auditor-General’s briefing on Department Audit for financial year ending 31 March
Department briefing on delay in tabling of Annual Report 2004/05

SUMMARY
The Auditor-General, Mr Shauket Fakie, talked the Committee through a detailed report of the events that had led to the delay in the Department of Home Affairs Annual Report, as well as the increase in the audit fees. There were a number of discrepancies between the report the Auditor-General had submitted, and the one the Department had submitted. Members were particularly interested in why the Auditor-General’s office had used a private firm to assist in the audit, and in who would be responsible for the budget over-run.

Minutes
The Chairperson explained why the Committee had thought it necessary to call a meeting with both the Auditor-General and the Department of Home Affairs. On 7 February 2006, the Committee had held a meeting with the Department to discuss the reasons for its not submitting its Annual Report, which made it difficult for the Committee to assess its budget for the coming financial year. The Public Finance Management Act (PFMA) required that departments submitted their Annual Reports timeously. There was a sense that the auditing process had not been adhered to. The Committee then decided to invite the Auditor-General to present the auditing process, as well as with the problems that his office had experienced during the Department audit.

Auditor-General’s Report
The report detailed the process that had been followed during the Department of Home Affairs’ audit as well as an overview of what normally happened during the audit cycle. It was aimed at explaining why there had been a delay in the finalisation of the 2004/05 audit, as well as the increase in the audit fees. Waiting on outstanding documents, and the resubmission of amended financial statements, were cited as some of he reasons why the report had been delayed. The delay in the audit process had resulted in the significant budget over-run.

Ms Lilly Zondo, the business executive responsible for the Department audit, added that the audit files were in the process of being ‘quality reviewed’ by an independent auditor. If no material issues arose from this process, the Department audit should be finalised by the end of March 2006.

Discussion
Mr M Sibande (ANC) expressed concern about the number of people who had been involved in the audit process. He asked who had been responsible for the delay and whether the Auditor-General’s office had worked according to an audit plan.

Mr S Huang (ANC) asked whether the Auditor-General took responsibility for the documentation that the Department had suggested he had lost.

Mr J Beukman of the Department’s Strategic Management Unit advised both parties to consider what they could do to prevent a similar situation happening in future. He asked whether it should be compulsory for the accounting officer to be involved in the Audit Steering Committee (ASC) from the start of the process in order to deal with the communication problems.

Mr Fakie responded that the Auditor-General should take the responsibility if something went wrong in the process. By the same token, the Director-General should take responsibility for what went wrong in the Department. Ideally, the Director-General should chair the ASC. In this case, the Director-General had delegated the responsibility to Mr Khambule, the Chief Financial Officer of Department. When the whole audit cycle did not finish off with the delegated person, the Auditor-General had to clear the report with the Director-General. The latter had then raised certain other concerns which could have been addressed at a much earlier stage if he been part of the ASC. The Director-General’s involvement in the process was critical. Due to their busy schedules, one could not expect D-Gs to be present at every weekly ASC meeting, but he or she should make an effort to be present for the meetings at the most critical stages. He conceded that both the Director-General and the Auditor-General were supported by their respective teams, but was adamant that when things went wrong, the responsibility was theirs and not that of their support staff.

Mr Fakie said that the Auditor-General’s office had for many years used audit firms familiar with public sector departments. For instance, Gobodo had been used on numerous occasions. Very specific terms of engagement had been layed out with the auditors before they took the assignment, and the Auditor-General’s office had made sure that the private firms understood exactly what the Auditor-General expected. They were very familiar with the requirements of the PFMA as well as those of the Terms of Auditing. He believed that had the Auditor-General brought in brand new auditors who had never worked for the Auditor-General or in the public sector environment before, it would have been a major problem.

Mr Beukman asked whether it would be a good idea to use a ‘practice note’, wherein an official from the Department or the Auditor-General’s office could take responsibility for document collection. This would then hopefully prevent any disagreements about whether documents had been submitted or lost.

Mr Sibande asked who had failed to submit the outstanding documents and whether the Department had been given any guidelines for the submission of the requested documents.

Mr Fakie said that documentation had been the crux of the problem as far as finalising the audit. The auditors had requested documentation in order to provide evidence supporting the information in the financial statements. The departments had to make the documents available. The Auditor-General’s practice was that, whenever auditors requested any documents from an auditee, they signed to acknowledge receipt and return of the document. In this particular case, there had been no evidence to indicate that the documents had been given to the auditors in the first place.

There was no need for a guideline for the submission of documents as it was a very simple process. This was the reason for the ASC meeting – when the samples were selected the auditors would indicate what documents they would need. It was important for both offices to create nodal points that would be responsible for the submission and return of documents.

He was hopeful that that the report would be finalised by the end of March. Minister Mapisa-Nqakula and himself would keep an eye on developments. The Minister would request the Director-General to at least attend the ASC meetings.

Mr Huang asked how the R3.95 million that the audit had already cost, would be split among the teams who had been involved in the audit.

Ms S Kalyan (DA) said that the report indicated that "upon review of the financial statements, there had been a material change to them, namely the revenue amount". She asked who had the authority to change what was presented in the audit report.

Mr Fakie pointed out that the material change related to the financial statement and not to the audit report. The Auditor-General had issued a financial opinion on the financial statements. The audit report was the property of the Auditor-General. No-one could change the audit report. When the financial statement changed, the audit report also needed to be adjusted in order for it to read in line with the financial statements.

Ms Kalyan asked what, if the process ran smoothly, an audit would normally cost. Mr Fakie explained that the Auditor-General submitted a budget to the Committee for the Auditor-General’s office. The Auditor-General did not get any funding from Parliament. It’s funding came from its recovery rate i.e. the hourly rate the Auditor-General’s office needed to charge to recover the cost of managing their budget. Whenever the Auditor-General’s office went to do a job at any department, they charged the rate that had been approved by Parliament. The Auditor-General’s office subjected itself to submitting accurate monthly time sheets reflecting the time that had been spent on each audit. Based on the time spent at each department, a bill was sent to that department. During the audit planning phase, the Auditor-General had estimated that the audit at the Department would cost R2.2 million. The Department would have paid an additional R500 000. The actual amount now stood at closer to R4 million.

Ms Kalyan asked why it was necessary to restart the process, and how the process being restarted had contributed to the delay. Mr Fakie responded that the Auditor-General’s office, together with the Department, had set certain timelines. The first milestone was set for July 2005. That had not been met. The second one was set for October. The second process commenced after October, which they had hoped to complete in November. That deadline had not been met and they were hoping to finalise the report by the end of March.

The Chairperson asked why the Department had not indicated in the report they had submitted to the Committee, that officials who had been involved in the audit had been suspended some time into the process. Mr Khambule (Chief Financial Officer) responded that he did not think that that bore any relevance as "it never impacted upon the audit". Only two of the people who had been suspended had been involved in the audit, and they had been replaced immediately.

The Chairperson asked what the Auditor-General’s experience with Department had been prior to this process. Mr Fakie responded that such problems were experienced regularly and not only with this Department. He had, on the basis of his meeting with the Minister, indicated to his audit staff that in future they would not allow the situation to drag on in the same manner. They should ‘close the door’ after a certain time and report based on the information available. In terms of the PFMA accountability arrangement, departments had six months after the end of the financial year to table their reports. If departments were unable to meet this requirement, the Minister had to provide Parliament with an explanation. In terms of Section 65 of the PFMA, the Auditor-General had to submit a report to Parliament on which departments had not tabled their reports and which departments had not provided explanations for the delay.

He admitted that on the understanding that the Department would provide the information in order for the audit to be finalised by November or December 2005, and that the Minister would provide Parliament with an appropriate explanation for the delay, he had not been involved. When matters had really started getting out of hand in January and February, both he and the Minister had got involved.

The Chairperson reminded Members that in one of the last reports on the Department, the Auditor-General had indicated that there had been problems with the Department’s control systems. The Director-General and the CFO had been trying to resolve problems within the Department. He asked whether this had impacted negatively on the completion of the audit.

Ms S Kalyan (DA) commented that surely the Department did not submit their original documents to the Auditor-General. If they were lost, the Department should have been able to supply another copy. The Department’s report had indicated that the audit plan had commenced "without discussion". The report claimed the Auditor-General was unavailable for most of 2005 and that the Department had not formally been briefed on why the audit was not continuing.

Mr Huang said that the Department has already overspent by R1.2 million. Who would take responsible for this wastage?

Ms I Mars (IFP) pointed out that the documents submitted by the Department and the Auditor-General did not tally. There were glaring discrepancies in the statements made in both documents.

Mr Fakie replied that he had evidence to support the dates that his office had put the strategic plan to the Department. He could not take responsibility for what the Department presented to the Committee. The records of the ASC would support the dates mentioned in the report. Ideally, a strategic audit plan should be approved before any audit was commenced. In this situation however, the Auditor-General had to start some audit work or else the timelines would not have been met. He admitted that the strategic plan might sometimes need some adjustments, but in such a case, it would not mean that the audit would run in a completely different direction. In the interest of time, the auditors had commenced with some of the work and if some gaps had been left in the strategic plan, then they would have gone back to that. It was clear however that no gaps had been left in the plan.

A representative from National Treasury’s Public Financial Governance and Administration division pointed out that for the past three years, the Department had received a qualified audit report. She asked when the Committee thought that an intervention was necessary. The Chairperson responded that this issue would be addressed at a later stage. For now, the Committee just wanted the report to be submitted.

Mr T Godi (ANC), Chairperson of the Standing Committee on Public Accounts (SCOPA), added that if no judgment was going to be passed on who was responsible for the delay, he did not see how continuing in this manner was necessary. The Auditor-General and the Department had submitted two conflicting versions of what had caused the delay. He asked how one ensured that this kind of thing did not happen again and what lessons had been learned about communication.

Mr K Morwamoche (ANC) reminded the Committee that since there was no complainant, the purpose of the meeting was to assist in finding an amicable solution. The Chairperson added that the Committee was not a court of law to pass judgment. It was just important for Parliament to know what the problem was. He hoped that the Committee would be able to get answers, especially with regard to systems within the Department. He did not think that the Auditor-General was satisfied with the documentation he had received. The fact that a number of officials had been suspended for corruption, indicated that there was a problem in Department. The Committee needed to know what that problem was. It needed to pass the Department’s budget for the next financial year and he was not sure whether the Committee would be able to do that when certain questions had not been answered. If the Department did not comply as far as the submission of certain documents to the Auditor-General was concerned, then they should be held responsible.

Mr Khambule responded that the Auditor-General’s report was inaccurate in a number of areas. The most critical issue for the Department related to when the audit commenced, and to the fact that a number of teams had been sent to perform the audit.

The issues relating to the lack of documentation had also not been accurately reflected. The problems experienced in documentation had resulted from unclear requests. The Department conceded that some documentation was outstanding and that the Auditor-General’s team had informed them that if the documentation was not there, they would still conclude the audit. It was unfortunate that the team who had been at Department and who had done the audit, was not present to answer some of the questions. In addition, the team the Auditor-General had sent was made up of junior clerks (who were predominantly white), and one of the contributing factors to the problems experienced related to the lack of transformation within the Office of the Auditor-General. The programme used to retrieve data was not appropriate. There were numerous issues relating to communication and understanding between the two offices.

The Auditor-General responded that his Office was accountable to Parliament in as far as their transformation initiatives were concerned. One needed to ask whether the staff involved were satisfied with the level of transformation taking place.

Ms Zondo said that neither the demographic make-up of the team nor the apparent lack of understanding of the Department’s information, had ever been raised at any of the ASC meetings. Since the Director of Finance was an ex employee of the Auditor-General’s office and had been an audit manager before, he would have dealt with such issues. Many of the problems arose because the auditors requested information that was simply not there. The Auditor-General had the right to conclude the audit. Departments could, due to limitation of scope, be disclaimed in an audit. He suggested that the Auditor-General could not conclude the audit because he himself was not sure about the documents they were requesting.

As far as the adjustments to the financial statements went, Mr Khambule said that it was normal that during an audit, the auditors gave advice. The reason a financial statement had changed was precisely because the Department had acted on such a piece of advice.

With regard to the Department’s internal controls, he said that their last financial statements had been qualified on two issues – the Lindela Accommodation Centre and the deposit account. The Lindela issue had been resolved but the deposit account still remained a problem in the current financial year. The challenge was that the Department did not have the capturing mechanism for receipts – deposits would appear in the books but could not be matched with the relevant receipts. The Department had installed a basic electronic accounting systems at 146 provincial offices to date.

The Chairperson asked who would be responsible for paying the R500 000 which was the estimated cost to completion of the audit. Mr Khambule replied that the Department has paid the R500 000. He would not comment on who was responsible. The Chairperson said that Parliament would still need an answer from the Department regarding who it thought was responsible.

Mr Khambule said that the Auditor-General’s report was inaccurate regarding the Department’s failure to comply with the PFMA. He had a letter, dated 1 October and signed by the Minister, which gave the reasons for the delay. He was responsible for ensuring that the Minister complied with the PFMA, and was confident that the Department had complied.

Ms Zondo said that the Auditor-General had, in terms of Section 55 of the PFMA, reported that the Department had not submitted their Annual Report and that the Minster had then submitted a report indicating why the report had not been tabled.

Mr Sibande said that the Committee had to handle the situation very carefully because they were representing the people of South Africa. The Auditor-General had indicated that they used experienced firms to assist in the audit. This was problematic. It was necessary to take a closer look at the outside firms in terms of transformation. One had to look closely at the structure of Gobodo. The Chairperson asked whether the Department had experienced any problems Gobodo.

Mr Khambule responded that officials from Gobodo, as well as from the Auditor-General’s Office, had done the audit. Mr George Gorekwang, the Director Financial Administration, had dealt more closely with Gobodo. Mr Khambule indicated that Gobodo’s lack of understanding of government accounting had contributed to the problems experienced.

The Chairperson commented that the situation appeared to be more complex than the lack of documents and the unavailability of certain officials. The only way to deal with the issues would be to inform Parliament.

Mr Gorekwang said that throughout the Auditor-General’s representation, it had been indicated that requests were sent via email. The Department had indicated that the team should come to the Department so that they could get to know each other face-to-face. There had been no proper introduction to Gobodo. The audit team had already ‘pre-concluded’ that there were irregularities in the Department’s financial statements, without evidence. The auditors used the ‘CATS’ system for the retrieval of documents. The audit team had admitted that some of their selections were inaccurate. The Department had had to assist the team in reading the documents. This was not indicated in their report.

The Department had said that it had informed the team that he would not respond to the strategic audit plan (SAP) that had been emailed because the team had not formally come to meet with Department officials. The edit programme had also had to be explained to the team. The Department had been qualified on issues that did not exist. Department had invited the team to a lecture about the work of the Department. Management had not attended but instead sent junior clerks.

The Auditor-General wondered why, if the audit team used the same programme when doing their audit in other departments, they had not experienced similar problems there. Often the Department had data indicating certain amounts spent. The auditors then requested documentation that supported that particular transaction. The ASC meetings should be used to point out any errors that the auditors were making and to guide and educate them in the programmes. He would have a serious problem if the auditors did not listen to the department. The auditors were interrogating the Department’s data and the Department was in a better position to tell them whether they were going about it in the correct manner.

Ms Zondo pointed out that the team was ‘layered’ in terms of experience, and the Auditor-General tried to ensure that there was some kind of continuity. To assign blame to junior members was not appropriate. The senior manager of the audit had to take responsibility. This issue should also have been raised at the ASC meetings. She had taken the business executive position on 1 November 2005, and the intention was that she should be introduced to the Director-General. Although there had been a change in the business management of the audit, they had never relinquished their responsibility. If an audit was running smoothly, there was normally no requirement for senior management to get involved in the execution phase.

The Chairperson wondered why junior clerks had been appointed to do the audit when Department had been assessed as a high-risk department. Ms Zondo explained that the contracting out of the audit was independent from the assessment of the audit as high-risk. If the audit had been assessed as high-risk, the Auditor-General would have ensured that the team would be stronger and more experienced. The Auditor-General had been confident that Gobodo was capable of handling the Department audit. The contracted company had informed the Auditor-General about their team-members.

Ms M Maunye (ANC) wondered who was responsible for determining whether an audit was high-risk. Ms Zondo responded that the contracted firm acted as the Auditor-General’s agents. They did the assessment and jointly agreed with the Auditor-General that the assessment was correct. The Auditor-General ultimately took the responsibility for the report.

The Chairperson asked whether these problems had been communicated to the Director-General. Mr Khambule responded that after every ASC meeting, he met with the Director-General to brief him about progress. Much correspondence had been sent to the Office of the Auditor-General about the problems they had experienced.

The Chairperson requested the Auditor-General explain some the issues that were being raised now. The matter was costing much time and money. Mr Fakie said that his management team would be involved at this level. If they had experienced the problems raised now, they should have passed these to him. He would ask his team why they had not been informed that the situation was so bad.

Mr Huang requested that the Chairperson approve a public hearing to deal with the matter. He asked why the Department was considered a high-risk department after 11 years of democracy. He also wondered about the cost of the audit by the end of March. The Chairperson agreed that someone would have to accept responsibility.

Mr W Skhosana (ANC) asked which team had worked with the Department audit prior to Gobodo. He asked which documents the Auditor-General had requested and which ones the Department could not supply. He also wondered why, if both parties had accountants, they could not understand what was being requested.

Mr Gorekwang said that the Department had supplied flagged documents (not boxes) but that the audit team could not read them. Pictures taken by Willem Opperman were not mentioned in the Auditor-General’s report. When the audit team saw the volumes of documentation that the Department had supplied, they "simply went away".

Mr Fakie could not comment on the details. The Auditor-General’s office believed that there had been adequate opportunity to highlight issues throughout the process to address the problems and frustrations of the Department. Neither team had reported any of these difficulties to him. He would like to see the correspondence that had addressed these issues. The Auditor-General’s office had learnt much about the challenges that existed within the Department. Officials from the highest level of both the Department and the Auditor-General’s office had to ensure that these problems would not recur. He was prepared to commit to getting personally involved in order to iron out some of the problems of documents and communication.

Mr Sibande thought that the Committee was on the right track. The Auditor-General’s office particularly needed to have a proper monitoring system to ascertain that duties were appropriately delegated. It should check up on the firms used. He requested both offices to work together to correct the mistakes because it reflected negatively on the Committee as well.

Mr Khambule said that the Department was committed to resolving the issues and would make a point to co-operate with each other. It would not want to burden the Committee with the same problems again.

Dr Huang asked when the Department would no longer be considered high-risk. The Chairperson responded that this issue would be dealt with at a later stage.

In conclusion, the Chairperson said that the Committee had the responsibility to call on anyone when issues arose. The current tensions were unnecessary. The Committee accepted both offices’ commitment to resolve the issues and to not let it happen again. Members would meet with the Department again to discuss matters relating to their internal controls. Spending more money than necessary due to a lack of communication was serious. Someone would have to take responsibility. The Department would be called to explain where they would get the money to pay the additional fees they had not budgeted for.

The meeting was adjourned.