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STANDING COMMITTEE ON PUBLIC ACCOUNTS
18 October 2006
GENERAL AUDIT REPORT FINDINGS: AUDITOR-GENERAL BRIEFING
Chairperson: Mr TN Godi (PAC)
Documents handed out:
Executive Summary of General Report Findings
The Auditor-General presented a briefing on the executive summary of the general audit report findings. He illustrated the main challenges facing state departments regarding auditing and asset management. He elaborated on the root causes of the current problems that lead to the increase of audit qualifications.
Members raised concerns about asset management, the ineffectiveness of internal audit committees, departments that had been let off the proverbial hook and international benchmarking.
Mr Godi welcomed Mr Shauket Fakie, the Auditor-General, Mr Freeman Nomvalo from National Treasury South Africa (NTSA) and Members to the meeting.
Mr Fakie commenced by referring to the Audit opinions of 2005\06 that had been analyzed and stated that the situation has deteriorated. Furthermore, he stated that the challenges ahead include: communication and participation of senior management in the audit process; the leadership role of National Treasury including guidance and advice to departments as well as other areas, such as IT systems and performance information. He referred to the financial capability model as being the basis and instrument of Auditing and Monitoring. He explained that departments and other entities are currently operating on level two. However, according to their strategic plan they should have been operating on level three, which would indicate that the system works well and that skilled employees are functioning in a controlled environment from which quality information leads to quality decisions. According to the strategic plan, levels four to six would be implemented in the near future.
Mr Fakie continued by pointing out the root causes of the strategic issues. The first root cause is a people related issue. The lack of skills that exist in departments reflected on the lack of capacity and the high level of vacancies, specifically in the financial sector and at senior levels. Furthermore, there is a need for an extensive amount of training and skill building. Currently, there is little guidance, monitoring and checks and balances. Performance management systems are an issue, since inadequate weight is placed on the system and is not taken seriously. This leads to unintended consequences, where departments and other entities become defensive, subjective and personal. Therefore it becomes difficult to audit in the mentioned environment.
The process perspective can also be viewed as a strategic root cause. Some departments are ineffective and non-strategic due to processes such as cumbersome and time-consuming paperwork. Furthermore, the administrative processes in place hinder decision-making. Moreover, there is a need for a system of checks and balances, because of the current lack of monitoring and reconciliation. Departments and other entities do not conduct monthly monitoring, which would enable quarterly reports and finally collectively facilitate the year report. In-year monitoring is generally insufficient. Lastly, the three IT systems, namely BAS (Basic Auditing System), Persal, and LOGIS (Logistical Information System) that are currently in place have presented numerous complications.
Finally, the governance arrangement can also be considered as a root cause. The accountability of departments and other entities need more emphasis and consequences must be taken seriously. This ties in with issues relating to delivery by government as well as performance management systems, as mentioned above. With regard to the audit committee, good government structures are in place and they are functioning well. However, their effectiveness is questionable.
Mr Fakie noted that root causes would not have been of such a concern if senior personnel were more actively involved in the process. In-year monitoring is currently insufficient and inadequately executed. The guidance provided to departments on procedural conduct is distributed too late. This, therefore, impedes the whole in-year monitoring process. One of the fundamental requirements to review annual reports of departments is to benchmark against International standards. It is crucial to analyze the content of the annual reports and to ensure that it reflects previous reports and paperwork. Departments struggle to conduct in-year monitoring efficiently and are often unable to meet deadlines. For example: seven departments provided their annual reports after the audit report had been signed; 20 departments had not handed in their reports by the end of August 2006, when the audit report was printed. The annual budget has increased by R80 billion in 2006. Of the allocated funds, 67% is spent on transfer payments, 19% on personnel and 14% on other.
Inconsistent trends regarding department qualifications were another point of concern. Qualifications per department has risen from 0.65 (2001) - 2.2 (2006). Eleven departments received qualifications in 2006. Mr Fakie pointed out that he has made an analysis of the past six years and thereby finds the inconsistency troubling. The Department of Home Affairs has received qualifications every year, as well as Correctional Services. The Department of Health received four, Department of Justice five, Parliament three consecutively, Department of Labour two, and Department of Water Affairs and Forestry four. This was a problem from a sustainability point of view. Thus, Mr Fakie considered the various reasons for these issues. The two principal reasons were asset management and accounts receivable and revenue. Since 2001, they had to deal with thousands of matters of emphasis, which had reduced to 314 issues in 2006. The main matter pertains to personal asset management. Traditional matters emphasised have also been a factor in qualification issues regarding personnel and other expenditure as it relates to the Division of Revenue Act (DORA). Lastly, IT systems and the internal audit committees have also contributed to the problem. The number of issues have increased marginally from 261 (2005) – 314 (2006), of which 46 are related to IT systems. This increase is most significant in the area of justice, protection, economic services and infrastructure. Mr Fakie emphasised that the bar must be raised and that incremental growth must be attained.
Mr Fakie stated that a disclaimer was issued to the Independent Complaints Directorate (ICD) and six other public entities: South African Local Government Association (SALGA), Agricultural Research Council, Road Traffic Management Corporation, Cross Border Road Transport Agency, Information System and Electronic and Technologies Training Authority, and Construction, Education and Training Authority. Furthermore, it was mentioned that Correctional Services and Home Affairs displayed the most qualification issues, whereas the Public Service Commission and Public Enterprises provided clean reports.
Quality and timeliness of audit information was a matter of concern. Submission of substandard financial statements and the late submission of supporting documentation resulted in material amendments to financial statements after submission. In addition, the lack of involvement of senior departmental management affected the audit process. He made the important point that forums such as audit committees and audit steering committees are not being used. Since 2006, Audit reports of Departments must be submitted on the 31st of May, whereas in previous years Departments could still amend reports after the deadline. This contributed to the increase in qualifications. Mr Fakie noted that auditors are often blamed for misunderstanding the departments and their processes. However, the annual audit report is based on evidence and departments must provide counter-evidence in order to change the report. He pointed out that numerous departments have been let off the hook regarding asset management. The Auditor-General went back to the National Treasury and re-emphasised the necessity of distributing correct training guidelines for departments. The LOGIS programme once again proved to be problematic. The reason for letting so many departments off the hook was that too many departments displayed the same problems regarding asset management. He recommended that a senior auditor should be present at future SCOPA hearings with departments regarding asset management.
Mr Fakie felt that departments and other entities provided too little information regarding their performance, which impedes the process. In 2006, 17 departments did not submit their report until two weeks after the 31st May deadline. Regarding performance information, National Treasury provided six criteria which are supposed to link the strategic plan and budget of each department with the annual report.
In conclusion, Mr Fakie expressed his gratitude to all role players and hoped for the completion of the Audit Report to be presented to Parliament before the end of October.
Mr P A Gerber (ANC) asked which departments had been let off the hook. He stated his concern about the disclaimers, of which most are very small companies not audited by the Auditor-General. Very little information has been presented to the Committee about these disclaimers.
Mr E W Trent (DA) was pleased that the bar has been raised. However, the Public Finance Management Act (PFMA) was supposed to reduce the amount of paperwork and improve on management. Therefore, Mr Trent wondered whether the problem of too much paperwork is a strategic issue.
Mr G W Koornhof (ANC) praised the Auditor-General for doing a great job within a very capable office. He expressed his regret at the Auditor-General’s end of term. He required more information on the leadership role of the National Treasury, which Mr Fakie considered as one of the four challenges ahead. Regarding Audit committees, he wanted to know who is responsible for their effectiveness and whether SCOPA has a role to play.
Mr E T Vezi (IFP) also congratulated the Auditor-General for raising the bar. However, he was confused about the financial capability model, and wanted to know if movement is possible between level one and two. Further, he asked if the Auditor-General was aware of international benchmarking which could provide additional guidance.
Mr Fakie replied that he does not have the names of the departments who have been let off the hook. However, they would be able to identify them in the report, since there will be no mention of asset management.
Regarding the six public entities, the Auditor-General made a detailed analysis when they were independent using external auditors as required by the Public Auditor Act. The current criteria ensured that auditors are creditable. He stated that there were procedures in place and that they are dealing with the issue.
Mr Fakie insisted that paper shuffling is a strategic issue and that guidance is crucial and should be given to departments. He stated that there is still an old mentality of wanting to be told what to do. Departments wanted to take the initiative, but the National Treasury had to provide guidance.
The Public Service Commission has provided some guidance which has become an operational issue between management and staff regarding performance management. The National Treasury should be able to comment further since their guidance has been too slow. Furthermore, audit committees need to participate in the audit process itself. Directors-General were a problem since they are responsible for the establishment of audit committees and for failing to involve the committees in the auditing process. SCOPA’s role is to monitor and to improve upon these processes.
As for raising the bar, it cannot be measured clinically or scientifically. It is a progression from year to year. He expressed his optimism and that there were improvements generally speaking. The only problem is the pace of improvement. At least each department has descriptive asset registers although it currently needed values. DORA has contributed to the general improvement.
On the financial capability model, two departments have put in extraordinary effort, namely the Department of Justice and the Department of Water Affairs and Forestry. Generally departments are dealing with qualifications on a symptomatic level instead of dealing with the root issues. In terms of International benchmarking, it takes between five to ten years to see drastic improvements. Mr Fakie stated that the current model is benchmarked on the Canadian model. He suggested that Members should not be overly optimistic since South Africa has a long way to go in order to achieve similar standards.
Mr Fakie encouraged Mr Freeman Nomvalo from National Treasury South Africa (NTSA) to elaborate on the position of the National Treasury.
Mr Nomvalo stated that Mr Fakie is generally correct. However, he considered the PFMA as posing a future challenge. With regards to asset management, four years ago they commenced with the Canadian financial capability model and implemented it in 2004. Case studies were conducted in 2005 within each department and the National Treasury in order to design a tailor-made guideline for each department and province. Yet, departments still do not understand how the asset management systems work. He felt that it is a key challenge to make auditing a continuous process within departments. Most departments do not have complete registers and do not understand the process. Brain-drain poses another problem, because some officials undergo training, but due to reshuffling within the department, other less skilled officials end up doing the work. Some audit committees do not understand their role and the biggest challenge for the National Treasury is that departments take up challenges and submit to their authority. Senior personnel must take responsibility and must be held accountable. Mr Nomvalo would not have let anyone off the hook, in order to deal with the issues at hand. He felt that the process is correct, but that the problem lies with lack of capacity of personnel and their skills, as well as taking in-year auditing seriously. Finally, he found it troublesome that some auditors of departments deny the Auditor-General access to their meetings, especially those who do not attend those meetings themselves.
The meeting was adjourned.
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