New Auditor General on National Audit Outcomes 2005-06

Meeting report

STANDING COMMITTEE ON PUBLIC ACCOUNTS (SCOPA)
17 January 2007
NEW AUDITOR GENERAL ON NATIONAL AUDIT OUTCOMES 2005-06

Chairperson: Mr T Godi (PAC)

Documents handed out:
Overview of the Audit outcomes for the 2005–06 cycle
General Report of the Auditor General 2005-06 cycle Part 1, Part 2, Part 3, Part 4, Part 5
Draft Committee Programme 2007 as amended by this meeting

SUMMARY
The newly appointed Auditor General, Mr Terence Nombembe, briefed the Committee on key elements of the latest General Report of the Auditor General. He focussed on the audit opinions of national departments and public entities, the high percentage of qualified findings and matters of emphasis, and the performance information review. Emphasising the need to audit at the more sophisticated Levels 4 to 6, he highlighted the lack of strong managing processes for the persistent high levels of qualified audit findings. This lack had to be addressed. He also identified the need for cooperation between the Standing Committee on Public Accounts and the Portfolio Committees in Parliament in vetting the strategic objectives of departments. Members raised questions about repeated qualified audit reports by certain departments, realistic expectations for department performance and benchmarks set by other countries.

MINUTES
Chairperson’s opening remarks
The Chairperson welcomed members after the parliamentary recess. He hoped that the Standing Committee on Public Accounts (SCOPA) would continue its work with the same attitude, effort and energy members had displayed during 2006. The level of understanding and unity amongst members had contributed to the successes the Committee had enjoyed.

He pointed out that time would be the biggest challenge confronting the Committee during the coming session. Prior to the recess, SCOPA had identified about 40 departments and public entities that would appear before it in a series of public hearings, which had been scheduled between the end of January and mid-March. Adhering to that schedule would require much dedication from members.

Urging members to keep their eyes focussed on the road ahead, he said that the Committee would continue its “unwavering commitment towards fighting the ills and the wrongs that occur in the administration and management of public funds”. He reminded them that some commentators had agreed that SCOPA had turned a corner and was now on the road to success.

The Chairperson then welcomed Mr Terence Nombembe to his first meeting with SCOPA in his position as Auditor General. The former Auditor General, Mr Shauket Fakie had, in October 2006, given the Committee an overview of the audit outcomes for the 2005/06 cycle. As the General Report had not yet been released at that stage, it was not presented. Mr Nombembe’s presentation would assist the Committee in identifying the overarching challenges present in the management and administration of public funds. Such information would be of great assistance during the upcoming hearings with departments.

Auditor General’s presentation
Mr Nombembe noted that Mr Fakie had, in October 2006, gone through much of the detail contained in the General Report, which had since been tabled before Parliament. He had touched quite extensively on the “strategic drivers of the key trends” reflected in the report, had given specific details on the outcomes of certain specific departments and had highlighted the important role National Treasury would play in improving matters. SCOPA had engaged with the then Auditor General and the Accountant General on specific areas that required clarification and guidance. Mr Nombembe would focus on the key strategic messages contained in the report and on what actions had to be considered in dealing with the findings.

Talking to the summary of the audit opinions of national departments, Mr Nombembe explained that although at 12% the number of unqualified audit reports had doubled since the 2004/05 cycle, that number still remained low - the noticeable improvement was “not exciting”.

It was important to note the interplay between the reports that had been qualified and the ones that contained matters of emphasis. Regardless of whether a department received a qualified audit report or whether the Auditor General had identified matters of emphasis, areas of concern had to be addressed because they dealt with serious matters. The only difference between the two classifications was that qualification items would give rise to an error in the financial statements while, matters of emphasis would not give rise to errors in the financial statements but were nevertheless matters of concern that had to be corrected.

Mr Nombembe suggested that role players (Office of the Auditor General, the Committee and departments) might consider applying their minds to what they would consider a satisfactory level for the total percentage of unqualified reports. This would mean that as SCOPA’s interaction with the departments began, they would have an objective to move towards. Without a clear focus, its work would get done but there would be no accurate measure of how successfully it was being done.

Mr Nombembe emphasised that the unqualified audit reports were an important pre-requisite for the speedy movement to auditing at Levels 4-6 where the effectiveness of the management and the economy with which the financial resources and government resources were managed were audited. He agreed that, as Mr Fakie had previously clarified, when high levels of qualification and emphasis were reported, efforts to audit at these much more sophisticated levels would not bear any meaningful results. He reiterated that it was important to have a clear target for when auditing at these levels should be possible.

Moving to the summary of the audit opinions of national public enterprises, Mr Nombembe said that even though the level of unqualified reports was higher than in the case of national departments, it still was not satisfactory. As far as public enterprises were concerned too, it was necessary to decide what level of unqualified reports one wanted to achieve and by when. He conceded that at 32% the level of cleanliness was commendable when compared to national departments and imagined that the results were compatible with the available resources for managing their financial affairs.

Mr Nombembe explained that trends played a role in the portrayal of Government’s image and had to be monitored on an ongoing basis. Drawing members’ attention to the fact that about 10% of the public entities’ reports could not be audited, he pointed out that the timeous availability of information to the Auditor General and Parliament, was one of the challenges that hampered trend analysis.

The presentation also touched on the deeper reasons that underpinned the qualifications and modifications (for national departments) reflected in the report (slide 3). Public entities had not been included in the analysis because their reporting format had not yet been standardised. Mr Nombembe felt that reporting should be uniform in order for the Committee to engage with public entities in a much clearer and focussed manner.

The report spoke of a high number of Level two findings. Such findings emanated from situations where mature managing processes were not yet in place. There was thus a high risk of things going wrong since processes were not developed enough and thus could not give a high level of stability (as far as the resources of that entity were concerned).

Here too Mr Nombembe proposed that there should be a clear target for an acceptable percentage of Level two findings. Considering the high level of such findings there was still a great risk of mismanagement of public funds. He felt that they should be eliminated altogether. The fact that 70% of the departments that had been audited were classified at Level two was a matter of grave concern.

Level three findings referred to situations where mature management processes were in place but officials failed to comply with them. Such situations were unacceptable. Mr Nombembe said that the information he was sharing was critical to the effectiveness of the Committee as an oversight body as well as to the role of the auditors, and the effectiveness of the executive in terms of understanding the underlying factors that gave rise to audit concerns. Understanding the definitions and concerns would ensure that all parties involved had a similar way of looking at the concerns raised in the report.

As already pointed out by Mr Fakie, issues related to officials’ ability to perform their duties came across quite strongly in some of the findings. Vacancies went a long way towards hampering effectiveness. In some instances, officials were not adequately equipped to perform their task. These were elevated quite sharply in the report, especially in those instances where competency was the root cause for some of the problems.

Performance management was important in terms of the performance management system in place, as well as the manner in which performance assessment was done. The extent to which issues raised in audit reports had been addressed during the performance management process, was crucial. One had to determine whether performance concerns raised by the Auditor General had been addressed.

Mr Nombembe said that the significance of the Performance Information Review stemmed from a requirement of the Public Audit Act. The Auditor General was required to, in addition to providing an opinion or conclusion on financial matters, also provide a conclusion on financial management in general and in particular on the achievement of critical objectives.

The Office of the Auditor General had for the past three to five years been preparing themselves to cover these areas in its audit scope. This audit approach had been introduced in a phased manner. Up until 2005/06 the Auditor General had reported factually on what departments and public entities reported in their annual reports. This approach did not touch on the extent to which the information provided was supported by the underlying record. Such an approach would be introduced in the future.

Mr Nombembe explained that for the past three years the Office of the Auditor General had been focussing on getting departments to report in terms of National Treasury requirements. The trends reflected in slide 4 showed that there was a high level of understanding and discipline in reporting in this manner. The first General Report had reflected much lower levels of adherence to these guidelines. He was pleased that over the years the situation had improved quite extensively - the latest report showed that at least 70% of departments reported in accordance with the guidelines.

Drawing members’ attention to the statistics on reporting in terms of criteria 4 and 6(b) he explained that criterion 4 related to the consistency with which departments’ results were reported throughout the year. Only about half of the departments managed to report information consistently (on a monthly, quarterly, annual basis).

Criterion 6 required that departments and public entities report their actual performance against their targets. The figures for criterion 6(a) indicated that most departments were doing this. The figures for criterion 6(b) however highlighted that where there were discrepancies between the budget information and the actual information, there was very little compliance as far as explaining clearly what those discrepancies related to. He suggested that when departments and public entities appeared before SCOPA, members should make reference to some of these key elements. It was important that basic reporting requirements were complied with, so that when underlying records supporting the information were investigated, one did not find discrepancies.

Mr Nombembe went on to explain that there was a difference between performance auditing and performance information auditing. The latter referred to the auditing of information on service delivery as promised by the departments, that is, to what was this information reported in their annual reports.

In future the factual reporting of what these entities reported against the treasury guidelines, would be replaced with an approach that would interrogate the extent to which that which had been reported was supported by the underlying records. Only then would a conclusion on the state of affairs be drawn. This conclusion would be comparable to the conclusions that were currently being issued on the regularity audit where an opinion was expressed on the extent to which the reported information was in line with the underlying records. For this process to take place there would need to be clear guidance from National Treasury on how that information should be reported and presented by departments and entities. National Treasury and the Public Service and Administration Task Team were currently in the process of developing such an approach. He could not comment on when it would be ready for implementation but hoped that the Minister of Finance would be able to, in the near future, make an announcement on when this information should be auditable.

Another aspect highlighted in the discussion with Mr Fakie and the Accountant General was the requirements of the Public Finance Management Act which had different timelines for annual reports and for the audit of financial information. At present audit information had to be submitted at the end of May whereas the performance information review was done in around August resulting in this information becoming available too late to be included in the audit conclusions. If the audit office were to be expected to report on this performance information at the time they finished their PFMA audit, it would be necessary to have consistency in the timelines for these two sets of information.

In 2005/06 departments had, based on arrangements with the Auditor General and guidance from National Treasury, cooperated in supplying information earlier. These arrangements and guidelines were however not supported by a legislative requirement. The PFMA might have to be amended to correct the incompatibility of these reporting expectations.

In conclusion Mr Nombembe highlighted the importance of cooperation between all three parties in the governance framework, in order to improve governance and to achieve the targets highlighted in the Chairperson's opening remarks. He stressed that the information received by the Auditor General and the Committee as the oversight structure, had to be consistent so that at no point information was seen in a different format. If the information was underpinned by the root causes that gave rise to a particular problem, things would be looked at from the objective of finding solutions rather than debating issues for the sake of debate.

The simplification of that information, making it clearer and more understandable, would assist everyone in “improving governance and thus the image of our government and country as far as the financial management of public resources was concerned.” This message had to be made clear during the Committee’s upcoming hearings. He added that the support necessary from National Treasury, internal auditing and audit committees could not be emphasised enough. It was important that the key executive accounting officers and authorities had strong support mechanisms to help them meet governance requirements. The clarity, simplicity and understandability of the messages emanating from their audit reports could not be emphasised enough. The effectiveness of the hearings was important and focus should be directed to what the root causes and the underlying drivers of the concerns were so that clear, simple, understandable and easily implementable resolutions could be drafted.

Discussion
Mr E Trent (DA) noted that page 9 of the General Report showed that some departments repeatedly received qualified audit reports and that some had actually deteriorated. This was a matter of concern particularly because some departments such as the departments of Defence, Correctional Services, Home Affairs, Justice and Constitutional Affairs, Health and Labour, were of critical importance to the country. Despite the fact that SCOPA met with some of them on a regular basis there was no real improvement in their reports.

Mr Nombembe recalled that this matter had been debated quite extensively with Mr Fakie in the October 2006 meeting and agreed that the matter needed urgent attention. He felt that the situation pointed to a need to focus on what the underlying drivers of repeated qualification were. Resolutions taken to address issues had to focus on adequate support and should have the right focus and emphasis. He argued for consistency in the manner in which departments, the Auditor General and the Committee as oversight mechanism dealt with and received information. He emphasised that all three players had a role to play in minimising consistent qualification and believed that the upcoming hearings would play an important role in re-examining the process. One also had to make sure that when dealing with issues one did so with the intention of minimising repetition. The Office of the Auditor General would do its part in ensuring that briefing sessions highlighted these aspects elaborately. The day before, in fact, the matter had been highlighted in a briefing session to the executive team of his office.

Mr Trent noted that Figure 3 in the General Report contradicted the information in the presentation which indicated that there had been an improvement in the level of matters of emphasis identified between 2004/05 and 2005/06.

Mr Nombembe agreed the information appeared to be inconsistent and would look into the matter. He said that the information in the report was accurate, but that the manner it had been packaged in the presentation that day had to be explained. The matter would be picked up with the reporting team.

Dr E Nkem-Abonta (ANC) wondered how much time the Auditor General thought a department or public entity would require to up their performance in order to reach Level 4 auditing. SCOPA needed this information to make sure that it did not push them too hard. He asked if Mr Nombembe could give a response based on benchmarks set by other countries.

Mr Trent recalled that Mr Fakie had, in a previous briefing, indicated that one of the reasons for the increase in qualified reports was that the Auditor General’s Office had lifted the bar and was less lenient. In the past they may have sent reports back to departments so that they could be corrected and now no longer did so. He wondered whether Mr Nombembe felt that the Committee might have unrealistic expectations.

Mr G Madikiza (UDM) asked what the average threshold for unqualified reports was in other countries. This information was important if one were to set measurable, achievable and reasonable thresholds for South African departments.

Mr Nombembe replied that from his interactions with other supreme auditing institutions and other auditors general he learned that countries like Canada, Australia and New Zealand did a large proportion of performance auditing but that large number of their audits were not done by their auditors general but could be easily outsourced to audit firms. This was possible because the information and the manner in which it was reported were basically clean since their governments had matured in terms of their practices and resource management. Accounting for the resources that had been utilised was basically second nature. South Africa needed to get to that position as it would allow for more focus on Level 4 findings.

It was difficult to say how long it would take to reach that level. Research into this was currently underway and he did not have a specific answer. He felt that members had made an important observation. He was pleased that they had highlighted the need for a clearer understanding before making specific commitments. His Office would in due time give feedback on this research.

Dr Nkem-Abonta noted that the Auditor General had pointed to competence as a contributing factor when it came to the reason for slow progress. He could not recall SCOPA ever recommending that competency needed to be improved. Its recommendations related mainly to compliance, processes and transparency. He was not aware that much emphasis had been put on hiring people with the requisite experience and competence.

In addition the Auditor General had said that performance management was a problem. This indicated that officials in the management spheres, tasked with managing performance, were not doing their work. SCOPA should consider making recommendations that point to the need of managers to manage. If managers failed to do so they would have to bear the consequences.

Mr Nombembe said that the PFMA aimed at encouraging and allowing managers to manage. If the root causes of concerns could be classified as Level two, one had to ask to what extent practices were in accordance with the PFMA, which was meant to eliminate all Level two findings. It was important to, during the engagement with departments, elevate the correlation between the PFMA requirements and audit findings. He agreed that sharper focus should be given to the role of the accounting officers.

Dr Nkem-Abonta noted that so far the Office of the Auditor General had been involved in “consistency auditing”, that is, measuring if departments met their objectives and delivered what they said they would. He wondered how one could ensure that departments requested sufficient money to deliver on those promises and adhered to the principle of value for money. While he agreed that in government it was difficult to do, it was of central importance to know how to measure value in order to maximise value for money.

Mr Nombembe said that this raised interesting questions around the validity and robustness of performance objectives. Were they meaningful enough to achieve real service delivery?

He thought it was an ideal opportunity to identify the need for cooperation between SCOPA and the Portfolio Committees in Parliament. When a department presented its strategic plan to the relevant Portfolio Committee, the robustness of the objectives had to be tested. Cooperation between SCOPA and the Portfolio Committee should be effective given the move towards service delivery audits and results.

Mr Madikiza wondered what the reasons for the increase in the number of unavailable reports from public entities might be.

Mr Nombembe thought that one of the reasons was the incompatibility of the Public Audit Act requirement to audit the information earlier, with the requirements of the PFMA which allowed for that information to be presented later towards the end of August. This was a fundamental contributing factor and if it could be resolved, matters would improve. At the moment they were dependent on the departments and entities to supply the information earlier than the prescribed deadlines.

The Chairperson said that although the General Report was voluminous, the strategic approach (as outlined by Mr Nomembe) would help to focus on areas of concern. As they went into the hearings members would be able to focus on some of the strategic issues.

He pointed out that part of the problem was that when officials were called to appear before SCOPA, they did not accept that there were problems that needed to be addressed, but rather spent time trying to deny that those problems existed. Denial of the true situation remained a big problem. He agreed that everyone involved should join hands in trying to address this key challenge.

Questions around vacancy rates, skills and systems and processes would be areas of focus as the Committee interacted with departments and entities. If departments and entities had to operate with such handicaps, there was no way that they could be effective.

He said that SCOPA would expect departments and entities to have targets that they could achieve. Small improvements in areas where there had been little achievement would not be accepted. He did not think that SCOPA should operate in a manner where it set acceptable levels for qualified reports. The low level of clean reports was “horrible, horrible and totally unacceptable” and that “there was nothing to be happy with, at all”. He added that the Committee always sought an approach that was “consistently guided by the political imperative of serving our people and putting their needs at the centre of all our activities in public administration.” The invaluable assistance provided by the Auditor General’s Office would greatly assist the Committee. This meeting would be the first of many and he hoped that the relationship would be as fruitful as the Committee hoped it to be.

Committee Programme for first session of 2007
The Chairperson said that the programme adopted towards the end of 2006 would have to be changed due to a Cabinet Lekgotla ending on 25 January at which directors general were required to be present. The hearings planned for 24 January would thus need to be rescheduled to 2 February. The rest of the programme would remain the same. Hearings would wherever possible be scheduled for both Wednesday mornings and afternoons.

The Committee would meet on Thursday 1 February with the Minister of Minerals and Energy to discuss SCOPA’s 62nd Report of 2005.

The Committee’s secretary would make a list of reports which had not yet been received. A letter had already been written to the Speaker about this but no response had been received at that point.

Mr B Pule (UCDP) asked about the possibility of shifting the Friday hearings to Monday afternoons.

The Chairperson said that to accommodate those members who travelled on Friday, hearings would take place only in the morning. Mondays were normally used for political party study groups. Parties normally used the study groups for planning their participation in the week’s committee meetings. The matter could be debated to see if a solution could be found.

Mr Trent said that Mondays were not a problem for Democratic Alliance members of SCOPA as they were dedicated to only this committee. He also noted that the Committee had made good progress with the departments falling into categories C and A. He was concerned about those in category B however. The Committee needed to intensify its preparations for their interrogation. He did not want to see the Committee fall behind in making resolutions related to this category.

The Chairperson thought the concern valid. The Committee needed to determine how many departments were in that category so that appropriate issues could be focussed on.

Mr Trent thought it useful to use the Thursday 25 January meeting, for discussing how to proceed.

The meeting was adjourned.