A summary of this committee meeting is not yet available.
HOC COMMITTEE ON THE REVIEW OF STATE INSTITUTIONS SUPPORTING CONSTITUTIONAL
14 March 2007
OFFICE OF THE AUDITOR GENERAL
Chairperson: Prof K Asmal (ANC)
Documents handed out:
Office of the Auditor General response document to Committee questionnaire
The Committee questioned the Office of the Auditor General on the reporting lines with Parliament, the meaning of its duty to check the "audit regularity of departments", the meaning of the terms used by the AG when giving reports, the distinction between regularity and performance audits, and the specific requirements of the latter, and how the Auditor General would deal with recommendations for improvements. The time spans for the work, the terminology used, the scope of the audit and compliance by Departments with acceptable standards were addressed. Further queries related to the relationship with Treasury and the Office of the Accountant General, performance of provincial departments and local government, financial performance against budgets, referral of matters to the National Prosecuting Authority, the competence to undertake environmental audits, international audits, the external auditors of the Auditor General, and the roles and relationships with other bodies, including conclusion of formal relationships. There was discussion whether the socio-economic rights functions of the Human Rights Commission and the Auditor General’s focus would overlap. The relationship with provincial legislatures was examined. The Auditor General was asked if there were impediments to its independent functioning, and the role of the media, funding, technical assistance to departments, interaction with parliamentary committees and the audit processes were debated. Institutional governance and staff strategies, including disclosure and accepting other work, were questioned.
The Standing Committee on the Auditor General reported briefly to the Committee on the framework, and the scope of the Committee’s work. The AG would be responsible for the administration of the Office and the Deputy AG would be implementing policies. The audit Committee would exercise oversight of the management, and the Standing Committee exercised oversight responsibilities over executive performance, certain important executive appointments, providing an opinion in the nature and the scope of audits performed by the AG, and opinions on audit fees, the standard and level of compliance with auditing. The Committee could provide an opinion but could not interfere in the work of the AG. The delegated authority was described. She noted that Parliament needed to develop mechanisms that could be used at this Standing Committee and other committees to protect the independence of the Auditor General. Such mechanisms needed to be included in the Rules of Parliament and clearly understood by the Executive. The Committee would consider the matter.
The Chairperson noted that the Committee was operating under set terms of reference and also had regard to the Annual reports and the ten year report compiled by the previous Auditor General..
Mr Chairperson asked if the Auditor General saw anything anomalous in the reporting lines between the Office of the Auditor General (AG) and Parliament, particularly in respect of the oversight functions.
Mr Terence Nombembe, Auditor General, stated that his interpretation was that Parliament had a general oversight function to ensure that the funds allocated by the government were used in keeping with proper accounting practices and good governance. The Auditor General had been selected as the best placed institution to be able to perform this function and to report on transparency and good governance.
The Chairperson noted that the alternative would be to have a special system which would not have the culture and tradition of a public body. He noted that the primary function of the AG was to check the "audit regularity of departments" and asked for clarity on what this meant.
Mr Nombembe meant that regularity referred to the financial management audit, which would be done in conjunction with other bodies. The Auditor General would also attend to other types of audits, which he would detail later. The audit as envisaged in the Constitution was a regularity audit and the AG, having carried out this audit, would report to Parliament. That was the AG's first priority and 90% of the resources would be devoted to auditing financial management of government departments. The AG was cognisant of the importance the work, which was also linked to service delivery by government. Performance auditing would look at the extent to which money was spent efficiently and correctly.
The Chairperson asked for detail on what was involved and what the terms used in the reports by the AG meant.
Mr Nombembe replied that the regularity audits were classified into three broad categories. These referred to the extent to which the AG was satisfied with the information provided to support the financial reporting by government departments. An unqualified opinion meant that the AG was happy that the information was correct and that it was supported adequately with the underlying accounting records and information. The AG could not ever confirm absolutely conclusively that everything was totally in order, but there was nothing material that led the AG to another conclusion. The second form of report was the qualified audit, which would result when the AG was uncertain about the credibility of information or availability of underlying proof to support the accounts. This would apply when the majority of items were properly supported but some were not. The third and most onerous qualification was a disclaimer report, or an adverse opinion. This would be given when the majority of items reported could not be supported adequately by underlying records. Therefore the AG could not comment on the accuracy of the financial records at all. Finally there were also instances where the findings could be material, but would not apply to financial information. The AG could give an unqualified opinion on the financial statements, but then draw the attention of Parliament to the fact that although the reports were properly supported there were still underlying concerns. The Portfolio Committees knew that these matters of emphasis were to be taken as seriously as the qualifications. They might affect compliance with regulations, other laws or the effectiveness of the systems of internal control. they might indicate that the controls were not sustainable and that there would be problems shortly.
The Chairperson asked if a disclaimer would be related to the operations of the department, and whether there was blurring of the regularity and performance audits.
Mr Nombembe replied that the AG was of the opinion that it should be moving in the direction of comprehensive reporting. When it offered a report on financial performance it should be giving clearer reference to some of the underlying causes of some the problems. They might relate to not getting information because there were not enough people to do the job, or that people who were employed were not adequately trained or monitored. At that level the AG was trying to evaluate how significant or simple the solution might be.
The Chairperson referred to performance audits, which were intended to assess the effectiveness and efficiency of services. He asked, if the AG were to do such audits, if they would not impose a large burden or lead to a tension between the departments and the AG. He enquired what criteria would be used to look at the performance audits.
Mr Nombembe replied that he did not believe this would raise tensions. It was his understanding that these audits would add value to departments because their systems would be made efficient and resources could be better used. An objective assessment should be welcomed by the department.
The Chairperson said there was some concern in the Standing Committee on Public Accounts (SCOPA) that some departments had not reached a sufficiently developed level to warrant such performance audits. He understood that the Public Audit Act (PAA) gave the AG licence to do so, but the issue was whether there was capacity in the departments that would make it meaningful.
Mr Nombembe elaborated on what was intended to be achieved with each type of audit, to clarify what would be the appropriate stage at which the AG should be increasing the scope of its audits. He said the SCOPA comment was valid. Before a performance audit could be considered, some basic conditions must be fulfilled, which would include an unqualified report at a regulatory level. There should be no doubts about compliance and the accuracy of the information supplied. Once that was achieved then the AG would think that more stringent accountability requirements would be appropriate. It had shared with SCOPA the model for this "level 3 maturity" which assumed the department was already compliant with robust procedures, policies and strategies.
The Chairperson noted that the business plans would then be taken into account.
Mr Nombembe said that departments must have reached the acceptable level of maturity. He illustrated the difference by taking a hypothetical example of a Department of Health that handled medical supplies. The typical regularity audit would look to the extent to which the costs of those medical supplies were adequately accounted for. If that was correct then the audit performance would look at the extent to which the objectives of providing the medical supplies had been achieved, by examining the strategy plans and seeing how far they had been met. National Treasury (NT) had already drawn up a set of useful guidelines on how to draw up a strategy plan, and almost every department was complying with around half of those guidelines, but not complying adequately on the other half. Some Departments could not explain their strategies against the plans. The third level of audit would look to whether the Department, in following the plans, had achieved economic effectiveness, and whether it had spent R1 million where it should only have spent R750 000, and whether there were proper economic measures in place to ensure that it would consistently do so. This would require far more specialised people.
The Chairperson asked how the performance audits would be assessed.
Mr Nombembe replied that the AG would draw a conclusion, but it had not yet determined what standards would be used to name the conclusion. Those conclusions would be based on the objectives it was trying to achieve.
The Chairperson asked if recommendations would be made for improvements.
Mr Nombembe responded that the AG already made recommendations in the management letter to departments. The audit report contained the overall conclusions. All the issues were already being dealt with.
The Chairperson had the impression that the executive would not receive any recommendations in the reports but the recommendations were intended to assist in achieving compliance in the next audit. He asked if the recommendations were in the public domain and what was the rationale.
Mr Nombembe said the items would be grouped or clustered into common trends. All the issues giving rise to the qualification or disclaimer would be extracted. The same issues would be in the management letter but perhaps in more detail. All that was needed to arrive at an opinion would be in the audit report. It would therefore include all matters that would confirm whether the AG had been happy with the financial statements. The matters that would not influence the audit opinion were matters that should be attended to before they generated concern.
Mr Nombembe further clarified that the AG was currently allocating about 8% of the human resources to the performance audits and the decision on what should be covered was determined by the relevance of the topic. The AG would focus on information emanating from Parliament, the State of the Nation address, deliberations at SCOPA and the interactions with the Executive to pick up the most important issues.
The Chairperson noted that the entity being audited would pay for the audit.
The Chairperson asked what would be the time spans between initiating and concluding the audit. He pointed out that many of the matters had already been corrected.
Mr Nombembe replied that the nature of the performance audit meant that it could take ten months to a year, as compared to the four to five months for a regularity audit. A performance audit would not be year-specific. In most instances, the performance audits served as the basis to take corrective action.
Ms M Smuts (DA) asked if it would not be useful to refer to these audits in terms that made it more clear that they were in fact assessing value for money audits. The public demand for performance audits resulted from the concerns about economic efficiency and effectiveness. The performance audit was really a value for money audit. Compliance was another matter.
Mr Nombembe confirmed that this was correct. He agreed that the terminology was not always clear and the AG was working on simplifying it. It regarded all audits to be "value for money" in the sense that they were confirming the spending.
Ms Smuts asked if the AG would check on conditions on the ground. If a Department claimed it had been given R6 million housing subsidies she asked if the AG would check that the houses had been built.
Mr Nombembe replied that the spending must have given rise to improvements. The AG would not just report on the profits. It was working to get even the regularity ones to have an element of performance. It would be working on the terminology to clarity it.
Mr S Dithebe (ANC) asked if all departments were now complying with the Generally Accepted Accounting Practices. He noted that the Department of Defence said it would not be able to achieve an unqualified report in the next two to three years because of the absence of an integrated financial management system, which would only be operative around 2011.
The Chairperson said that this was really question to be directed to the Portfolio Committee on Defence and SCOPA.
Mr Dithebe noted that if there were unqualified reports there would generally be value for money. If there was a qualified report, this would indicate that there were problems. He asked what relationship existed between the AG, and the Office of the Accountant General to try to achieve the AG's objectives.
Mr Nombembe replied that the manner in which AG interacted with National Treasury (NT) was very important. The NT, through the Office of the Accountant General, set the standard of Generally Recognised Accounting Practice (GRAP) that was gradually being phased in. The AG would confirm when GRAP was not adhered to. The AG would have to establish why the department had not complied. This did not only apply to departments but also to municipalities where some of the local authorities were unable to account to the standards prescribed. It was important that a solution be found so that the cycle of non-compliance did not simply repeat.
Ms M Matomela (ANC) noted that 70% of departments were adhering to performance in terms of strategic plans. She asked if this figure included the municipalities.
Mr Nombembe said that this number related to performance under six criteria. It only reflected performance by national departments and excluded the local authorities.
The Chairperson asked the AG to put in writing, briefly, a summary of what it meant by performance audits, and to detail what if would intend to do, how it had begun to act, and how this would apply to national, provincial and local government. It should also address the resources. He asked what action the AG could take if there was persistent non-compliance. He also enquired whether there was any relationship between the AG's functions and those of the South African Human Rights Commission (SAHRC) relating to their ability to interrogate socio economic rights, which essentially related to service delivery.
Mr Dithebe noted that in the mid 1990s many departments had inadequate resources, but several years later there was a crisis of underspending of the resources.
Mr Nombembe said that the AG regarded a performance audit as one that would confirm to what extent the money was used effectively, economically and efficiently for the purpose for which it was intended. This was a straightforward definition. It became more difficult when considering to what extent the AG had the capacity to perform this audit and to what extent the department had the capacity to had the capacity to be audited along those lines. If the department was not ready then the auditing exercise would serve no purposes. It was important to identify the role of the AG, which was to identify the extent to which there had been compliance by the CEO of the department. The AG was not trained to formulate policy, but simply to apply it and to check compliance with guidelines formulated elsewhere.
Mr J van der Merwe (IFP) asked for clarity on how the AG would deal with financial performance on the budgets.
Mr Nombembe explained that one way the AG could attend to such audit would be to assess the extent to which the department was doing its spending in accordance with legislation such as the Public Finance Management Act (PFMA) or Defence Regulations. The audit of information would look at something like the roll out of antiretroviral treatment by a health department.
Ms Smuts asked what special investigations had been undertaken and whether they were budgeted.
Mr Nombembe replied that under normal circumstances the AG did not budget for special investigations but in the instance referred to it had put money aside in September. He reminded the Committee that the costs of the audits and investigations could be borne by departments and the special investigation could result from a complaint from the public. Ms Smuts asked if some investigations might be handed to the National Prosecuting Authority (NPA).
Mr Nombembe said that the AG would normally be limited to confirming or dispelling the suspicion of error in the financial statements. If the nature of the findings indicated criminal action then the information would be given to the NPA.
Ms Smuts noted that the AG could undertake environmental audits.
Mr Nombembe confirmed that the performance audits could cover any topic. Environmental audits could be a part of the work. He stated that an audit had been done on medical waste in the provinces. The AG would have to understand the policies in place to administer, manage and control medical waste. It would look at capacity in the hospitals to manage its waste, the existed of policies on waste, whether there were procedures in place to ensure that the policies were followed, and whether there was monitoring. The AG would not get involved in the technical matters of how to set up a waste policy or whether it was the best policy.
The Chairperson noted that the AG was extensively involved in the accountability model in Africa. He noted that international audits were undertaken, and about 5% of income related to this, although this aspect was not mentioned in the report to the Committee. He asked why the audits were done and where the legal authority derived.
Mr Nombembe said that the omission from the report was merely an oversight. The international audits were covered in the strategy plan and were a focus area. The option existed under the PAA to engage in international matters. The reason was broadly one of survival and competition within the profession. The AG's Office was competing with commercial audit firms for qualified personnel. The opportunity to work overseas was a major draw card, and gave the AG the opportunity to expose trainees to overseas assignments.
The Chairperson asked how this impacted on capacity and operations in South Africa.
Mr Nombembe replied that was one of the reason for doing a study on the pressure on the associates, which had recommended that provided the overseas work did not exceed about 5% of the total work, this would not put a strain on resources. There was no special division, and the AG used the same staff, in rotation, as would also be dedicated to other projects.
The Chairperson noted that the PAA permitted the AG to do various things. He wondered if "cooperation" with national and international bodies was sufficient basis for auditing the international accounts. He asked the AG to look into this and report back to the Committee.
The Chairperson asked who audited the AG's accounts.
Mr Nombembe said that the Act made provision for that, and there were external and outsourced internal auditors. BDOSpencer Steward attended to the external audit function.
The Chairperson asked if parliament had any role and whether the external auditors would report to the Portfolio Committees.
Mr Nombembe said the external auditors were to be appointed by Parliament. The current firm had performed the function for five years and it was now time to review the appointment of the auditors.
The Chairperson asked whether the present appointment procedures would ensure independence of the Office of the AG. He asked whether the present arrangements in regard to salary were practical and efficient, and whether the oversight procedures would ensure independence.
Mr Nombembe replied that the fact that there was a Parliamentary Committee to oversee the activities of the AG , and to support and strengthen the independence, objectivity and dignity was a welcome initiative from Parliament [the newly constituted Standing Committee on the Auditor General]. Independence was difficult to define. It had a lot to do with how judgement would be exercised. The AG and his staff were to do all core business with independence and objectivity. He had found nothing that was compromising their ability to do so. The oversight body was teasing out the question.
The Chairperson asked whether this same Standing Committee would be appointing the auditors for the AG's Office.
Mr Nombembe said that a report would be considered by the Standing Committee.
The Chairperson asked whether it was humiliating for the AG to have his salary reviewed by Parliament.
Mr Nombembe stated that the oversight committee was also looking at the governance framework and would be looking at divisional independence to make sure that the roles of each player in the framework were clearly defined. It would be finalised in June 2007. In regard to his salary the Act stated the basis on which this would be determined, and it was similar to the top level of the judicial salaries. The Annual Report would contain details and this was common to many commercial organisations also. It was part of the good governance system.
The Chairperson pointed out that there were differences between judges and the AG in respect of their retirement packages.
The Chairperson asked about the roles and relationships between the AG and other bodies.
Mr Nombembe said that there was no specific clarity given by reference material. The legislation required the AG to engage with other bodies to agree on the terms of reference or mechanisms to ensure that there was a system which would guide joint cooperation. This was based on Public Service Commission recommendations on alignment of resources and sharing of information.
The Chairperson asked about the relationship with other oversight bodies, including provincial bodies. He asked if there were any specific bodies to whom AG would report, and whether it would also report to the South African Local Government Association (SALGA) or other similar organisations.
Mr Nombembe said that the reporting and interaction with oversight bodies would be linked to the nature of the reports. For instance it would table reports to whichever body was best placed to deal with the report. Many matters tended to require joint action by a number of parliamentary committees. There was often a need to cooperate to work out a plan for joint interventions.
The Chairperson asked if the AG would like to make any suggestions and to comment on whether Parliament was rationally and effectively exercising oversight. He asked if the AG had ever asked Parliament to address itself to a particular report.
Mr Nombembe replied that the AG had not.
The Chairperson asked how the AG would go about getting assistance from any one of the 36 committees if it needed it.
Mr Nombembe said that there were a couple of options. It would not help to spend a great deal of time auditing government departments if the results were to become so dissipated that they could not be followed up. One of the primary priorities of the audit was to support and strengthen democracy through accountability. The nature of the reporting had to link to public expectations of what would be done to correct matters. The media was one of the agencies who were the communicators of news to the public. The AG would report individually on the departments. SCOPA would have hearings based on a schedule of priorities. Its recent practice had been to involve members of the relevant Portfolio Committees in the hearings. Another option was the Consolidated General Report issued annually by the AG where all outcomes of audits were consolidated into one report. The AG in this instance would have the opportunity to brief the whole of parliament on the general outcomes, distilling the essence of the issues raised during the audits. However, seldom had there been an opportunity to brief everyone at the same time. There was a further problem, in that as soon as the reports were public, the media would tend to publish their own interpretation before the AG had given an official pronouncement. It would be of great assistance if the AG. The possibility of having a joint sitting of parliament, or of participating in the provincial legislature, as well as local government, were issues being explored.
The Chairperson commented that a joint sitting of parliament would only occur under exceptional circumstances. It was more likely that the provincial legislatures' involvement was a better option, perhaps to combine a joint sitting of provincial legislatures with a general report. The Committee would consider some mechanism for presentation of the General Report outside of a joint sitting. It was unfortunate that reports were misinterpreted, but once they were published they were of course in the public domain.
The Chairperson noted that there had been recommendations made by the AG, and asked if Parliament had ever acknowledged reports or said that there would be a special debate. He asked about the recommendations made to departments.
Mr Nombembe replied that the special debates had not happened yet, but may do in the course of further interaction. The AG would interact with departments during the final and interim audits. It would be able to follow up before the end of the year. The committees established during the audit process would achieve the objective of feedback. Resolutions would be issued by SCOPA and sent to the departments. The departments had to confirm that the recommendations had been dealt with. Since Parliament was the only vehicle where reports were considered, it was very important that the work was taken seriously and that there be effective recommendations and follow-up.
The Chairperson asked about the relationship with provincial legislatures. He pointed out that the provincial offices for health, education and welfare were in fact the deliverers of services.
Mr Nombembe relied that the South African system of auditing did not run on a federal auditing system, so the AG would have access to all departments. There was a permanent office headed by a business executive in each province. Those business executives were accountable to the AG through the Corporate Executives and the Deputy AG. All the planning and monitoring was done nationally. The outcomes of the audits in those provinces were treated in the same way as at national level. The role of the AG specifically in regard to the provincial legislatures was limited to the extent of feedback from the provincial executives. The AG was thinking of ways of gaining greater visibility in those legislatures. This returned to the earlier point of having access, even if this only took place once a year.
The Chairperson asked if there was an equivalent of SCOPA in the nine provinces.
Mr Nombembe said that there was. The Association of Public Accounts Committees (APAC) sought to cooperate on the way they did their work, and was fully supported by the AG.
The Chairperson asked who appeared before SCOPA.
Mr Nombembe replied that the Head of the business executives would take charge over the provincial offices, and there were also parliamentary officers who were to interact consistently with the Executive. Nationally there was a coordinating function to provide guidance, standards and monitoring. This had not been operating as consistently as it could.
Ms Smuts noted that SCOPA was the crucial interface. She asked what happened to the reports of the AG at local government level.
Mr Nombembe replied that some of the local authorities were audited annually, and some had backlogs. They would also submit a report quarterly on the financial statements. It was pleasing that there was an increasing trend of submissions and it was hoped that in the next few years there would be complete compliance. The AG's reports would be addressed to the Council of the Local Authority. There did not yet seem to be any consistent pattern of considering those reports. The Municipal Finance Management Act (MFMA) had a provision for Council to have the equivalent of SCOPA but this had not happened till now. There was also provision for NT to provide guidance for Councils. In May 2006 a useful guide on oversight by Councillors was issued by NT, and much could be achieved by following it, and by training councillors. There would have to be consistency of training to cover the rotation of people and change of terms of office.
The Chairperson noted that the relationship with the Public Protector was not formalised, although there was a formalised relationship with the Public Service Commission (PSC). He enquired why there was this discrepancy.
Mr Nombembe replied that the reason for the PSC agreement was the closeness of the mandates. PSC also had a responsibility for reviewing and evaluating the effectiveness of public administration, and the two bodies wanted to avoid duplication of effort and maximise the resources spent on investigation. With regard to the other Chapter 9 Institutions there was no direct correlation of mandates. Their work was related strictly to their own competency, and this would differ from the AG's brief. There were some cross-overs but not enough to warrant a formalisation of relationships.
The Chairperson noted that the focus would distinguish each office but there might be overlaps in investigations.
Mr Nombembe confirmed that a review was conducted some years ago following a matter that required the AG to confirm whether there were similar mandates. There was nothing systematic to say how a joint relationship could be informed. However, he felt that it was important to be proactive so that in future the AG would not be second-guessed in another situation and there was potential for formalisation.
Ms Smuts remarked that in situations involving service delivery there must be scope for the AG to do the audits, and for the SAHRC to examine the degree to which socio economic rights were being infringed or addressed. She asked if there was not in particular potential for synergy on socio economic rights.
Mr Nombembe replied that the opportunity was there. If the Chapter 9 institutions were to present a holistic picture there would be need to do this. The question was the type of audit being conducted. A service delivery audit would provide immense opportunities for cooperation as the promises on service delivery may be cross cutting across a number of institutions. The primary goal would be to present a holistic picture.
Ms Smuts added that sometimes the work on procurement might point to a problem that SAHRC could then take up.
Mr Dithebe noted that citizen dissatisfaction surveys might be linked to reports, for instance, on socio economic rights, and asked whether the AG would then recommend extension of its mandate on performance audits.
Mr Nombembe said that in future it could be of benefit for society to get these audits but cautioned that the scope would have to be wide enough so that any issues in the AG's Report were not contradicted by another Chapter 9 Institution who might have looked at the matter from another angle.
The Chairperson noted that setting policy was the function of the executive. There was sometimes a fine borderline between setting and enforcing policy. Some of the Chapter 9 bodies were essentially given a political mandate.
The Chairperson asked about the relationship with the National Prosecuting Authority (NPA). He asked what the AG would do if it found evidence of serious criminal behaviour.
Mr Nombembe replied that the auditors could focus on special investigations but did not do forensic audits. There was a guideline which was formulated about four years ago, when the AG was still accountable to the Audit Commission, to clarify where it would start and end its functions. The AG's role was review of practices, policies, transactions, procedures and systems. If an audit of these items did give rise to suspicion of corruption, then it would be handed over to the appropriate agencies.
Ms Smuts noted that the AG was the most highly evolved of the independent institutions, in that it had its own revenue stream, and ran its own administration. She asked if there were still impediments to the independent functioning of the AG. She also asked if there were any difficulties with the Public Audit Act. The AG could exclude certain confidential secrets or findings but would not do so where there had been wasteful expenditure or conduct. She asked whether the provisions on the national interest represented a problem.
Mr Nombembe said that the funding for most activities would come from government, in the sense that the AG would bill and get paid for an investigation. Most of the requests came directly from government or followed a complaint by the member of the public, and the AG would be paid by the institution being investigated. The auditing standards required that as part of the planning and risk aspects the AG had to consider fraud and error, under the International Standards of Accounting. This took additional time and sometimes there was tension with the bodies being audited because of the increased audit fees.
The Chairperson asked whether the AG would offer technical assistance. He pointed to the anomalies that had arisen in the Enron matter. He asked how the AG would maintain the necessary distance if it did provide advice.
Mr Nombembe said that the primary duty and mandate was to audit. Any assistance and advice would be provided only through the audit process. This related back to the value-add. There might be matters discovered in the course of the audit where the AG would tell management what it should do to deal with the risks.
The Chairperson asked who would be selected as the auditor, and how many people would look at and would evaluate the report before it was publicly presented.
Mr Nombembe explained that the audit process had institutionalised in two ways. The work of each level of the audit was reviewed by another level and this was a well-established practice in the audit field. Auditors would look only at evidence and would have to decide whether it was conclusive. If there was no conclusive evidence, the auditors would qualify the report. The principle of evidence must not be compromised. The guidance was the International Federation of Accountant' standards. These also stated that there must be an independent pre-issue review of the report, to confirm that another person would have arrived at the same conclusion The person who signed the report must ensure that all checks and balances had taken place. There was also an independent review by the independent Board of Auditors regulating all auditors in private practice. This was not mandatory for the AG but it had volunteered to participate.
The Chairperson asked what internal mechanisms there were to ensure that the report prepared by the team was signed off reflecting the factual situation, and secondly it was all done at arms length.
Mr Nombembe replied that that another complexity in the audit process was the Code of Conduct of Auditors, which compelled auditors to be above board and to have independence and to declare their interests. That was common to the entire auditing profession. It was working to a system that would solidify the implementation of the Code of Conduct, confirmed with the introduction of the Public Audit Act.
The Chairperson said the central issue was often systematic failure to address the recommendations. He asked to what extent repeated failure to stick to recommendations would undermine the AG's authority and whether it had any recourse. He asked if Section 51 had been used to sanction non-compliance or obstruction.
Mr Nombembe said that non-provision of information, whether deliberate or unintentional, was dealt with in two ways. In the planning process the AG made sure that the requirements for the audit were clearly stated, so that there was a proper system of control to provide the information freely. The AG would comment in the reports where this had not happened. If the AG struggled to get information it would then impose a cut-off date. The Standards of Auditing required an auditor to audit extensively before giving a non-qualified report. When the information was not provided, the auditors had to wait to finalise the reports. Last year the AG had consulted with the regulator to interpret what the practical requirements were. PFMA required an audit within a certain time frame. The AG sought confirmation that if the information was not provided by a certain time, then the report must be treated as a qualified report. The lack of information could affect only one or two items. The important point was what happened to the information, and that was where oversight became critical. The department would then need to explain the underlying causes of the delay, and to clarify whether it was deliberate, or resulted from lack of processes for risk management, governance issues, or highlighted the risk of fraud. Failure to provide information became much more serious when perpetrated by senior management because these people could override controls.
Ms Smuts stated that the understanding of the constitution was that the prohibition of interference extended to all arms of government. She asked whether the legislatures or the media had done anything that constituted interference.
Mr Nombembe said this related back to his earlier comment that when the media issued statements prematurely, the AG was left in the position of trying to defend its statements that had been misconstrued. The AG should be given he opportunity to elaborate on its reports so that the information was not misconstrued. In a sense this was interference with its role in that the AG would have to defend media comments that did not reflect the correct tone or context. There was not interference in the sense of what was being reported on. The AG must determine the scope of the audit, and could not be dictated to in the process, as otherwise its objectivity could be called into question.
The Chairperson said that it was necessary to look at this point further. There was freedom of the press and freedom of speech. The question arose how far this would go before it actually created an impediment to the work of the AG. He suggested that perhaps what was needed was a good press office and good media relations.
Mr Dithebe asked if the AG was working on a sustained and appropriate relationship with the media. He noted that scientists complained that journalists could make fiction out of science. There would be something similar if the journalists did not understand audit complexities.
Mr Nombembe replied that the issues had been identified as a risk for the Office. The answer lay in the Office's practices, policies and strategies.
The Chairperson asked about institutional governance. The Act stated that the AG was accountable for his or her administration, yet Section 32 said that the Deputy AG was head of administration. He thought that these were sensitive areas. He asked how the Office would deal with issues, and what would follow if the Deputy AG decided not to follow the direction of the AG. These were the only two people named in the Act.
Mr Nombembe replied that there had been an exercise undertaken to deal with that complexity and to identify what the Act meant when it said that the Deputy AG must do certain things. A governance framework would be considered by the Standing Committee on the Auditor General (SCOAG) before June.
The Chairperson asked for a copy of this framework.
Mr Nombembe noted that it was not yet completed.
The Chairperson asked that the sections that had been completed should be forwarded to the Committee.
Mr Nombembe continued that the framework did not deal with the eventuality of disputes between the two officers. If there as an issue related to an audit conclusion there was a guideline to deal with that, which effectively also minimised the risk of disputes occurring.
The Chairperson said that Section 32 was either badly drafted, or intended that the Deputy AG must act at the behest of the AG. He asked what would happen if there were difficulties between the AG and management.
Mr Nombembe replied that these would then be dealt with in terms of the performance management systems, which also included appraisals, and that set processes would be conducted. Tensions between the AG and his Deputy would also be dealt with under these systems.
Ms Smuts asked why the AG, as an independent body, had an advisory board.
Mr Nombembe replied that this was also being considered as part of the governance framework. The Board was not part of the governance structure. It was provided for in order to give latitude to the AG to contact other people to assist him in making decisions.
Ms Matsomela noted that there was an executive. She asked whose decisions were final.
Mr Nombembe replied that this was also dealt with in the governance framework. The Deputy AG had responsibilities which he or she could do himself but the introduction of Exco provided a platform for joint decisions by the executive committee, with the final decision by the Deputy AG.
The Chairperson asked about staff turnover. He noted that there were 800 trainee accountants and asked where they would train.
Mr Nombembe relied that the AG ran a system similar to commercial audit firms, where students were brought in to go through a three-year training process, under the supervision of qualified personnel, to ensure that they could take their professional exams and register as professionals.
Mr Dithebe asked who would do the selection of the students.
Mr Nombembe replied that this would be done by the recruitment team in HR, in keeping with assessment and selection guidelines and through a formal assessment, following applications from students.
The Chairperson asked about the AG's relationship with the public. The complaints machinery seemed to be incredibly complex, requiring an affidavit. Any compliant not complying with the prescribed format would be rejected. He said that the complaints would relate to poor service, and there seemed to be no logical basis for requesting an affidavit. He noted that ordinary people should be able to have easier access.
Ms Smuts asked if the complaints process related to complaints to the AG about matters that the public was requesting the AG to take up, or complaints about the Office of the AG.
Mr Nombembe explained that the procedure had been framed in this way to try to limit sweeping and unsubstantiated statements about the work done. The structure allowed for feedback on complaints right up to their conclusion. It was trying to avoid spurious or irrelevant complaints, by ensuring that the complainants must be serious about lodging their complaints.
The Chairperson asked how many complaints had been received.
Mr Nombembe said that none had been received.
The Chairperson asked whether there was a register of interests, and what was the rule regarding outside employment and interests.
Mr Nombembe replied that an employee would need permission from the Office to engage in other business that would earn income, to ensure that the Office was not likely to be affected negatively. Employees were encouraged to sit on other Boards to enhance skills.
The Chairperson asked what would happen to any salaries or per diem allowances paid to the civil servants sitting on the board were paid, and whether it would have to be declared.
Mr Nombembe said that this was covered by the framework referred to earlier. In practice, most of the board work would be closely related to the work of the Office, such as sitting on the Accounting Standards Board, or the South African Institute of Chartered Accountants or other professional bodies. Permission would be given to sit on other boards if the work would not be too onerous and detract from their office work. If they were paid, the payment could be retained.
The Chairperson asked if this applied also to the AG and Deputy AG.
Mr Nombembe replied that the AG and Deputy AG were not permitted to join any other Board nor become a partner in any other business.
The Chairperson noted that any relationship inconsistent with the independence of the Office must be declared. He asked if there was a disclosure of interest form. He asked where information relating to these aspects was to be found.
Mr Nombembe responded that the provisions on disclosure of other interests were contained in the Code of Conduct and related not only to actual but also to perceived conflicts.
The Chairperson asked if members of staff had to disclose their assets, such as fixed property or shares, or disclose gifts. He was of the opinion that this was necessary.
Mr Nombembe answered that the AG and Deputy AG were prohibited from doing other work so that there was no provision for disclosure of these interests. In so far as other work by other staff members was concerned, the AG would make a specific ruling whether the work or participation on boards would enhance or detract from the effectiveness of the organisation or other bodies' participation. The AG did not believe there was a need for further restrictions.
Ms Matsomela asked about the policy of broad-based black economic empowerment. The AG mentioned that there would be a draft comprehensive strategy. She asked why this was only being done now, and when it was likely to be effective.
Mr Nombembe replied that there were policies and strategies on transformation. That statement related to the Office's need to assess its level of compliance with the newly published Codes. This would be done during 2007 so that a refined strategy could operate from 2008.
Standing Committee on the Auditor General (SCOAG)
Ms B Hogan (ANC) Chairperson of SCOAG, noted that the predecessor to this Committee had been the Audit Commission, which had consisted of members of parliament and others from accounting circles. She was not sure of the reasons for this but assumed that the establishment of a Board of Directors could have been perceived as compromising the independence of the AG. She dealt with the Corporate Governance Framework in brief and reported that this had resulted from an intensive two-day workshop.
The pending Corporate Governance Framework established the AG in a similar position as the Board of Directors and the Deputy Director-General would effectively be the Chief Executive Officer (CEO). This ran contrary to normal understandings of corporate governance frameworks in both private and public sector. SCOAG held workshops with the AG to better clarify how the Committee would interact with this institution. Measures had been put in place to ensure that that this framework was properly drafted. The AG thus had executive responsibility and the Deputy AG was the implementing agent of these policies.
Oversight over the management was done through the audit committee. This body was a watchdog of the management of the financial systems and was representative of independent auditors. SCOAG exercised oversight responsibilities over very specific issues, which included executive performance such as budgets, strategic plans of departments, spending, and annual reports. It was involved in certain important executive appointments as it made recommendations to the President on the appointment of the AG, Deputy AG and appointments of the external auditors. Other oversight responsibilities included providing an opinion in the nature and the scope of audits performed by the AG, relating to both regulatory auditing and performance auditing. The AG had to seek the opinion of SCOAG when presenting the nature and scope of planned audits. She stressed that the Committee could provide an opinion but could not interfere in the work of the AG.
The full list of the statutory functions of SCOAG included an opinion on the audit fees, the standard and the level of compliance with auditing. SCOAG’s oversight functions were therefore to provide an opinion; consider and recommend matters to the full House, to agree on the retention of financial surplus, to appoint external auditors as well as to assist and protect the independence of the AG.
The checks and balances on the AG included the designation of the deputy AG as the CEO and the delegated authority was clearly spelt out. The AG was subject to the scrutiny of audit committees, the oversight of SCOAG and the appointment of advisory committees. This meant that the AG needed to base decisions on extensive consultation. There had been engagements over of the quality assurance checks and the lack of understanding of those being audited.
Parliament needed to develop mechanisms that could be used by at SCOAG and other committees to protect the independence of AG. She recalled that a Commission of Enquiry had been set up to investigate the allegations against the AG made by the then Minister of Justice, Mr Penuell Maduna. Additional mechanisms needed to be set up to protect the integrity of the Office of the AG, which could include mediation. These mechanisms needed to be included in the Rules of Parliament and should be clearly understood by the Executive.
Prof Asmal commented that the purpose of Parliament’s work should ultimately be the protection of the dignity as well as the independence of all Chapter Nine institutions. Parliament could only work within its own jurisdiction. It could therefore agree to issue a statement or a motion, and since this was not subject to debate, the dignity of the institution would be protected. The Committee would discuss how parliamentary committees could carry out the provisions of the Constitution to protect the institutions concerned.
Ms Hogan stated that since the dignity of the AG could be impaired at any level of government or society, other mechanisms in addition to parliamentary methods needed to be considered. A resolution of parliament was not, for instance, applicable to municipalities.
Prof Asmal responded that Parliament could set up a culture that protected the dignity of the institutions. Legislation for such purposes could interfere with the principle of freedom of speech. The Committee could recommend that SALGA and provincial legislatures and executives develop rules in this regard. He stressed that statements made in parliament were governed by the Rules of the House.
Ms Rajbally (MF) agreed that mechanisms to protect the dignity and independence should be incorporated into the Rules of Parliament.
Prof Asmal warned that the failure of parties to take the Committee seriously, the low priority of the Committee and the inability to form a quorum would impact on recommendations the Committee wanted to make. This very important committee’s work also suffered the classic challenge of forming a quorum. It was often impossible for Joint, Ad Hoc and Standing Committees to meet on Fridays. Some parties insisted on representation, but failed to attend meetings, which also subverted the process, and would also form part of the Committee’s discussions.
Prof Asmal said that the Committee would not meet the following week. Members would be provided with a list of all submissions made the following Wednesday. A meeting would be held with the secretariat to develop a structure for the report.
Although some members expressed their disagreement, the Chairperson ruled that the slight by the Youth Commission would not be further discussed.
The meeting was adjourned.
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