Audit Outcomes (National & Provincial audits) for 2007/8

Committee of Chairpersons

18 November 2008
Chairperson: Mr T Ralane (ANC, Free State)
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Meeting Summary

The Auditor-General (AG)presented the status of audit outcomes in terms of the Public Finance Management Act (PFMA) for 2007/2008. Completion of audits stood at an average rate of 95% out of an overall total of 486 entities. There were 112 financially unqualified audit opinions with no other matters of emphasis, 216 that were financially unqualified with matters of emphasis, 105 qualified opinions, 21 disclaimers and 9 adverse opinions. The AG raised five key issues that would need to improve or change in order to facilitate higher rates of compliance. These included a more regular output of financial statements from departments throughout the year, closer involvement and commitment from leadership, improved capacity, especially at a provincial level and the institutionalisation of coordination between Portfolio Committees and the Standing Committee on Public Accounts. It was a matter of concern that several qualifications occurred year after year. Benchmarking with international countries showed that the quality of financial and management information, availability of documents for audit, assistance from officials, and full adherence to requirements were all crucial.

Members agreed that it was necessary to leave a firm foundation for the next Parliament so that institutionalisation was important. They questioned how the statistics on departments were drawn, whether there was weighting applied, expressed concern on the rapid turnover of staff at top levels, whether gender budgets were included and audited and the use of performance audit models. They also asked for the root causes of qualified audits, the continuous problems besetting the departments, whether the work of consultants had shown any improvements, the parameters for non-financial performance and the need for engagement with the Public Service Commission.

Meeting report

Audit Outcomes for 2007/2008 financial year: Office of Auditor-General (OAG) presentation
Mr Terence Nombembe, Auditor-General, began with the last slide of his presentation, which was a summation of the findings made by the Office of the Auditor-General (OAG) on the audit outcomes for the 2007/08 financial year. . These encapsulated the requirements for positive audit outcomes.

First and foremost of these criteria was the close involvement of leadership. It was up to the leaders also to ensure sufficient human resources. Many of the findings related to this capacity issue. The ongoing monitoring of action plans was another requirement. The continued coordination between Portfolio Committees and the Standing Committee on Public Accounts had to be institutionalised, so that they focused on financial performance and the development of action plans. Unless this was done, certain departments would continue to receive the same audit findings year after year. Even when members of the Committees changed, continuity would be ensured through institutionalisation, from one Parliament to another. This point could not be over-emphasised.

The introduction of regular financial statements would obviate the phenomenon of multiple adjustments during audits, which was too late in the year to change government accounts. These adjustments indicated that information used during the course of the year could not be accurate or credible. Chief Financial Officers (CFOs) were responsible for preparing regular financial statements but this was something they were not always currently doing. National Treasury could provide the required format. Departments simply needed to expand and improve on their financial administration, and could do so by redefining the role of the CFOs. The ability to practise the preparation of financial statements on a regular basis throughout the year would also minimise mistakes at the end of the year.

The strengthening of coordination between National and Provincial Treasury, as well as the capacity of provincial treasuries, would assist in giving better support to provincial government entities.

Mr Nombembe summarised that these five key points formed the essence of what he would like to relay to all Members responsible for oversight. It was the responsibility of leadership teams to engage throughout the year, and not leave matters until the end of the year. Qualified reports could be avoided if these issues were addressed. Drawing up of financial statements on a regular basis would contribute significantly, and it was found that those with clean audits had attended to these issues already.

Mr Nombembe noted that the auditing of 500 Public Finance Management Act (PFMA) entities was no small responsibility. A tally of 486 audits had been completed, and that represented 95% of all entities. The OAG was awaiting financial statements from one Provincial Treasury, in Northern Cape. This achievement was to be applauded, as one of the core requirements of government was that of accountability.

The number of financially unqualified audits, with no other matters of emphasis, was 112. This constituted 23% of the total number of audits and was a 13% improvement on results just two years ago. National public entities accounted for 41% of this number.

Mr Nombembe indicated that adverse opinions were the most undesirable, with a total of six departments receiving this result. Two Provincial departments in the Eastern Cape and North West, two National public entities, and two Provincial public entities had adverse opinions. The National Department of Home Affairs had received a disclaimer. The action plan this Department had adopted was, however, very impressive. This Department had started on this a little late in the year for the results to have shown themselves, but it was a model action plan for any department to follow. It was the responsibility of all to do whatever was necessary to ensure that their momentum was sustained with regular constructive engagement to achieve results. The 105 departments that had received qualified opinions needed to adopt the same attitude, but very often, in these cases, leadership was not interested in the audit results and no action was taken, resulting in the same problems recurring several times. Leadership had to take an interest in these issues. A change in the responsibility and role of leadership in monitoring these matters was crucial.

Departments too often had fragile financial administrations. Financial statements should be regularly prepared and the training and reorientation of CFOs would bring about a huge difference in results.

The highest percentage of qualification audit findings was in the sector of capital assets. It did not really matter where this emphasis lay, as long as the issues were being addressed. This was clearly not the case, with most qualifications being a repetition of years before.

A process of benchmarking, using results from several other countries, had strongly indicated six main criteria facilitating unqualified audits. Among these the quality of financial statements and management information was crucial. The availability of documents for audit was another.
The availability and enthusiasm of key officials during audits, which had been emphasised this year, was yielding some results, but there was a need for full adherence in order to get clean audit opinions. These elementary indicators had to be used as a guide.

Mr Nombembe intended using the general report for refocusing parliamentary attention on governance issues and encouraging ongoing dialogue. He was reliant on this team to facilitate the institutionalisation of these processes, in order to ensure the gains thus far made would be secure and sustainable.

The Chairperson said that Members owed it to voters to leave Parliament with a firm foundation upon which the next parliament could build. This would mean institutionalising the process as described by the Auditor-General (AG) and redefining the relationship between parliamentary committees and Standing Committee on Public Accounts (SCOPA).

Mr E Trent (DA) asked for the method used in calculating the percentages, indicating those departments that used good practices. He asked whether they had taken into account the quantum of expenditure of those departments, since, for example, the Department of Health should be weighted far more than the Department of Safety and Security. He was concerned by the quick turnover of Directors General, who performed the CEO function in Government. 

Mr S Tsenoli (ANC) asked why the 283 municipalities had not been included in the report.

Mr Nombembe said the good practice indicators were not weighted but they were simply based on how many departments were adhering to these indicators. They were not related to the quantum of the department, regardless of its size. He stressed the need to strengthen  institutionalisation, since politicians came and went. He said quarterly reports were welcomed. Monthly provisional information could be used to build up to quarterly statements. The quality of in-year information could be supplemented by financial information. Currently there was a disjointedness between management information and financial information. Synchronisation was needed.

Mr Nombembe said that the municipalities were still being audited and the picture was very impressive, in terms of the submission of financial statements, especially since in the previous year there had been a huge backlog. They had caught up for audit for the end of 2007. More than 90% of municipalities had been audited and over 90% had submitted their reports. The outstanding reports were likely to be audited by the end of November and December. The information would be available by the next parliament. Timeliness of submissions, and the quality of accounting documents at local government level were a serious matter. The OAG were engaging with Treasury on this matter, which needed constant attention.

A Member said the United Nations conference on gender related to her question. She asked whether a gender budget was included among departmental budgets. This issue was being ignored.

Mr Nombembe said audits did not incorporate the gender aspect. They were purely based on results. Gender would possibly be a futuristic aspect of audits, but at the moment it would have to be picked up by oversight in the parliamentary process. The AG merely responded to what parliament had adopted and approved. The AG would possibly audit and reflect on this aspect in future. It was a policy issue and as such OAG did not get involved in it.

Another member of the OAG said performance audits would become part of the 2009 to 2012 business cycle. OAG was working on a system of rating performance, and had established key factors that would be crucial for an appropriate performance audit. It was in the process of finalizing these criteria. The information that was currently being audited was an evaluation for accuracy and validity. By 2010 OAG would be phasing in this other programme, so that there would be an opinion expressed also on performance.

Mr Nombembe said the OAG had to incur additional costs for the use of consultants as a result of a severe skills shortage, and that, especially in local government, there was a shortage of qualified accountants. The OAG did rely upon consultants for specialised work. It was a complex issue, which did not excuse the matter, but it did need a thorough analysis. He suggested, with regard to the audit outcomes of municipalities, that the National Assembly be briefed on these,  together with National and Provincial audits, although at the time they would be behind the Public Finance Management Act (PFMA) audits by six months.

Ms T Tobias (ANC) said there was a report available by the Public Service Commission (PSC) that included performance audit models from other countries. She suggested the Auditor-General look at these for guidance. She believed it needed the political will to kick-start the process and the Chair of Chairs could fast track it.

Mr N Godi (APC) asked for a greater understanding of the root causes for qualified audits. He accepted that there were capacity and turnover issues. He noted that in reality the number of  financially unqualified audits of National and Provincial departments had improved by one department in each category. This was hardly a huge improvement. The same issues seemed to beset the same departments every year. These audit outcomes should be viewed with a more tempered optimism, as things were not moving as quickly as they should. The question also should be asked whether any improvements were due to the work of consultants.

Mr P Gerber (ANC) said that in a special report done several years ago, external auditors had redone audits and this had resulted in a lot more qualifications. He asked for a comment on this and asked how many of 463 audits had been done by external auditors.

Mr Nombembe agreed that the shift in the increase of unqualified audit reports was a small one.  He reiterated his conviction that the leadership and those who had oversight roles were not paying sufficient attention to these audit reports. Premiers should take note of these issues, and all those at leadership level had to take these reports far more seriously. This would result in a response further along the ranks and would change the negative pattern of unacceptable audits. He accepted that it was also the responsibility of the OAG to question these departments and entities. Once again, he stressed that institutionalising the regular preparation of financial information on a monthly basis, and not just on an annual basis, would go a long way towards resolving some of these problems.

An official from OAG added that all 463 audits were signed off by the AG himself. Even if consultants had done a portion of the work, they all worked according to the same guidelines and framework within which an audit had to be done. In practice there might be one or two gaps, but the aim was that the same methodology be used throughout. 

Rev P Moatshe (ANC) asked whether the AG had developed parameters for non financial performance and when would the OAG be ready to roll out the process.

An official from OAG said the OAG was in the process of accelerating the implementation of performance auditing. Officials regularly engaged with the forum of South African Director Generals and had raised the issue with them.

Mr Nombembe said local government should collaborate or engage with the Public Service Commission. Cabinet had identified ministries to engage with the Auditor-General, including Public Services and Administration, Provincial and Local Government and Finance.

The meeting was adjourned.


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