Auditor-General on matters to be considered when interrogating annual reports of State-Owned Enterprises

Meeting report

The Chairperson welcomed the Auditor-General’s delegation, and expressed appreciation for their help in assisting the Committee to carry out its oversight work. He then handed over the chairpersonship to Dr G Koornhof (ANC) so he could leave the meeting at a later stage for a medical consultation.

Mr Kevish Lachman, Business Executive, Auditor-General of South Africa (AGSA), introduced his presentation by commending the Committee for its proactive approach in handling its oversight responsibilities. He gave the assurance that AGSA was always available to offer its support.

He said AGSA’s constitutional mandate existed to strengthen the country’s democracy by enabling oversight, accountability and governance in the public sector. Its core responsibility was to perform the audit function, in terms of the Public Audit Act of 2004, and to report its views on financial information, performance against predetermined objectives, compliance with applicable laws and regulations, and on the state of internal controls.

He said that in the past, AGSA’s attention had been focussed only on financial information. However, the audit process had now migrated to also considering performance against predetermined objectives, and this would probably form a separate section of the Auditor’s report within two years. He pointed out that the aspect dealing with compliance with applicable laws and regulations was very public sector oriented. If any issues arose from the financial, performance or legal compliance aspects, leading to a qualified audit, the report would then highlight the internal control weaknesses which had given rise to the qualification, and corrective action plans would be drawn up around the identified weaknesses.

The Auditor Director was responsible for determining AGSA’s relationship with State-Owned Enterprises (SOEs), and for choosing those which would be subject to audit, and which would not. The selection criteria included requests from Parliament or the entity itself, public interest, the capacity of AGSA to conduct an audit, and the specialist industry and technical knowledge required. The SOE, its appointed auditors and AGSA worked in close cooperation in respect of the audit focuses and reporting requirements.

Mr Lachman said the Portfolio Committee, when considering an SOE’s annual financial statements, should focus on the entity’s performance against its pre-determined objectives. This was because if there was a financial loss, or writing down of assets, the auditors would give their approval, provided all the required financial processes had been followed. However, from an oversight point of view, it was critical for the entity to be asked why an investment had been made, that had led to the loss or write-down, or whether it had added value in terms of service delivery, job creation or revenue generation. Service delivery, rather than profit, could well be the critical factor. The sustainability of the SOE also needed to be considered, and if there were concerns in this respect, they would be highlighted in the AGSA report.

When there were modifications in the audit report, identifying weaknesses in internal controls, there should be a comprehensive and detailed plan to resolve the situation within a maximum period of three years, and this plan should be regularly monitored by the Committee.

He urged the Committee to continue its key visits to SOEs so that they could get a sound understanding of their operations and business environment, and be better placed to monitor and guide the entities. Attention should also be paid to the directors’ reports, as these dwelt on the key activities and sustainability of the entities, and highlighted the challenges facing those who were ultimately accountable.

The Committee needed to obtain insight into fruitless, wasteful and irregular expenditure. By definition, fruitless and wasteful expenditure would have been prevented if due care had been exercised, while irregular expenditure was incurred when proper policies or legislation were not complied with – both of which were the result of a lack of adequate controls.

Other areas requiring attention were supply chain management, human resource management and service delivery, where the main challenges facing SOEs were often related to shortages of skilled personnel.

Mr Sybrand Struwig, AGSA senior manager, described AGSA’s auditing of predetermined objectives (AOPO), the aim of which was to increase the strategic focus of government and make more efficient and effective use of limited resources through the introduction of more systematic monitoring and evaluation. The main criteria of AOPO were compliance with regulatory requirements, usefulness and reliability.

Mr Lachman concluded by emphasising that the leadership of entities should explain their mandate to the Portfolio Committees as the starting point of their presentations, and suggested that a SWOT (Strengths, Weaknesses, Opportunities, Strengths) analysis should follow. The performance report should inform the Committee on the problem areas, and also areas where the entity felt comfortable. He also encouraged the Committee to conduct site visits to the SOEs.

Discussion
Mr C Gololo (ANC) asked if AGSA could give guidance on the oversight role regarding risk management.

Mr Lachman agreed that risk management was a critical part of the functions of an entity’s accounting authority, and should form the focus of the oversight of strategic and operational plans. A SWOT analysis would identify the risk profile of the entity.

Mr A Mokoena (ANC) asked whether AGSA’s mandate covered the auditing of all of the State’s assets, or merely the SOEs.

Mr Lachman said AGSA audited the public sector as a whole. In terms of the Public Finance Management Act (PFMA), all entities – national, provincial and local – had to submit financial reports to the Auditor-General, as well as the Treasury, and these were ultimately consolidated. This meant that provided all entities reported, all State assets were audited.

Mr Mokoena asked whether AGSA had the means to check whether entities were continuing to make the same mistakes year after year.

Mr Lachman said the starting point for the audit was a separate working paper, where the prior year’s findings were reviewed and repeat findings identified and reported on.

Mr Mokoena questioned the thoroughness of AGSA’s audits, expressing concern at press reports where millions of rands were reported as “missing” from entities. He wanted to know why AGSA, as the supervising auditing authority, would not have been aware of these situations.

Mr Lachman said rigid standards were followed. However, the audit process was conducted on a sample basis, and an audit risk existed in any audit process. This could result in issues not being picked up, for instance, when there was management collusion, so oversight functions in governance structures became critical – one of them being internal audit. Leadership governance and financial management systems were also integral factors in all-encompassing governance processes aimed at preventing bad experiences, rather than relying merely on audit processes.

Dr S van Dyk (DA) referred to the “controversial” issue of bonuses paid to senior management at SOEs, which were based on internal board decisions, and not on legislation prescriptions. Although the Auditor-General annually referred to these bonuses, he did not describe them as irregular expenditure, and he wondered if this was to sidestep the issue.

Mr Lachman said it was difficult pass judgment on whether such payments were wasteful or irregular, as it depended on the specific instance. If provision had been made to pay bonuses, and all the key criteria had been followed, this would be picked up in the audit. They would be considered irregular only if they were made in contravention of some prescript which would prevent a bonus being paid.

Dr Van Dyk said the Presidential Review Committee (PRC) was currently looking at the whole issue of public entities and SOEs, and wondered if AGSA had been invited to make any recommendations on the matter.

Mr Lachman said AGSA was working closely with the PRC, but the PRC had a separate mandate which it needed to follow.

Ms C September (ANC) said she was worried that Parliament’s oversight function was modelled mainly on the points covered in the AGSA presentation, together with the Constitution and the PFMA. She felt there was a need for the Committee to have its own “regulations”, rather than just following Treasury guidelines, as other objectives were important in ensuring the community did not grow poorer and disparities continued to increase.

Mr Lachman said he supported the Committee’s prerogative to go beyond the parameters outlined in the AGSA presentation.

Mr P van Dalen (DA) referred to Transnet reporting a loss of R8 billion under “fruitless and wasteful expenditure.” It had explained how this had happened, for reasons such as unforeseeable circumstances, but had then stated that it did not need to report on all other expenditure under R25 million, because in the bigger scheme of things, it was immaterial. It bothered him that this could be recorded in the annual report, and nothing had been said about it.

Mr Lachman said it was a legal requirement that any fruitless or wasteful expenditure over R10 000 had to be reported.

Mr Van Dalen asked whether accountability for a qualified audit rested with top management, or could they claim they did not know about the issues involved and were therefore not responsible.

Mr Lachman confirmed that any issues raised in an audit report were the responsibility of the SOE’s leadership and governance structures.

Mr K Dikobo (AZAPO) asked what “warning signals” would be relevant when looking at AGSA’s internal capacity as a factor in its audit selection criteria.

Mr Lachman said AGSA had a large portfolio, and worked to international standards. This required it to ensure it could provide the necessary resources to staff an audit in terms of capacity, knowledge and experience.

Dr Van Dyk said that because auditing was an administrative, and not an economic process, it was possible for an entity to earn an unqualified audit without achieving meaningful levels of productivity. He asked what could be built in to the system to measure productivity.

Mr Lachman responded that AGSA had identified a link between productivity and performance against predetermined objectives, and a well defined strategic plan should determine what delivery expectations were. SOEs were required to report on their performance on a quarterly basis to shareholders and the Treasury.

Mr Dikobo referred to the earlier comment that service delivery might be more important than profit in the case of an SOE, and if this fell outside the ambit of AGSA’s mandate, who should be responsible for measuring the impact of service delivery on the community.

Mr Lachman conceded that while AGSA looked at areas such as finance, performance against objectives and compliance, measuring the impact of SOEs activities on society did not fall within its ambit. However, the way in which an entity performed against its predetermined objectives provided an insight into its impact on society.

Ms G Borman (ANC) said the measureability of performance against criteria was essential, and asked if it would be possible to link a specific focus area, such as job creation, to AGSA’s audit process, so that it could be overseen by the Portfolio Committee.

Mr Lachman said it was important for AGSA to understand the key imperatives driving the SOEs, as this helped them to assess the impact of their operations on the environment.

The Chairperson thanked the presenters, and said the Committee would continue to have regular interactions with AGSA. The meeting was closed.