Auditor-General SA 2015/16 Annual Report & Strategic Plan 2016-2019, with Auditor-General input

Meeting report

Chairperson’s opening remarks

The Chairperson welcomed everyone in the meeting and indicated that the Auditor-General of South Africa (AGSA) had requested that the Committee should deal with all the matters to be presented within a two day period by treating one set of presentation this week and the other next week. However, this was likely to be impossible due to the schedule of Members, especially those from smaller parties who served in multiple committees.

Ms S Shope-Sithole (ANC) said that AGSA had carefully considered all factors before requesting that two days should be given to cover the entire presentation. It was therefore, important for the Committee to honour this request in order to conduct a thorough job.

Mr N Singh (IFP) said he was mostly aware of the information contained in the presentation by AGSA. He pointed out that most Members were exempted from working on Fridays because of the need to attend to other commitments, especially Members from smaller parties. It was also clear that Fridays are off for most Members because of other commitments and this especially the case for those from smaller parties. It would probably be a better idea for the Auditor-General (AG) to condense the presentations to be made in order to create more time for discussions. 

Mr A McLoughlin (DA) also agreed with the suggestion made by Mr Singh for the presentation to be condensed as most Members were scheduled to attend other committee meetings on Fridays.

Ms Z Dlamini-Dubazana (ANC) also agreed with the suggestion, noting that Members had pending obligations to be undertaken in the coming weeks.

The Chairperson said that the general view was for the presentation to be condensed.

An apology was received from Mr B Tompham (DA). It was pointed out that the Committee had no secretary at the moment since the previous Committee secretary had retired. However, the content adviser provided assistance in the interim.

Mr Kimi Makwetu, AG, AGSA, proposed that the Committee should come up with an available time from its programme to further discuss some issues that would be tabled at the current meeting. The AGSA respected the fact that there was limited time at the moment for further engagement on matters that required attention. It was also aware that there would be a need to have a more in-depth engagement as soon as possible in order to do justice to the presentation. A proposal was made for Members to schedule a meeting to hold on 24 November 2016, depending on the availability of Members.

Briefing by the Audit Committee of Auditor General of South Africa (AGSA)

Mr Peter Moyo, Committee Chairperson, AGSA, indicated that Ms Mthombeni resigned as an Audit Committee member effective 31 August 2015 and Ms Carol Roskruge Cele was appointed in April 2016 to replace Ms Mthombeni. During the period under consideration, the committee received and interrogated information from management e.g. Integrated Annual Report; other relevant organisational structures and independent assurance providers. This information gave AGSA confidence that the organisation’s resources and financial expertise were adequate. Effective systems of internal controls was also deemed adequate and partially effective with an overall risk factor of medium. It was noted that no critical issues capable of rendering the systems of internal control unreliable had been brought to AGSA’s attention.

The Audit Committee was responsible for ensuring adequate oversight of the system of internal controls and risk management. Having reviewed the submission by internal and external audit assurance providers, the committee was able to conclude that organisation’s systems of internal controls could be relied upon for integrity and reliability of financial reporting; safeguarding, verification and maintenance of the organisation’s assets; detection of fraud and error; and compliance with laws and regulations. The audit committee reviewed the financial statements and noted management’s confirmation of going concern for the 2016/17 financial year. The committee was however, satisfied that AGSA would maintain the ability to trade as a going concern for the foreseeable future. It was also satisfied that system of internal controls was sound and that integrated annual report and financial statements were prepared in accordance with the appropriate standards – including International Financial Reporting Standards (IFRS) and Global Reporting Initiative (GRI).

The internal audit function, Mr Sizwe Ntsaluba Gobodo, was mandated to independently apprise the committee of the existence, adequacy and effectiveness of the organisation’s risk management, internal controls and governance processes as directed in its approved charter. The committee noted that the internal audit plan had been successfully executed for the year under review. It was certain that the implementation of recommendations proferred and corrective actions reported to management would further enhance the internal control environment.

The committee also expressed satisfaction with the independence of the external auditor appointed by SCOAG, Kwinana and Associates Inc. (Kwinana), which was in accordance with the provisions of section 39 (2). This was because the external auditor was independent of AGSA and was not conflicted as required in section 39(2) (c) of the PAA.

The external auditor to the committee made presentations on its independence. The presentations assessed the external auditor against the criteria of objectivity and independence as specified by Independent Regulatory Board for Auditors (IRBA). It also considered previous appointments of the external auditor as external auditor to AGSA, as well as the quantum of other work it carried out for AGSA.

No additional remuneration or benefit from the organisation was offered to the external auditor, except for audit services rendered or in terms of permitted non-audit services.

Based on the outcome of the above activities, the committee concluded that the external auditor’s independence was not impaired, prejudiced nor influenced during their dealings with the AGSA.

In terms of sustainability controls, performance and information, the committee was of the view that the responsibility to ensure processes were put in place for sustainable initiatives and reporting rested on the organisation’s leadership. The committee considered and approved audit plans relating to the performance reviews and sustainability information by the internal auditors. It also considered the limited assurance for selected sustainability indicators provided by external auditors and the observations made by the internal auditors in their reports, in order to be certain that disclosures fro, materials were reliable and did not conflict with the financial information.

It was expected that the Standing Committee on the Auditor-General (SCoAG) would approve the recommendation for the reappointment of Kwinana and Associates Inc. Kwinana as the independent external auditor of the AGSA for a further period of three (3) years, after considering the proposed terms.

Kwinana had served as independent external auditors for AGSA since the 2010/11 financial year. Its contract had only been renewed once during the 2013/14 financial year. It had since been annually appointed to continue providing its services as independent external auditors. The contract between Kwinana and the AGSA expired at the conclusion of the audit for the financial year that ended on 31 March 2016. After deliberating on whether to advertise and request bids for the impending vacancy or reappoint the existing independent external auditors, the committee decided on reappointment. The committee confirmed to SCoAG that an appointment had to be made by the end of November 2016 to enable the audit firm to commence work.  The AGSA would struggle to meet its reporting obligations if SCoAG did not approve the appointment of an external audit firm by the end of November 2016.

Discussion

Mr Singh asked about the steps that had been taken to replace Mr Gounden who resigned as an Audit Committee member effective from 29 September 2016. The term of period for the audit firm was something that the Committee needed to take into consideration as it was unclear whether the Act prescribed how long the Audit Committee should be there. The general view was that there is no problem with the reappointment of Kwinana and Associates but the Committee should be provided with the full profile of the company since there could be some new members who would not be present during the appointment process.

He also asked for the reason for the Deputy Auditor-General (DAG)’s absence at the meeting.

Mr Ntombela expressed concern about the fact that Kwinana and Associates was vying for the third term as this was not supposed to be allowed. He asked for the factors that informed this decision to reappoint Kwinana and Associates for a third term. The general logic was that problems may arise in future after a third term extension for an audit team like Kwinana and Associates’ contract. The profile of Kwinana and Associates should be submitted to the Committee to help with determining the demographics of the company.

Ms Dlamini-Dubazana commended the work that was being done by Kwinana and Associates, noting that it had produced fair and accurate financial statements. The main priority should be on the work that had been done by Kwinana and Associates and the retention of institutional memory. The change of an audit firm could bring about instability and this was a factor that Members needed to take it into consideration.

She however, requested that the Committee should be provided with detailed outcomes of the integrated audits that had been completed in order to determine whether there were any serious concerns that had been picked up in those integrated audits.

She asked if there were any improvements from audited sectors.

Mr McLoughlin also supported the suggestion that Kwinana and Associates should not be vying for the third term as this was likely to create problems in the long run.

Ms Shope-Sithole proposed that there should be a continuity of the audit firm for the third term.

The Chairperson responded that there would still be a debate on the continuity or otherwise of the audit firm, as this was a matter that was to be discussed by the Committee.

More information was requested on the reasons for Ms Mthombeni and Ms Gounden’s resignation from the audit committee; as well as plans in place to replace them. Priority should be placed on ensuring there was no disunity or lack of harmony within the Audit Committee.

The audit committee was also asked to state the main reasons for recommending an extension of the term of Kwinana and Associates.

Mr Moyo replied that the Charter provided that the audit committee should consist of three to five members and it currently had the required number of members at the moment.

The audit committee was not responsible for appointing itself, as this was within ambit of the DAG. The most important thing to be considered was for the audit committee to be independent to the office of AGSA. Various processes were undertaken every year to assess the independence of the committee.

The Portfolio Committee would be furnished with the profile of Kwinana and Associates. It was however, clarified that it would be a misnomer to refer to the “third term” in the extension of term of Kwinana and Associates, since auditors were appointed on an annual basis. The three year bid that was referred to in the presentation was mainly for order and efficiency, and the profession in South Africa had no tenure terms. There were companies listed under the Johannesburg Stock Exchange (JSE) that had had the same auditors for a period of 100 years. AGSA was more progressive in a sense that a decision was taken not to appoint any audit firm for the period longer than 10 years. 

It was also clarified that the first three years for any new audit firm was dedicated to understanding the systems in place. The efficiency of an audit firm would only begin to be visible in the fourth year but AGSA was clear that the term should not be allowed to go beyond a 10-year period. The committee in charge of selecting external auditors for the office of AGSA insisted on recruiting black firms to enhance the transformation agenda. AGSA was also adamant that any black firm to be chosen should not have done any other work for AGSA.

It was noted that it had always been difficult for the audit committee to select an audit firm and this was a matter to be taken into consideration by the Committee. AGSA was however, progressive in terms of stipulating a limited tenure of contract for audit firms. The audit committee expected a response on the extension of Kwinana and Associates’ contract by 30 November 2016, as there were other processes to be taken into consideration before the approval of the extension.

In line with professional guidance, the office of AGSA insisted on a five-year rotation of partners responsible for audit. The implication of this requirement was that a lead partner could only audit for a period of five years. AGSA also said required an audit firm to have a minimum of five partners, in order to ensure that the entity could appoint a company with potential to do the required work. Another criteria taken into consideration for the appointment of audit firms was transformation, which focused on gender issues and the number of black partners in the company. It was important for AGSA to ensure that any appointed company would do a quality work. The audit committee was only responsible for auditing the functions of the office of AGSA, while the AG was responsible for conducting audits. The audit committee basically had nothing to do with the way the AG carried out its audits.

It was noted that all resignations by members were voluntarily. The audit committee was working harmoniously as a team.

The DAG was absent from the meeting due to health reasons but the AG could provide detailed explanation on the matter.

Mr Makwetu apologised for forgetting to table the DAG’s apology, noting that the DAG had been advised by the medical team not to travel.

The Chairperson welcomed the apology of the DAG, and went further to state that the Committee would deliberate on the matter of the extension of term of Kwinana and Associates and the profile of the company before 30 November 2016.

Mr Moyo explained that Kwinana and Associates was a black firm led by a woman, and this was one of the things that attracted the office of AGSA to the company. 

Briefing by the Auditor-General of South Africa

Mr Makwetu mentioned that since October 2014, AGSA promised to add value to its work, as well as a continuous conduct of meaningful engagement with its stakeholders to influence change. AGSA also promised to ensure that the organisation remained viable by safeguarding the three enablers of its independence, which were its legal framework; availability and training of staff; and financial resources.

Concerted effort had been made to protect AGSA’s operating license by ensuring it had a clean administration, preserved its ethics and integrity, and continued to drive transformation. AGSA had completed 952 regularity audits; issued ten GRs for the Public Finance Management Act (PFMA); and issued one consolidated MFMA GR with summaries for each province. It also included an assessment of the implementation of initiatives linked to the Medium Term Strategic Framework (MTSF).

AGSA had visited various service delivery projects at the municipalities with clean audits to determine success factors. It noted that there had been an improvement in performance of municipalities in terms of compliance to the prescripts of PFMA and Treasury regulations, as the number of municipalities with unqualified audit opinion without findings increased from 5% in 2010/11 to 20% in the 2014/15 financial year. The integrated approach added value by drawing on the breadth of specialist expertise in the AGSA at each phase of the audit process, which included information systems auditors, as well as investigations and performance auditors, referred to as specialised audit services.

The information systems auditors conducted specialised audit procedures for 720 auditees to support risk assessments of the overall ICT management, and observe municipalities’ readiness to implement the Municipal Standard Chart of Accounts (MSCOA). AGSA increased the use of computer-aided auditing techniques (CAATs), and this was aimed at improving testing during the 2014/15 MFMA cycle, which resulted in full population coverage. AGSA was set to perform automated testing and recalculation of predetermined objectives’ indicators during the PFMA audits of South African Revenue Services (SARS), Airports Company of South Africa (ACSA), Public Investment Corporation (PIC), Passenger Railway Agency of South Africa (PRSA), SA Tourism and South African National Roads Agency Limited (SANRAL).

AGSA had conducted detailed fraud risk assessments and fraud risk detection analysis, and reviewed complex and high value procurement contracts of various auditees. It also led the review of substantial smart meter contracts signed by a number of high-capacity municipalities. AGSA was proud to have performed independent verification checks on the qualifications of selected/key employees at various metropolitan municipalities such as City of Johannesburg, City of Tshwane, City of Cape Town and Ekurhuleni. It also conducted a transversal review on the validity of indigent debtors at 24 high-capacity municipalities. A total of 24 specialists in the areas of health, education and infrastructure had been deployed to generate additional understanding of the auditees’ performance in service delivery. AGSA also worked on 212 integrated audits and shared knowledge with regularity auditors to upskill them. Interim audits on annual performance plans had increased from 120 to 176 in 2014/15. The aforementioned outcomes enabled accounting officers and the executive to address weaknesses in those plans before submitting them to the portfolio committees, and to brief the committees on remaining weaknesses.

AGSA had completed the aforementioned reviews and had advanced in the development of its audit methodology with the intention of aligning it to international auditing standards and best practices.  The organisation-wide launch during the 2016/17 audit cycle was eagerly awaited by all staff and this enabled AGSA to apply a consistent risk approach to planning audits. It also provided an avenue to integrate its audit disciplines. This launch would also allow AGSA to provide assurance on financial statements, annual performance reports and compliance with key legislation in a more seamless manner, and could potentially be applied to special cases such as smaller auditees. The outcomes of an independently conducted stakeholder survey revealed to the value of AGSA’s products to its stakeholders.

It was noted that audit findings were increasingly being contested based on the interpretation of legislation and other legal instruments. AGSA welcomed criticisms from auditees, because it was interested in improving its control environments. Some auditees had displayed a worrying attitude and such cases presented a threat to AGSA’s independence, and would cost the organisation time and money. 

The President had outlined government’s commitment to dealing with instances of conflict of interest and consequence management in the public service. Coordinating ministries had been delegated to execute the recommendations in AGSA’s reports. The 3% yearly audit income increase was below the Consumer Price Index (CPIX) of 6 %, which translated to a discount of approximately R52 million passed on to auditees, since audit teams delivered cost efficient audits. There had been a reduction of audit hours (efficiencies) in audits of some departments such as Department of Justice and Correctional Service, and Department of Defence compared to previous years. The increase in direct costs of 5% below inflation driven by organisation’s cost optimisation strategies to contain cost of audits. The charge-out rate increase of only 5% was a testament of AGSA’s drive to ensure an affordable audit cost. AGSA expected auditees to pay fees on time, to enable it maintain its financial sustainability. The total outstanding debt was R679 million (2014/15: R709 million) representing 24% of total revenue (2014/15: 26.

The local government debts amounted to R343 million (2015: R366 million) or 51% of the total debt. Allocation from the Treasury was in respect of 1% auditees. The local government debt of R343 million (2015: R366 million), which amounted to 51% of the total debt, was concentrated in the Eastern Cape, Free State, Northern Cape, and North West. The overall debt owed by local government reduced from R366 million to R343 million in the current year and was mainly attributed to the following:

• AGSA discussions and interventions with National Treasury and SCoAG.
• Effectiveness of collection strategies such as litigation process and ring-fencing agreements (debt paid through payment agreements).
• Provision for doubtful debt, mainly in the Northern Cape, Eastern Cape and North West provinces.
• Shortfalls continued to be experienced from the amount received from National Treasury (1% payments).
• Financially distressed municipalities increased from 66 in 2011/12 to 86, contributing to the R203 million of debt outstanding in 120 days

The surplus within AGSA was yet to be translated into liquid cash that formed part of the outstanding debt at end of the year. In 2015/16 AGSA received R42 million out of R121 million in respect of 1% auditees from National Treasury. The retention of the 2015/16 financial year net surplus of R105 million by the AGSA as per section 38 (4) of the PAA to continue with the funding of audit projects, investment in support and maintenance of operations and other investment in strategic and business initiatives.

There was still a decision to be made on the re-appointment of the Kwinana as the external auditor for the 2016/17 financial year.

Presentation of AGSA’s Strategic Plan and Budget

Mr Makwetu mentioned that a number of key areas to be considered in the current Strategic Plan included the following:

• Increased number and trends of pushbacks resulting in infringement of its mandate.
• Greater attention to consequence management in the public sector.
• Slowdown in economic growth resulting in increased number of auditees in distress.
• Increased importance and attention to the achievement of the SDG.
• Scarcity of skills.
• Contribution to transformation.
• Attention to quality of audits.

AGSA also aimed to increase the reach and impact of engagement with citizens on its mandate and role through community outreach, CSI activities, and social media. Effort would be made to enhance citizens’ awareness and understanding of audit outcomes, engage with professional associations, consolidate the GR supporting material, and ensure responsible media coverage of audit outcomes. The overall focus would be on further improvement of efficiencies, increase in audit fees collection, and strengthening the contribution to consequence management for maladministration in the public sector.

AGSA would also focus on developing professional staff, both in audit and support areas and train black CAs as part of its commitment to the transformation of the accounting and auditing profession. It would develop key strategic initiatives aimed at improving consequence management in the public sector by utilising Memorandum of Understandings (MoUs) with other organs of state like Public Protector, Anti-Corruption Task Team and Special Investigation Unit (SIU). There was also a need to optimise the opportunities for consequence management provided by the audit directive, and pursue other options for augmenting legislation in support of consequence management in the public sector.                   

AGSA would implement a transformation strategy that would actively contribute to the growth and transformation of the profession, increase the number of black employees living with disabilities and also strengthen enterprise and supplier development programme. 

In terms of revenue analysis for 2017/18 budget, there had been a reduction in hours base’ over the past years due to efficiencies drive. A commitment to affordable fees resulted in revenue increase of only 3% in 2015/16 which was lower than CPIX. This translated to a revenue discount of R52 million to the fiscus. The budgeted increase in the revenue for 2016/17 was based on a yearly increase of 5%, which is also below CPIX.

In 2017/18 however,  AGSA would continue with the drive to contain audit fees at 6% in alignment with CPIX.

The following had been factored in this budget:

-Capping of fees for financially distressed municipalities to 1% of total expenditure, resulting in R32 million given back to the national fiscus in 2017/18.

-The reduction of R13 million in audit fees due to the amalgamation of municipalities.

-The reduction of CWC from 21% to 18%, which translated to an increase in own hours of 137 000. This will be achieved through increased internal efficiencies and pooling/sharing of internal resources (within BU’s and between provincial and national BUs).

It was also pointed out that staff remuneration in 2015/16 was 10% below budget due to vacancies being filled later than planned. The staff remuneration in 2016/17 increased by 12% and was attributable to inflationary increase and a modest increase in headcount due to backlog in filling of vacancies. Aggressive cost cutting in line with cost optimisation tactics such as moratorium on recruitment (position-freeze), rationalisation of headcount resulting in overall containment of staff remuneration to increase of 2% in 2017/18.

In 2015/16, the reprioritisation of training and development in line with the 4V strategy, resulted in savings. In 2017/18, focus on development continues to be heightened through courses such as SMDP and MPD to enhance development of our managerial levels.

The 2017/18 expenditure related to licences and cost for the maintenance of Capital Expenditure (CAPEX) projects (ERP, resource planning, MIS recoveries projects), which were developed in 2015/16 and 2016/17, and were now operational.

In conclusion, it was indicated that the full implementation of AMP, amalgamation of some municipalities and the impact of distressed municipalities in the 2017/18 budget had an overall impact on revenue. The negative macro-economic factors and the changes in local government leadership could increase the risk of low collections. In response to this, the AGSA was committed to investing in new relationships and continued enforcement of the existing collection mechanisms. The cost optimisation tactics had a positive impact on the containment of overhead expenses. This value will be passed on to auditees. Furthermore, strict control of overtime, reduction in use of consultants and optimisation of supply chain practices would contribute to the improvement of operational efficiencies and cash flow.

Discussion

Mr Ntombela indicated that the effectiveness of the organisation was dependent on the workforce in place and there should be a mechanism in place to keep the current workforce happy and satisfied for the effectiveness of the organisation.

In terms of the issue of “sunset clause”, it was noted that the agreement was designed to come to an end at a certain point. He proposed that the Committee should  verify if AGSA was dealing with an agreement that ought to have been stopped or was perpetuated under the wrong impression, and take a decision based on that. A recommendation would need to be done immediately if the issue of the “sunset clause” was negatively impacting on the operation of the entity. The Committee also noted the significant improvement in performance of municipalities especially in the region of Eastern Cape, which implied that AGSA had been putting in very effective measures in place. There were municipalities that were performing poorly but there were indications that the situation had improved.

He also asked if it was possible for AGSA to perform independent verification checks on the qualifications of the selected or key employees to be extended to regional or smaller municipalities as this was where the problem was rife.

The AG was asked to explain to the Committee what he meant by the worrying attitude of municipalities.

The 96% success rate on timeline of audit reports was noted, and explanation was requested on whether or not any serious offenders existed in those departments that constituted the remaining 4%. Explanations were also requested on the process that was being followed in the distribution of the trainees in various government departments; the exact number of trainees that were trained in the previous year; the rate of the distribution of those trainees; the exact percentage that was being observed within AGSA; and the role of AGSA in collaborating with the Department of Public Service and Administration (DPSA) in the recruitment of the trainees.

Ms Shope-Sithole made it clear that accounting by government departments should not be regarded as an option but a must. The responsibility of the legislators was to ensure that there was accountability in the usage of public funds.

She requested that a list of government departments failing or delaying in their account to the prescripts of AGSA should be submitted to the Committee.

It was proposed that the Committee should play an important role in the amendments of the PAA or recommend the amendment of the section of the Constitution, as this would put an end to the unaccountability in the utilisation of state resources.   

Mr McLoughlin also supported the remarks of the Chief Justice, Mr Mogoeng Mogoeng on the fact that the AGSA should be given “more teeth” in terms of enforcing accountability. It almost seemed futile for AGSA to merely make recommendations without having enough legislative power to enforce those recommendations.

With respect to the issue of “sunset clause”, it was clear that this was a matter that might have been driven by a contractual agreement at the time. It was proposed that the Committee should be furnished with the contract so as to see what was agreed upon at the time. The Committee should also be briefed on the complaints that had been directed to the office of AGSA by some auditees. The general view was that the “attack” directed to the office of AGSA by the auditees was because of government departments that had failed to follow all the legal prescripts like the PFMA and Municipal Finance Management Act (MFMA).   

Mr Singh commented that it was sometimes the different interpretations in the application of law that caused confusion between the office of AGSA and public entities as, indicated by the Department of Environment Affairs (DEA).

With regard to the matter of the “sunset clause”, it was not only the AGSA that was affected by this problem, as Parliament was also still paying medical aid subsidies to all members who had retired from 1994 or even before that, including members of the provincial legislators. Parliament was currently looking at this matter as Members were now scrutinising the financials of Parliament.

AGSA was asked to begin considering value for money audits in government departments and municipalities that were already receiving clean audit opinions. The issue of the value for money was also equally important as it would be able to tell if taxpayers were getting value for their money.  

It had been discovered that the office of the AGSA did not have enough capacity in terms of financial and human resources to deal with all State-Owned Entities (SOEs). Mr Singh opined that he was always suspicious of audits performed by independent auditors contracted by AGSA when asked to audit SOEs, as it reflected some form of partiality or bias towards SOEs. AGSA was asked to draw up a plan on the capacity that would be required to perform audit to all the SOEs, and permanently remove this suspicion towards the independent auditors auditing SOEs.

There was also a perception that some of government departments and municipalities suddenly received these clean audits because officials from the AGSA work towards ensuring that they received such to further assist their performance review. The AG was asked to comment on this perception, and clear doubts on whether quality was being compromised.        

Ms Dlamini-Dubazana indicated that some of the challenges experienced by the office of AGSA should be attended to by Members as legislators. The Committee should assist the AGSA in performing efficiently and effectively, and this included dealing with the matter of the “sunset clause”. The Strategic Plan for 2016-2919 clearly showed that there were a lot of issues that the Committee was supposed to engage the office of AGSA on and make recommendations that would be taken to Parliament. It was impossible for Members to consider all the issues that had been flagged by the AGSA while the Committee was only meeting once a quarter. It seemed like the Committee was neglecting the AGSA while it had this compounded “bottlenecks”.

There was no problem with the retention of the surplus of R105 million by AGSA.

AGSA should be commended for hiring specialists to assist with the performance of audits in various fields like education and health.  

AGSA was warned about the potential liquidity risk it was facing, as this was likely to result in a systemic risk. The Treasury was obliged by the Public Audit Act of 2004 to pay AGSA the money needed for those municipalities that could not generate revenue for themselves, but the Treasury had only paid about 51% of that amount. AGSA’s revenue was mainly reliant on the fees coming from the audits that had been conducted and this could lead to a problem in the long run. The failure of the Treasury to pay the entire amount due to AGSA was negatively impacting on the entity’s effort to perform its constitutional mandate.

AGSA was asked to provide further explanation to the Committee on the People’s Strategy Programme 1, the Integrated Information Technology (IT) initiative and the programme to educate the citizens.

The Chairperson asked AGSA to clarify what was related to the staff duties of R40 million as this amount was reflected as R17 million in the Annual Report. It was also asked to explain the reasons for increase in internal audit from R3 million to R4 million, legal cost from R1 million to R4 million and Information Communication and Technology (ICT) services from R26 million to R43 million.

AGSA was asked to submit the proposed amendments to be made to PAA in writing to the Committee. 

Mr Makwethu responded that there were many situations where the interpretation of the laws became a challenge between the auditors and the auditees and AGSA was constantly dealing with such issues. Instances also abound where interpretation of the law among two parties became a challenge, even when the Treasury was also involved in the process. The delays in realising audit findings were sometimes caused by waiting for the involvement of Treasury. Extreme cases existed where people were reluctant to release important documentation. Auditees contested the interpretation of laws through various means. AGSA had to pay a significant amount of legal fees as a way of contesting some of the charges instituted against it, especially the case involving the Department of Home Affairs.   

Steps had been taken in various provinces to ensure that municipalities could get to the stage of sustainable financial management and discipline. AGSA had already taken a decision that those municipalities with a strong foundation and stability to get clean audits like Western Cape should now focus on the value for money. It was pointed out that there would always be a part of work that would have to be done by the private sector, as this was part of the professional responsibility of AGSA.  It was also important for AGSA not to be seen as “grabbing away” from the audit firms. There was a need to create a conducive environment to enable external audit firms carry out their work effectively. 

In the long run, it might become a nightmare for AGSA rapidly conduct the entire audit for SOEs. AGSA measured its staff on totally different issues, and this was not based on the outcome of the audits as this could immediately create conflict of interest. In essence, the fortunes of the employees were not directly linked to the outcome of the audits as this could indeed compromise quality of the audit that had been conducted. Assistance was provided to municipalities that lacked understanding on reporting to a particular set of target, and this was usually part of an inherent engagement in the audit.   

The Committee would be furnished with the list of any serial offenders in the non-submitters. There were about a thousand people at any one time that were trainee accountants at level 1, 2 and 3 and there was always a target on those to be retained. Most of those that had been trained by AGSA ended up being Chief Financial Officers (CFOs) at various government departments; others joined the risk management in government; while some others completely migrated to the private sector. There were many of those trainees that ended up being absorbed in the broader sector of the economy. The performance of independent verification checks on the qualifications of the selected or key employees was kick started in metros but it was unclear whether this would be extended to the regional or smaller municipalities.

Ms Sibongiseni Ngoma, CFO, AGSA, responded that the organisation offered study loans to empower employees in developing themselves. These loans were offered and recovered within a period of ten months.

The increase in legal fees directly related to the cost that was incurred in litigating on the auditees and other contestations that were undertaken by AGSA. The internal audit fees had increased due to a number of mini projects undertaken in the 2015/16 financial year that were  aimed at providing assurance to the internal auditors, including the new audit methodology project. An additional project had to do with enterprise resource planning and tools that were utilised internally.

In relation to IT services, AGSA was catching up on the projects that had been delayed over the years.One of the reasons for this delay was cash containment and capacity. The increase cost in IT services was based on the upgrading of the server of AGSA to make the work of auditors more efficiently.

AGSA was currently sitting at a cash cover ratio of about three months, which meant that the cash in the bank of AGSA could find its daily operations and capital expenditure for the next three months. AGSA had embarked on additional processes to ensure rapid collection of fees from outstanding debtors. In the previous year, AGSA had to litigate against outstanding debtors. All those outstanding debtors were given a stipulated period within which to settle all the outstanding debts. It is indeed true that the Treasury had not completely paid AGSA all monies due to municipalities who were unable to generate revenue for themselves. AGSA was continuously engaging with the Treasury to resolve this matter and pay 100% of the amount required by law.     

Mr Eugene Zungu, National Leader: Audit, AGSA, responded that the intention for the next financial year was to extend the performance of independent verification checks on the qualifications of selected or key employees to regional or smaller municipalities. A conscious decision had been taken not to expand any work in the municipal sphere, taking into consideration that a new political leadership was in place.

The Chairperson concluded that the Committee would expect an indication from the AG on the day in which the Committee should look into all amendments to be made on the PAA. There would also be debates on whether the amendment to the PAA was the way to go as opposed to the Constitution. Communications would be sent to everyone on the possibility of having a meeting on 25 November 2016.

Adoption of minutes

13 April 2016 minutes

The Chairperson took the members through the document page by page.

The minutes were adopted without amendments.

The meeting was adjourned.