Public Audit Act Amendment Draft Bill: Auditor-General briefing

Meeting report

The Chairperson reminded Members of the Committee that this was the last day of external engagements as far as the Public Audit Act Amendment Bill was concerned.

Auditor General on draft Public Audit Act Amendment Bill

Mr Kimi Makwetu, Auditor General, gave an overview of the legislative instruments that fell within the context of the discussions on the Amendment Bill that the Committee had been discussing during the previous week.  From the engagements on the proposed amendments, it was clear that the auditors and the auditees were both separately enjoined by specific provisions of the constitution -- Chapter 10, which dealt with Section 195 about the principles governing public administration. Also, another provision of the constitution often referred to in the engagements was section 216 on the establishment of measures to promote transparency and expenditure control in government. The responsibility for this rested with the National Treasury (NT), which was also mandated to enforce compliance by the same provisions in Section 216.

Section 216 (a) gave rise to the Public Finance Management Act (PFMA), which established the roles and responsibilities of an accounting officer as well as the fiduciary duties and responsibilities of the accounting officer. Similar provisions in the Municipal Finance Management Act (MFMA) dealt with local government. The instruments also provided for disciplinary matters in case of financial mismanagement. Section 217 prescribed matters pertaining to procurement, while Section 218 on matters of government guarantees. All these were matters within the sphere of the executive.

Section 213 dealt with the National Revenue Fund (NRF) and situations when withdrawals could be made (Schedule 5 of the PFMA). Provisions for the AG also flowed from the same Constitution, as stipulated under Section 188, and provided for an independent check and assessment of the activities carried out under the PFMA and MFMA. The powers and reporting responsibilities of the AG, as given in the Public Audit Act (PAA), thus flowed directly from Section 188 of the constitution. These were the legislative foundations upon which lay the submissions of the AGSA in response to the draft Public Audit Amendment Bill.

Given that it was almost 15 to 20 years since these instruments – the PFMA, MFMA and PAA -- were promulgated, the question was how effective they had been in effective financial management and control, and what the bottlenecks were. Analysis of audit reports from 2008/2009 to 2016/2017 financial years, both in local government and national/provincial government, showed many undesirable audit conclusions, meaning that clean audits were not being achieved. For example, as high as 80% of the audits in local government and 71% in national and provincial governments, had undesirable conclusions for the 2015/16financial year. The trend over this time period was similar, with slight improvements in some years, but the overall picture was of unclean audits.

A clean audit as per Section 20 of the PAA had three elements that the AGSA to tested: fair presentation of financial statements, compliance with any applicable legislation, and reported information relating to predetermined objectives. On the side of irregular expenditure, the trend showed growth over the same time period. The highest amount for local government had been  R16 810 million in the 2015/16 financial year, and R46 687 million for the national and provincial government in 2016/17. This was despite the very specific responsibilities of accounting officers as provided by the PFMA and MFMA to prevent these expenditures from happening, and not just investigating after they have happened.

On the other hand, unauthorised expenditure for local governments had risen from R2 000 million in 2008/09, to R12 771 million in 2016/17, while for the national and provincial government the same had decreased from R6 605 million in 2008/09, to R1 467 million in 2016/17. Fruitless and wasteful expenditure for local government had been on an upward trend, from R56 million in 2008/09, to R1 024 million in 2014/15, before falling to R901 million in 2015/16. National government had also been up and down over the same period, rising from a low of R437 million in 2009/10 to a high of R2 426 million in 2012/13, before levelling out at an average of about R1 000 million from 2013/14.

The reason for the increasing expenditures, as indicated, was as a result of no consequences for the perpetuators. During the audits, extensive use of consulting services for financial management and other activities had been revealed as a major component of rising costs. There was also use of complex mechanisms to perform public functions on behalf of the government; complex contracts were entered into which consumed the bulk of the funds.

A number of factors also contribute to an institution’s vulnerability to corrupt activity, such as a monopoly of power, high levels of discretion in the ranks management without proper supervision, and lower levels of accountability. The main root causes of auditees’ continuing challenges were slow response to improving internal controls, inadequate consequences for poor performance, and transgressions and instability/vacancies in key positions and/or a lack of appropriate competencies among key officials.

The AG’s submission included responses to comments and suggestions from institutions such as the South African Institute of Chartered Accountants and Corruption Watch;

Commenting on the retrospectivity of the bill, he said the proposed amendments were intended to be prospective, but the inclusion of accountability for former officials would include those under whose watch material irregularities occurred from 1 April 2019 onwards. Accounting records may, however, refer to previous periods.

Regarding the definition of a debtor, the AGSA was no longer looking at defining a debtor since although the issue of debt collection activity had found its way into the bill, this was not the intention. The AGSA recommended the deletion of the definition of debtor. Regarding definition of ‘undesirable audit outcome,’ the AGSA agreed to the objections that the term was confusing and proposed that the definition be changed to ‘material irregularities’.

The appeal to the Committee to reject the proposed amendments to the PAA that gave the AG a wider discretion in opting out of small mandatory audits (boards, trusts and museums) was not supported by the AGSA, due to economic resources. The decision of the AGSA to outsource a portion of the work was in response to the reality that the office could not support this, and therefore needed to outsource these services. With time, though, the office intended to take back the audits of bigger and higher risk audits.

On the mandate to conduct performance and international audits, the AGSA believed that the strengthened mandate to conduct stand alone performance audits would further strengthen its ability to engage in these important audits. The AGSA also supported the inclusion of the mandate to conduct international audits, and believed that there was room to consult with the Standing Committee on the Auditor General (SCOAG) prior to accepting these engagements. The AG had consulted with senior counsel on whether this went beyond its constitutional mandate, and the initial feedback had been that it did not.

To address the issue of outreach and duplication, the AGSA proposed a three-tier approach. First, the AGSA would conduct an in-depth audit. Secondly, it would follow up on implementation of the audit report recommendations after six months. If there had been significant implementation, no remedial action would be necessary. If there had been no significant implementation, remedial action would be taken, including reporting to the relevant legislature bodies. Lastly, it would follow up on remedial action and if no significant implementation had been done, refer the matter for investigation.

Discussion

Ms N Mente (EFF) wanted clarification on whether the AG had said he wanted to remove the inclusion of former accounting officers from the retrospectivity aspect of the bill.

The AG responded that if the bill was applied retrospectively, it must also indicate the date to which this would be applied. The bill, however, proposed a prospective application, meaning that it would apply only from the date at which it was finished and agreed. However, the application of that prospective implication would also have retrospective implications. For example, if it was applied on 1 April 2019 and there was an investigation triggered after that which involved a transaction done in 2002, this transaction could not be excluded. This meant that if one was an accounting officer during the time of the transaction, even though now at the time of the Act becoming effective one was no longer the accounting officer, one could not be excluded from the investigation.

The Chairperson agreed with the AGSA that ‘undesirable audit’ should be replaced with ‘material irregularities’.

On the international audit, the Chairperson agreed that the AGSA should do it and also that the Committee need not be required to give approval to the AGSA prior to undertaking this, and that rather they just needed to be informed, since to get approval meant the Committee would need to get a resolution from the House to start with.

Ms Mente asked whether the AGSA would have enough resources to implement the suggested three-tier approach to audits and referrals, given that at the time the first six months lapsed, they would be required to start audits all over again, while also following up to see if the recommendations from the previous audit had been carried out.

Following up on this, the Chairperson asked, since level one was not binding, if the AG found a blatant breach of regulations, did he need to give the person six months before giving a binding recommendation or referral? On referral to other agencies -- for example, the Hawks -- would they not say that the AG was meddling in their affairs if they had to report to him whether they had followed up on the referred cases? As a suggestion, the reporting back should also include reporting to Parliament so that the other agency did not blame the AG for meddling in its affairs. He stressed that the issue of fruitless expenditure should not wait for six months to be checked if recommendations had been implemented, after which further a further six months would pass before the case was referred to appropriate agencies.

The AG responded that they were happy to include “and Parliament” on the point of other agencies updating the AG on cases referred to them. The AGSA would have enough capacity to follow up on recommendations as well as perform audit duties, since there was already a status of review process making enquiries on progress made on implementing recommendations of the previous year’s audit. These activities under the three-tier approach had also been budgeted for. To address the issue where blatant cases of fruitless expenditure needed to be addressed as soon as they were discovered, the AG suggested that they amend the provision in Section 5 (1) (a) to read “refer any known, alleged or suspected material irregularities”, so an action would arise at the time of the audit, as there were ‘known’ irregularities at that time.

The Chairperson said that the AG had indicated that he and Ms Mente should decide on the idea of having a review committee that could act as an appeals body to hear cases before they went to court in cases where an accounting officer disagreed with the AG’s findings,. He suggested that the ombudsman should constitute a representative from the NT, the AGSA, legal and regulatory bodies.

Ms Mente said that she had an objection to mixing up the review committee. She was uncomfortable with the exchange of notes, when there was a parallel investigation involving the AGSA and the national treasury (NT).

The Chairperson agreed, and said that they would finalise the issue as a Committee. They agreed with the formation of a review committee, and needed only to agree on its composition.

The Chairperson said that he was confused when the AG said that there was an agreement regarding the audit fees, since in the meeting the Members were unhappy with the one percent. The AG could not be exposed, because if an auditee did not want to pay or went broke, it should not be the AG’s problem, but rather it should be the NT’s problem. The AG should not be lumped with unnecessary debt collection at all.

Ms Mente said that the previous day, there had been discussion regarding the fact that the NT did not come out clearly on ring-fencing the budget for the audit money sent to the municipalities. As a suggestion, that line item in the budget for auditing in the municipalities should not even be released to the municipalities, since they used it and at the end of the day they did not have the money to pay the AG. What were the views of the AG, and what could the Committee do to influence the NT on this?

The AG gave the example of a municipality with assets worth R1 million. The provision stated that if the proposed audit fee exceeded one percent of R1 million (R10 000), the expenditure on top of the R10 000 must be defrayed to the NT. This leads to an accumulation of money owing to the AGSA office by NT. The NT was now proposing that it should sit with the AGSA, and agree on the maximum amount that should be charged and thus defrayed to the NT. The AGSA opposed this, as it infringed on the independence of the AG in determining the scope of the audit.  The AG proposed that the NT, as the custodian of the financial reporting framework for the municipalities, should assess the level of risk associated with the municipalities and discuss with the AG the sufficient audit procedures that would need to be taken. The AG would then decide on the amount sufficient for this.

Adv Empie van Schoor, Chief Director: Legislation, NT, responded that the NT also operated on appropriated funds and if the requested money exceeded a certain threshold, it was a problem to get the money. She also understood the AG’s position in not agreeing with the NT on fixing the amount for the audits. The NT did not set a budget for the audit fees of municipalities. However, a proposal in writing could be put to the AG’s office regarding this by Tuesday 20 March 2018, and if the AG was in agreement with the NT, this could be submitted to the SCOAG.

The Chairperson gave the AG and NT until Tuesday to give the SCOAG a paragraph proposing how to secure audit fees. 

Mr N Singh (IFP) referred to the AG’s response that Section 52 of the PAA mandated the office of the AGSA to issue regulations, and asked if the SCOAG was obligated to accept these regulations when brought to them for consultation.

The Chairperson responded that they could not tamper with the regulations, but the same were being brought to the Committee for consultation

Regarding the issue of value for money, Ms Mente asked whether some issues could also be included in the “known” acts which were discovered during audits so that they could be referred for investigation immediately. Examples included where a person inflated prices, or where a tender had to go out but was split so that it suited quotations which were not worth what they were supposed to be.

The AG responded that it might be difficult to categorise these items, especially where the prices were unknown. The government also entered into consultancy contracts, where different consultancies had different rates. It was thus sufficient to deal with cases where there were material irregularities.

Mr Singh agreed that it was difficult to report on immaterial irregularities, since one had to determine the prices of these items/services, and wondered who would have to do it.

The meeting was adjourned