Office of the Auditor-General operations: overview by Deputy Auditor-General
Sunday Times article on the irregular awarding of tenders: 14 June 2009
Auditor-General Report on the irregular awarding of tenders [available at www.agsa.co.za]
The Deputy Auditor-General presented an overview of the functions and responsibilities of the Office of the Auditor-General. The organisation was responsible for the auditing of all State-funded entities and was required to publish audit reports within three months of the end of the financial year. The Auditor-General employed 2300 personnel and outsourced some functions to the private sector in order to meet auditing deadlines. On-the-job training was provided to enable accounting students to complete articles for qualification as Chartered Accountants. The Auditor-General provided auditing services to the United Nations as well. Responsibilities included conducting investigations into financial irregularities upon request and determining audit standards. Governance structures included the Audit Committee and Remuneration Committee.
Due to time constraints, the representative Member of the Audit Committee was unable to brief the Committee on the responsibilities of the Audit Committee. He requested that the Committee attended to the appointment of an external auditor as a matter of urgency as the current agreement with BDO Spencer Stewart Inc. was nearing the expiry date.
Members asked questions about the outsourcing of audit functions to private audit firms and the potential for a conflict of interest, the investigations conducted by the Auditor-General into financial irregularities, the training pf employees, the staffing levels, the mandate and governing legislation applicable to the Auditor-General, the capacity of public entities to apply audit standards, the assistance required from Parliamentary Committees and structures and the ability of the Auditor-General to ensure that adverse audit comments and findings were acted on by the entities concerned.
The Chairperson suggested that Parliament was requested to expedite the allocation of the Report of the Auditor-General dated August 2008 to a responsible Committee for further action.
The Chairperson welcomed the delegates from the Office of the Auditor-General and read the agenda of the meeting. The delegation from the Remuneration Committee (REMCO) and Mr J Gumede were unable to attend the meeting. A discussion on the irregular awarding of tenders reported in the Sunday press on 14 June 2009 was added to the agenda.
Mr N Singh (IFP) requested that the role of the Committee vis-à-vis the roles of the Select Committee on Public Accounts (SCOPA) and the Portfolio Committee on Finance was clarified. He understood that the Joint Standing Committee on the Auditor-General dealt with matters concerning the Office of the Auditor-General whilst the other Parliamentary Committees dealt with the work carried out by the Auditor-General.
A workshop with the Auditor-General was scheduled for 5 and 6 August 2009 but the Chairperson considered that the Committee needed to be informed of the relevant issues sooner rather than later.
Briefing by the Office of the Auditor-General
Mr Thembekile Kimi Makwetu (Deputy Auditor-General) extended the apologies of the Auditor-General and introduced Mr J Biesman-Simons (Member of the Audit Committee) and Messrs Adiel Kamedien and Tsietsi Telite (Senior Managers).
The briefing to the Committee was intended to be an overview of the operations of the Office of the Auditor-General and a more detailed presentation was being prepared for the workshop in August 2009. The Auditor-General was established in terms of Chapter 9 of the Constitution and the current Auditor-General was appointed by the third Parliament. The Public Audit Act (PAA) prescribed the responsibilities of the Audit-General and the establishment of the Office of the Auditor-General. The Office operated as a Board. The PAA dictated that the Joint Standing Committee on the Auditor-General conducted oversight over the Auditor-General. An annual plan was submitted to the Committee to enable Members to evaluate if the Auditor-General had achieved his mandate.
The Auditor-General audited all entities funded by the State through the Appropriation Bill, including 35 Government departments, 9 provinces, all Public Entities and all municipalities. The head office of the Auditor-General was in Pretoria, with sub-offices in each of the provinces. The Auditor-General employed 2300 personnel.
Audit functions were outsourced to auditing firms in the private sector because of a lack of internal capacity to meet the required deadlines. The financial year of most of the entities audited ended on 31 March and audit reports had to be published by the end of July each year. The entities were governed by the Public Finance Management Act (PFMA). The financial year end of municipalities was the end of June and municipalities were governed by the Municipal Financial Management Act (MFMA).
The Auditor-General was also responsible for performing auditing functions on behalf of the United Nations (UN) and had established an office in New York for this purpose. Responsibilities for UN audits were rotated amongst member nations and South Africa was tasked with the auditing of peace-keeping activities for the period 2002 to 2012. The agreement with the UN dated from 1948.
Audits included performance auditing to assess the use made of consultants and the effectiveness of the oversight and governance of State Owned Entities (SOE’s) by Government Departments. Departments responsible for SOE’s needed to have clarity on expectations for the performance of the SOE’s concerned and the Auditor-General was in the process of developing audit standards for this aspect. A more pro-active approach was being taken in audits. A review of the auditing of Departments with new or changed responsibilities (e.g. the Department of Education) was underway.
The Auditor-General was also responsible for conducting investigations into financial irregularities, for example the irregular awarding of tenders referred to earlier. The investigations were undertaken upon request.
The Auditor-General prescribed audit standards, which were presented to the Committee for approval. There was a difference between performance auditing and the auditing of performance. For example the auditing of social grants took into account whether claims of the number of grants paid were accurate and was not misleading. Audits were intended to verify the validity of financial information and assessed the credibility and security of financial systems. Performance audits measured actual performance against targets set.
A Trainee Accountant Scheme was in place, where 700 to 800 accounting students were employed by the Auditor-General while they completed their articles. Personnel were either employed on a permanent basis or given fixed term contracts for a specified number of years. The workload varied during the year, with the peak period between the end of the financial year of entities and the deadline for the publishing of the audit report.
Mr Makwetu explained the organogram of the Office of the Auditor-General, the portfolios of provinces and Government Departments allocated to each of the eight Executives and the position of the heads of corporate service departments (e.g. Finance and Human Resources).
The funding for the Auditor-General was an anomaly as the function was dependent on payment from the audited entities for services rendered. The Office of the Auditor-General experienced difficulty in collecting payment from certain entities.
Governance structures included the Audit Committee and the Remuneration Committee. The independence of the committees was emphasised. The committees had no fiduciary responsibilities, made no decisions and were limited to giving advice to the Auditor-General. Clear terms of reference existed. The Remuneration Committee made recommendations on remuneration, including that of the Auditor-General. The decision on the remuneration of the Auditor-General rested with the Joint Standing Committee. The Audit Committee conducted quality control assessments of the auditing work done and was chaired by the Auditor-General.
Mr Singh noted that the Auditor-General outsourced audit functions to private audit companies. He asked what measures were taken to ensure no conflict of interest existed with the private companies. He wanted to know what level of staffing was required to eliminate the need for outsourcing. He asked who would request the Auditor-General to investigate financial irregularities. He asked if the Auditor-General maintained links with the relevant Heads of Departments in an effort to ensure that adverse audit comments were addressed as SCOPA saw the audit reports at a much later stage and the Heads of Departments were often not held accountable.
Ms J Sosibo (ANC) asked how often State Owned Enterprises reported to the Auditor-General. She asked what type of training was provided for students. She asked who decided the Auditor-General’s remuneration.
The Chairperson explained that the Auditor-General’s activity was an event rather than a process. The ideal would be a permanent presence at the entities subject to audit. The Auditor-General maintained links with Departments’ audit committees.
Mr J Matshoba (ANC) asked how long the Office of the Auditor-General had been short-staffed. He wanted to know how much was spent on contractors.
Mr Makwetu explained that the Auditor-General dealt with a finite product and knew how many audits had to be conducted, how much work was involved and the level of skill required. It was therefore possible to calculate the exact number of personnel required. He estimated that the staff complement would have to be doubled to complete all the tasks involved. The workload was however not spread evenly throughout the year. The overhead associated with permanent staff would be much higher and it was more cost-efficient to engage contractors. He gave the assurance that consultants operated in accordance with the instructions issued by the Auditor-General.
The Chairperson said that, although professional ethics were applicable, the human factor needed to be taken into account. He asked how the issue of potential conflict of interest was managed.
Mr Makwetu replied that every consultant had to submit a declaration of interest. The Office of the Auditor-General checked if a particular audit firm also provided consulting services for other Government Departments. Reliance was placed on the code of conduct applicable to the accounting profession and consultants provided sufficient information for the Auditor-General to carry out an assessment.
Ms S Tsebe (ANC) was not convinced that the Auditor-General could not do more to reduce the high rates of unemployment in the country. She asked if the number of trainees could be increased.
The Chairperson explained that the nature of the work required highly trained staff and that the ability of the Auditor-General to attract the necessary skill level was dependent on the ability to pay competitive salaries.
Mr Biesman-Simons said that the issue of staff levels had not been deliberated by the Audit Committee. In his own experience, the workload had a pattern of peaks and troughs and it was difficult to justify funding full-time staff. Audit firms offered competitive fixed rates and the Auditor-General tried to keep costs down. He said that audit firms regarded work done for the Auditor-General and Government as prestigious. The source of adequately skilled personnel was limited. Accounting skills were scarce and the in general, the unemployed labour force did not include accountants.
The Chairperson said that the Portfolio Committees were mandated to conduct oversight and had to ensure that the Auditor-General remained independent as well. A degree of conflict of interest therefore existed. He asked what the legal mandate was for the Auditor-General.
Mr Singh requested copies of the PAA and any other applicable legislation.
The Chairperson replied that a list of the applicable legislation and the relevant sections of the Constitution will be compiled for the Members.
Mr Makwetu explained that investigations were not specified in the PAA. Requests for investigations were usually received from an executive of the relevant entity.
The Chairperson said that the “whistleblower” legislation made provision for any ordinary person to be granted the right to report fraudulent behavior and the right to protection. He asked if the Auditor-General would consider requests from ordinary persons.
Mr Makwetu confirmed that the Auditor-General maintained relationships with Departmental audit committees and had formed an Audit Steering Committee. The findings of internal audits conducted by entities were taken into consideration and the Audit-General was able to assess the strength of an organisation by the standard of its internal audits.
Mr Makwetu said that State Owned Enterprises submitted their annual financial statements to the Auditor-General on an annual basis. He advised that the Office of the Auditor-General was able to complete audit reports on time in 90% of cases. The financial affairs of a small minority of entities remained in disarray and the financial records were in-auditable. By their nature, audits were retrospective.
In response to the questions on staff levels and training, Mr Makwetu said that training offered comprised both scheduled training courses and on-the-job practical exposure. The organisational structure of the Office ensured that trainees worked under the supervision of experienced personnel.
Mr Biesman-Simons said that the Auditor-General offered a student loan and bursary scheme for young people to study at universities for a Chartered Accountant qualification. Targets set for previously disadvantaged persons have been exceeded and he was very impressed with the standards achieved by the employees.
Mr Biesman-Simons explained that the Independent Regulatory Board of Auditors (IRBA) had reviewed the Auditor-General and had submitted a favourable review result.
The Chairperson asked what role the Auditor-General played in strengthening the capacity of public entities with regard to the application of audit standards. He asked why internal audits were not conducted by and audit committees did not exist in all public entities. He asked if the Auditor-General was obliged to inform the Committee of any irregular findings that may be reported in the media. He requested an assessment by the Auditor-General of the Parliamentary structures required to provide the necessary support. He requested clarity on the Auditor-General’s relationship with other independent entities, e.g. the Public Service Commission (PSC) and the Public Protector. The PSC issued reports on public entities as well.
Mr Makwetu advised that the Auditor-General assessed the financial management capacity of public enterprises and State-Owned Entities. The Auditor-General’s involvement extended beyond the mere issuing of audit reports and included working with the entity to address the causes of adverse audit comments. Road-shows to municipalities to discuss audit reports and to make suggestions for improvement have been held. At provincial level, the Premiers were engaged as well. Subsequent audits generally commenced with a review of the matters requiring attention from the previous audit. He said that many issues were not difficult to correct but the Auditor-General had no power to enforce changes on the entities concerned and many ignored the recommendations made.
Mr Makwetu said that the Auditor-General had more direct engagement with SCOPA. Departmental issues were generally dealt with by the Portfolio Committee concerned. However, the various Parliamentary Committees and SCOPA had different focus areas and he suggested closer links between the Portfolio Committees and SCOPA.
The Chairperson was aware that interaction took place between SCOPA and the Portfolio Committees. He asked if assistance was required from other Parliamentary structures.
Mr Makwetu said that the Office of the Auditor-General tried to work within the Parliamentary schedule. The Auditor-General had signed memoranda of agreement with the PSC and with the Public Protector but had not yet entered into agreements with the South African Police Service and other law enforcement agencies.
The Chairperson remarked that the PFMA made provision for the recovery of misappropriated funds and for the criminal prosecution of persons who had committed offences in terms of the Act.
Mr Makwetu replied that the mandate of the Auditor-General was to audit and report and did not extend to instigating criminal proceedings. The evaluation of audit reports was an executive function.
The Chairperson asked how the Auditor-General ensured that recommendations were followed up. He requested that the Auditor-General informed the Committee of instances where recommendations were made but no action had been taken. The Committee wanted to assist the Auditor-General by ensuring that the necessary support was forthcoming.
Mr Makwetu replied that the Auditor-General considered the role of the Joint Standing Committee to be supportive. He explained that in certain cases, the Audit-General was not given access to information that made it impossible to issue a comment. In such cases, a disclaimer was issued, which usually did not result in any action being taken.
The Chairperson remarked on the possibility of applying punitive measures to ensure that the necessary information was made available to the Auditor-General.
Mr Singh asked what the meaning was of the different types of audit opinions.
Mr Makwetu replied that the meaning and implications of audit opinions would be included in the workshop scheduled for August 2009.
The Chairperson commented on the fact that there was only one Auditor-General and no provincial Auditor-Generals. Even though provincial offices existed, the issue of separation of powers remained.
Briefing by Audit Committee
Mr Biesman-Simons extended the apologies of the other members of the Audit Committee, Prof Karen Barac and Mr Peter Moyo. Due to time constraints, he limited his presentation to the key issues facing the Audit Committee. The attached document was circulated to Members for further information.
The Joint Standing Committee on the Auditor-General appointed the external auditors of the Auditor-General. The appointed auditors were BDO Spencer Stewart Inc. but the current agreement was in its tenth year. The Committee needed to approve the appointment of the external auditor as a matter of urgency. The Auditor-General had placed the requisite advertisement inviting tenders in the press.
The Chairperson assured the Audit Committee of the availability of the Joint Standing Committee to attend to the matter. He suggested that the usual protocols were followed by the Auditor-General to arrange a meeting.
The Chairperson referred to the published Report of the Auditor-General, dated August 2008. The report was tabled in Parliament on 20 April 2009. He said that it was the prerogative of the Speaker of Parliament to refer reports to the appropriate Committee. He understood that the report in question had not yet been referred. The report was mentioned in recent reports in the media and the question was asked whether Parliament was acting on the issues raised. He had only received a copy of the report on the same day. He suggested that the Joint Standing Committee requested Parliament to expedite the allocation of the report for further action.
Mr Singh said that the Committee should therefore not deal with the content of the report. He asked who had commissioned the report.
Mr Makwetu pointed out that the report was issued in 2008. He undertook to establish where the report had originated from and to advise the Committee accordingly.
The Chairperson requested that the Committee Secretary read the opening paragraph of the report. The report referred to a report from the Auditor-General published in 2006, concerning the declaration of interest of Government Ministers and other officials. He said that copies will be circulated to Members of the Committee for their perusal. He remarked that the names of officials were often not removed by charities and other organisations from the published lists of board members even though the person had formally resigned his position.
The meeting was adjourned.