ATC201125: Report of the Standing Committee on the Auditor-General on the Integrated Annual Report of the Auditor General for the Financial Year 2019/20, Dated 25 November 2020

Standing Committee on Auditor General

REPORT OF THE STANDING COMMITTEE ON THE AUDITOR-GENERAL ON THE INTEGRATED ANNUAL REPORT OF THE AUDITOR GENERAL FOR THE FINANCIAL YEAR 2019/20, DATED 25 NOVEMBER 2020
 

The Standing Committee on the Auditor-General, having considered the Integrated Annual Report of the Auditor-General 2019/20, referred to it, reports as follow:

 

1. Introduction

The Public Audit Act (the PAA) requires the Auditor-General (AG) to submit the annual report, the financial statements and the audit report on those statements within six months after the end of the financial year to which they relate, to the Standing Committee on Auditor-General (SCOAG) through the parliamentary processes.

The AG satisfied the afore-said requirements by submitting the Auditor-General of South Africa’s (AGSA) annual report, financial statements and audit report to the Speaker for tabling in the National Assembly and for referral to the SCOAG on 30 September 2020.

In exercising its responsibility, the SCOAG invited the AG, his management team and the Independent Audit Committee to make a presentation on the AGSA’s Integrated Annual Report for 2019/20 financial year on 25 November 2020. Flowing from that interaction, the SCOAG highlighted and deliberated on some key issues raised in those interactions with regard to the 2019/20 Integrated Annual Report of AGSA.

 

1. Corporate Governance structures of AGSA

The Accounting Officer of AGSA is the Deputy Auditor-General (DAG). The DAG is appointed in terms of the 31 of the PAA. He or she is expected to amongst others, take all reasonable steps to ensure that full, true and effective records of all income and expenditure and all assets, liabilities, and of all financial transactions of the AGSA are in place. In the same vain, the AG has to take all reasonable steps to ensure that AGSA has and maintains a system of internal audit under the control and direction of an audit committee.

Another critical governance structure is the Audit Committee (AC) of AGSA. This committee is established in terms of section 40 of the PAA.  Members of the Audit Committee(AC) of AGSA are appointed by the AG in compliance with section 40 of the PAA as amended. Further the PAA provides that those members may not be in the employ of AGSA; and their term of office is not time bound. The AC of AGSA is responsible for oversight of the financial and non-financial reporting process, the integrity of the system of internal control and risk management.  Currently, it consists of four (4) members, including its Chairperson, who are independent, knowledgeable, have the requisite business, financial and leadership skills and do not hold any political office.

The second structure that plays a critical role in assisting to oversee AGSA is its Internal Auditors. The current Internal Auditors were appointed through a tender process which was overseen by the AC of AGSA. The primary role of the internal auditors is to conduct internal audits and advise the AC and AGSA Management on possible areas that need to be strengthened. Currently, Ngubane & Co are employed as the internal auditors of AGSA, replacing SNG-Grant Thornton, which their term came to an end during 2018/19 financial year. Ngubane & Co are employed on a three-year contract, which started during this financial year.

The existence of external auditors also plays a crucial role to ascertain the prudent financial management of AGSA’s resources. The appointment and role of the External Auditors are prescribed in the PAA. Section 39 (1) of the Act, which provides that the oversight mechanism (the SCOAG) must annually appoint an independent external auditor to audit the accounts, financial statements and financial management and performance information of the Auditor-General. Whereas section 39 (2) (b) of the Act stipulates that any such person appointed as an external auditor may not be a staff member in the administration of the Auditor-General.

            The current External Auditors, Crowe Jhb were appointed in December 2017 after the contract of Kwinana ended.  The AC has facilitated the appointment of External Auditorsthrough a fair, equitable, transparent and cost effective process; and in line with an AGSA’s transformation agenda.

 

 

1. Financial performance information

 

The AGSA has generated an actual revenue of R3.7 billion for the 2019/20 financial year. This represents a 4.5 percent year on year growth rate, when it is compared to the revenue generated in 2018/19 (R3.4 billion). Importantly, this percentage growth rate in the revenue generated during the 2019/20 financial year is lower than the percentage growth rate recorded during the previous year, 2018/19, which was 6.7 percent. However, the notable increase of 4.5 percent recorded during the 2019/20 financial year can be attributed to several factors such as reducing unbilled hours and realising efficiencies from fully implementing the AGSA’s revised audit methodology. Further, due to factors such as staff pooling between national and provincial business units mainly during the MFMA season, which resulted to an additional R107 million in own hours’ income and the commitment to achieving prescribed recovery rates and own hours’ revenue. Thus, all these revenue enhancement and efficiencies adopted by AGSA during 2019/20 financial year, resulted in an increase in AGSA’s own revenue to 78 percent and the reductions in the audit work allocated to private audit firms.

 

It is worth noting that, for the 2019/20 financial year, the AGSA has achieved a surplus of R190 million compared to R71 million recorded in 2018/19, and R67 million recorded in 2017/18 financial year. This surplus achieved during 2019/20 financial year by AGSA can be ascribed to cost containment measures implemented by AGSA over the previous years, which resulted in steady growth in overhead expenditure. For example, for the 2019/20 financial year, AGSA incurred about R1.2 billion, which is far lesser than the budgeted amount of R1.4 billion for overheads. Importantly, the overhead expenditure amount incurred, which is lesser than the budgeted amount, coupled with a surplus of R190 million, which is 5 percent of audit income, more above than the target of 1-4 percent of audit income, were achieved despite the fact that AGSA did not receive the agreed R50 million from the fiscus, earmarked to assist AGSA to implement the amended PAA. Further, this surplus corresponded with a sharp increase in the overall outstanding debts owed to AGSA. For the 2019/20 financial year, the overall debts owed to AGSA amounted to R931 million compared to R744 million owed in 2018/19 and R650 million owed in 2017/18 financial year.

 

At the end of 2019/20 financial year, AGSA’s financial diligence has led to a favourable balance of R674 million compared to R72. 3 million and R664 million recorded in 2018/19 and 2017/18 respectively. The decrease in the favourable bank balance, is partly due to the fact that the AGSA used its resources to fund PAA- related costs, which were supposed to be financed by the R50 million that was not received from the National Treasury

 

1. Surplus

 

As alluded above, for the financial year ended 31 March 2020, AGSA recorded a Surplus of R190 million, which is more than the R27,7 million, which was budgeted for in this financial period. The Surplus generated for this period under review represents a 5 percent of the total audit income generated for this period, against a budgeted percentage total audit income of 0.76 percent. Further, the surplus of 5 percent of the total audit income is above the AGSA’s target of 1-4 percent of generated surplus. This substantial improvement recorded under the reviewed period is reportedly due to a combination of the positive impact of cost containment measures adopted by AGSA and good performance in AGSA’s trading.

 

Importantly, section 38 (4) of the PAA as amended empowers the AGSA to retain the whole surplus or a portion thereof, following consultation with the National Treasury and after approval by SCOAG. If approved, such surplus is used for working capital and general reserve requirements. The portion of a surplus not retained is paid back into the National Revenue Fund.

 

During the Annual Report consideration for the previous years’ dating back as far as 2014/15 up to the 2018/19 financial year, the (SCOAG) has recommended that the AGSA retained surplus generated from these years as General Reserves. Further, the SCOAG, recommended that the AGSA must within 30 days of the adoption of 2018/19 report (The SCOAG Report on Integrated Annual Report), provide the Committee with definitive plans, with timeframes, as to how the office was intended to utilise the Net Surplus.

 

1. Outstanding debts

 

For the 2019/20 financial year, the debt owed to AGSA has on overall increased. At the end of 31 March 2020, AGSA was owed an amount of R931 million, which is more than the amount owed in 2018/19 (R744 million) and (R650 million) in 2017/18 financial year This represents an increase in the amount owed to AGSA, which is a stark contrast to previous periods like, a period between 2016/17 and 2017/18 financial year, whereby, outstanding debts to AGSA decreased. As from the previous financial year, AGSA has experienced another wave of increase in debtors.

 

Historically, AGSA used to experience a challenge of outstanding debts which were mounting annually. In conjunction with the SCOAG, in 2014, AGSA introduced some enhancement collection strategies, which include ring fencing of the outstanding debts with auditees and litigation of auditees. Following the implementation of the afore-said strategies, the challenge of outstanding debts subsided pointing to the effectiveness of these strategies.

 

Flowing from the above, it is concerning that as for the 2018/19 financial year, the outstanding debts increased to R744 million and to R931 million under the reviewed period, that is, 2019/20 financial year. This increase is despite that these strategies are still being in place. It is further concerning that local government audits are still contributing the highest percentage (46 percent) of outstanding debts, which is an increase from 43 percent during the 2018/19 financial year. More concerning is the worrying trend, whereby there is a sudden increase of outstanding debt from State Owned Enterprise (SOEs) and agencies. This increasing trend has been noticed since 2017/18 financial year, and it is getting no better.

 

1. Non- financial information

 

Under the strategic objective: Ensure high quality of our audits, the AGSA planned to achieve 80%-90% adherence to quality standards of audit engagements. For the 2019/20 financial year, this target was not achieved, instead the AGSA achieved 76% of audit files passing the quality control reviews. The quality of AGSA audit files is assessed by the Quality Control Assessment Committee, which is chaired by the AG. The Quality Control business unit performs mandatory post-issuance quality reviews in each cycle of a sample of completed audit files. The quality of the review process is annually overseen by the Independent Regulatory Board for Auditors (IRBA).

 

1. Other critical issues emanated from the Integrated Annual Report of AGSA

 

1. Special Audit Services Reserve

 

The AGSA has set aside a fund to finance special investigations or audits for which AGSA may not be able to recover the costs from a special auditee. The AGSA’s financial position shows that a special audit services reserve had an opening balance of R4 964 million at the beginning of the 2019/20 financial year. The same amount was recorded and reported at the end of 2019/20 financial year. In fact, the same amount was recorded since 2017/18. So this amount remains unchanged for almost 3 (three) financial years. Further, in all these years, there was no movement shown from this money, meaning there were neither additional funds nor deductions (use) from this fund throughout the years.

 

In spite of the above, the only explanation given by AGSA in the notes to financial statements, is that the “former audit commission instructed that the reserve should not be increased before further guidance is provided by the SCAOG, established in terms of section 55 (2)(b)(ii) of the Constitution”.

 

1. Scope of section 4 (3) Audits

 

Section 4 (3) of the PAA states that the Auditor-General may audit and report on the accounts, financial statements and financial management of-

1. Any public entity listed in the Public Finance Management Act; and
2. Any other institution not mentioned in subsection (1) and which is-

1. Funded from the National Revenue Fund or Provincial Revenue Fund or by a municipality.
2. Authorised in terms of any legislation to receive money for a public purpose

In spite of the above, for the 2019/20 financial year, AGSA directly audited 14 out of 21 public entities listed in Schedule 2 of the PFMA (large and complex SOEs). Of which, AGSA is in a process of taking over ESKOM and Transnet. Subsequently AGSA has increased its participation in the audits of these two SOEs, while working in collaboration with appointed audit firms from the private sector to manage a smooth transition.

These are commendable efforts made by AGSA to increase its ability to handle such audits and create some desire to audit them. These efforts are in line to address a concern raised by SCOAG in its previous engagements with AGSA, that AGSA should considertaking the audits of all of the 21 Schedule 2 SOEs. However, these efforts reportedly exerted pressure to the resources of AGSA due to a continuous need for intensive training and learning for staff in preparation for a take-over for instance.

 

1. Funding of the additional mandate given to AGSA

 

During the drafting of the Public Audit Amendment Act, it was resolved that the new additional powers to AGSA will be funded through fiscus. In fact, after SCOAG’s extensive consultation with the National Treasury, it was agreed that the funding for the additional powers the legislation will provide to the AGSAwould be considered during the annual budget process. Subsequently, the AGSA was expected to receive an amount of R50 million from National Treasury during the 2019/20 financial year, of which that was never materialised.

 

1. Resistance and push backs from some of the auditees

 

Since the 2016/17 financial year, AGSA has noted a growing concern, whereby, there was a sudden increase in the number of auditees resisted and contested the audit outcomes from the Auditor-General. For the 2017/18 financial year, the AGSA reported that these contestations and push backs from the auditees resulted to delay in the conclusion of audits and unnecessary increased in the costs of audits borne by both AGSA and the auditees. For instance, AGSA reported that for 2017/18 financial year, a total of 56 auditees contested AG’s audit outcomes, of which 40 audit contestations were for PFMA auditees and 16 were for MFMA auditees. Even though most of the reported contestations were resolved, push backs from five auditees stood out, mainly because two resulted in court actions and three resulted in audit reports not being tabled.

For the 2018/19 financial year, 88 auditees contested their audit findings, this represents a significant increase of 32 audits contested their audits compared to 58 recorded in 2017/18 financial year. Of the 88 contested audits, 55 were PFMA auditees and 33 were auditees from MFMA.

 

During the 2019/20 financial year, 98 auditees contested their audit findings of 2018/19 audits. For national and provincial audit cycle (commonly known as PFMA audits), 57 auditees contested their audit outcomes, while in 41 auditees from local government audit cycle (commonly known as MFMA audits) contested their audits. The reasons for such resistances were consistent with those recorded in the previous financial year, which in the main include, amongst others expectation of clean audits that didn’t materialise, regression in audit outcomes and technical disagreements. As it was a case in the previous financial year, these contestations have contributed to reports being signed off late, causing excessive pressure to the leadership and staff of the AGSA. Subsequently, 81 audits were completed on time, of which 84 percent were from PFMA audits and 74 percent were from MFMA audits.

 

1. Appointment of External Auditors

 

Section 39 (1) requires the SCOAG to annually appoint an independent external auditor to audit the accounts, financial statements and financial management and performance information of the AGSA. The A of AGSA facilitates the appointment of external auditor through a fair, equitable, transparent and cost effective process that is in line with an AGSA’s transformation agenda.

 

During the 2017/18 consideration of the Annual Report of the AGSA, the Audit Committee recommended the appointment of Crowe Jhb to SCOAG. In December 2017, the SCOAG approved the appointment of Crowe Jhb as an external auditor on condition that they present to SCOAG a transformation plan by 30 June 2018, which they only managed to submit on July 2018. The SCOAG further recommended that the Audit Committee should furnish it with the quarterly report on the implementation of the transformation plan of Crowe Jhb.

 

In pursuance of the above, for the period under review, the SCOAG never received any progress report from the Audit Committee. Currently, the Audit Committee has once again recommended the appointment of Crowie Jhb as the external Auditor of AGSA

 

 

 

1. The Committee Observations and findings:

The Committee made the following observations

1. The Committee noted the improvement in terms of transformation of the Crowe Jhb, as it was a condition of their appointment. Subsequently, their B-BBEE score has improved from level 7 to level 4 since 2019 and their target as per their transformation plan is B-BBBE Level 3 contributor for the year 20201.

 

Importantly, the Committee noted the fact that as part of the appointment terms of Crowe Jhb, the SCOAG had recommended that the Audit Committee should furnish it with progress reports on a quarterly basis on the implementation of the transformation plan of Crowe Jhb, of which that has never happened during the 2019/20 financial year.

 

Due to their improved B-BBEE score, the AC has recommended that they should be re-appointed as the External Auditors of AGSA

 

1. The Committee noted that the AGSA has generated a surplus of 190 million, which is more than the R27.7 million, which was budgeted for during 2019/20 financial year. Further, the Committee noted that the Act requires SCOG to approve the surplus to be retained by the AGSA or partly paid to the National Revenue Fund. Of importance, the AG has used the surplus, which was approved by the Committee in the previous year to fund its working capital. As such, the AG has requested the Committee to approve the retention of the entire surplus generated for the 2019/20 financial year as General reserves.
2. The Committee noted that the amount allocated to a special reserve fund has remained constant over the years. It further noted that the AGSA was advised by the former audit commission to not increase allocation to this fund beforefurther guidance is provided by the SCOAG.

 

1. The Committee noted that the amount owed to AG has on overall increased during the 2019/20 financial year. For the 2019/20 financial year, the outstanding debt amounted to R931million, which is more than the amount (R744 million) recorded in 2018/19 financial year. This in stark contrast to the declining trends, which were experienced in the previous financial years. Local government is the main contributor to this debt, while there is a notably growth trend of outstanding debts from SOEs. The Committee noted with concern this new trend, in particular to the fact that most of SOEs are becoming financially unsustainable. This can lead to more SOEs defaulting in paying audit fees to AGSA and therefore, adding up to the challenge of outstanding debts.

 

1. The Committee noted with concern the non-achievement of key performance target: to ensure high quality of our audits, especially, that it was not the first time the AGSA failed in achieving this target. For 2014/15 and 2015/16 financial years, the AGSA could not meet this target. Further, this targets could not be achieved this for 2018/19 and 2019/20 financial years The Committee was more concerned with the impact this might have on the credibility of audit outcomes issued to the audits. The Committee also observed that the non-achievement of this performance target also worried the Auditor-General, although no explanation was given for it.

 

1. The Committee observed that currently, AGSA directly audits 14 out of 21 public entities listed in Schedule 2 of the PFMA (large and complex SOEs). Of which, AGSA is in a process of taking over ESKOM and Transnet. Subsequently AGSA has increased its participation in the audits of these two SOEs, while working in collaboration with appointed audit firms from the private sector to manage a smooth transition. Further, the Committee has observed that all these efforts have exerted pressure to the resources of AGSA due to a continuous need for intensive training and learning for staff in preparation for a take-over.

 

1. The Committee noted that during the amendment of the Public Audit Act, it was agreed that the additional powers given to AG will require an amount of R50 million, which will be allocated to AGSA through the fiscus. This has not happened as the AGSA has to use its resources to finance the implementation of amended PAA. This has negatively impacted in the cash flow position of AGSA.

 

1. The Committee has noted that despite that there were no material findings of the AGSA’s audit, but there were some number of internal control gaps identified during the audit. Further, some audit findings identified remain unaddressed primarily because of inadequate capacity and capabilities within information technology, which continue to receive leadership attention and support.

1. CommitteeRecommendations

 

Flowing from the observations made by the Committee with regard to the 2019/20 Integrated Annual Report of AGSA, the Committee draws the following recommendations:

 

1. The Committee recommends the appointment of the current External Auditors as they show an improvement in their transformation plans. The Audit Committee must furnish the Committee with a progress report on their transformation on a quarterly basis as it was agreed to.
2. The Committee supports the retention of the total surplus of R190 million generated in 2019/20 as a general reserve.
3. Considering the scourge of corruption that is ravaging our country, there might be an increase in the request for special audits. If a further consideration is given to our country’s slow economic growth prospects and its financial impact thereof, thus, there is a high possibility of an increase in special audit requests and some special auditees may not be able to bear the full costs of their special audits. Therefore, the Committee recommends that this fund should be given an additional allocation for the 2021/22 budget.
4. The AG should consider extending his current collection strategies to SOE debtors. In this regard, the AG should enter into ring fencing agreements with SOEs’ debtors to ensure that they pay their outstanding debts to AGSA.
5. The Committee recommends that AGSA should submit mitigation plans on how it plans to correct the persistent non-achievement of performance target: ensure high quality of our audits, target to achieve 80%-90% adherence to quality standards of audit engagements. Such mitigation plans should be submitted by 31 December 2020.
6. The Committee welcomed the efforts made by the AGSA to expand its audit portfolio, especially with large and complex SOEs. In this regard, it recommends that AGSA should communicate any challenges it encounters when increasing auditing the number of large and complex SOEs.
7. The AG should fully implement the status of records review to ensure that early warning signs with regard to financial management of auditees are communicated in time so as to curb the resistance to accept audit outcomes from the AG.
8. The Committee recommends that the AGSA should develop an audit action plan to deal with the identified audit findings, and submit it to the Committee for monitoring its implementation.
9. The Committee notes with concern that the commitments made by the National Treasury during the consultations prior to the passing of the Public Audit Act, with regard to the funding of the additional powers to AGSA, have still not materialised. It was agreed then, that the funding for this purpose (to the tune of R50 million) would be allocated to the AGSA during the 2019/20 financial year. The Committee thus recommends that the National Treasury facilitates this outstanding payment with immediate effect.

 

The Standing Committee on the Auditor General is satisfied with the performance of the AGSA for the 2019/20 financial year and therefore recommends that the National Assembly approves the Integrated Annual Report.

 

Report to be considered.