INTERNAL CONTROL FOR PUBLIC FINANCE

1. INTERNAL CONTROL FOR PUBLIC FINANCE THE SOUTH AFRICAN EXPERIENCE Presenter: Beerson Baboojee | National Treasury | 2 December 2014

2. Contents • Brief introduction to South Africa • The importance of internal control • The control architecture in the South African public sector • How the components of the control architecture function • Conclusion

3. South Africa LOCATION PROVINCES

4. Background • South Africa is known as the “rainbow nation” • The political system is a constitutional multiparty democracy • The Constitution is the supreme law • Land mass is approximately 1 219 090 square kilometers • Population is roughly 52,9 million • There are 3 spheres of government: • National departments and public entities reporting to these departments • Provincial departments and provincial public entities • Local government (municipalities and municipal public entities)

5. Importance of internal control • The Constitution requires public resources to be managed efficiently, effectively and economically • South Africa has enormous social and development challenges which makes it even more critical for Government institutions to: • Deliver on their objectives • Report timeously and accurately on their use public funds • Comply with laws and regulations • Exercise responsible stewardship • Proper systems of control provide comfort that order, consistency, uniformity, noble intentions and a high level of public service ethos are present in the functioning of government • Properly designed and implemented controls increase the successful outcomes of legitimate government actions

6. Control architecture

7. Legislation (1/2) • Financial management legislation requires that the Accounting Officer must ensure that the institution that he or she is in charge of has an effective, efficient and transparent system of financial and risk management and internal control • Additional internal control requirements are also scattered across other legislations and frameworks but there is no nationally prescribed control framework at present • The philosophy of managerial accountability is embedded in the financial management laws • This philosophy implies that even in the absence of a prescribed control framework, management must implement proper internal procedures and control measures

8. Legislation (2/2) • The principles of the COSO framework and King Code of Corporate Governance for South Africa are widely adopted by government institutions • A benchmarking exercise undertaken by the National Treasury has shown that collectively the control requirements embedded in government legislations exceed those of COSO and the King Code • This implies that if there is full compliance with government legislations the requirements of COSO and the King Code will be exceeded

9. Institutional arrangements (1/5) • A control environment encompassing: • Effective leadership • High levels of ethics and integrity • Competent and qualified personnel • Policies, procedures and systems • Strategic and operational planning that take account of national priorities • Systems and processes to manage performance against the strategic and operational goals

10. Institutional arrangements (2/5) • Delegation of authority • The Accounting Officer is ultimately accountable • Every employee is accountable to the extent of his or her delegated authority • Managers are directly responsible in terms of their delegated authority for all activities of the programmes they are in charge of, including: • Designing, implementing and maintaining the internal control system • Exercising supervision • Monitoring the functioning of the system • Managing performance • Officials execute tasks within the parameters of established policies and procedures

11. Institutional arrangements (3/5) • Risk management • The Public Sector Risk Management Framework provides guidance on the risk management activity in government • Management are responsible for managing risks within their areas of responsibility • Risk management specialists assist the accounting officer and management to maintain an effective system of risk management by: • Developing and communicating the institution’s risk management framework • Working with management to identify, assess and prioritise risks, and develop strategies to manage important risks • Maintaining the risk register and reporting on risk control • Providing technical support and guidance in the execution of any risk management activity • The Accounting Officer and the Audit Committee are required to make statements on risk management in the annual report

12. Institutional arrangements (4/5) • Internal audit functions in accordance with local laws and the International Internal Auditing Standards, to: • Evaluate theadequacy, effectiveness and efficiency of the complete system of control (governance, risk management and control) • Provide recommendations to fix control problems • Provide audit reports to management and the Audit Committee • Consult to management as specialist advisors in certain areas • The Accounting Officer and the Audit Committee are required to make statements on internal audit in the annual report

13. Institutional arrangements (5/5) • Audit committees • Bring specialist experience, qualifications and qualities such as independence and objectivity to bear in advising government institutions • Function in accordance with an explicit terms of reference • Provide oversight over governance, risk management, control and related matters such as financial management, financial reporting, compliance and the audit process • Have functional control over internal audit • Provide protection to internal and external audit from manipulation • Have no executive status and act in an advisory capacity to the Accounting Officer • In terms of the law are empowered to escalate concerns to the Executive Authority, Auditor-General and the National Treasury • Required to make a statement in the department’s annual report on their view of governance, risk management and control, amongst other matters within their purview

14. Regulatory Oversight • A number of different government agencies are charged with overseeing that specific controls exist and are being adhered to • The National Treasury exercises oversight of financial management of government departments through: • Monthly budget reviews • Review of quarterly financial statements • Approving the amount to be withdrawn by departments from the national revenue fund each month • Annually assessing departments’ financial management capability • The Department of Performance Monitoring and Evaluation: • Reviews the performance of departments each quarter against their pre-approved performance plans • Annually assesses departments’ broader performance capabilities

15. Public Audit (1/2) • Each government institution is required by law to produce annual financial statements within the prescribed period and submit these for audit • The Supreme Audit Institution (Auditor-General) performs statutory audits of government institutions annually • Within the process of the statutory evaluation of an institution’s financial and performance management,the Auditor-General assesses: • Leadership (Political, Executive and Management) • Governance (quality of policies, procedures, institutional arrangements etc. geared to achieve institutional goals) • Compliance to laws and regulations, as well as policies and procedures internal to the institution

16. Public Audit (2/2) • The Auditor-General provides detailed reports of their findings and recommendations to fix them • In terms of the financial management regulations institutions are required to develop and implement plans to fix the control deficiencies raised in the Auditor’s report • Departments table their audit reports in Parliament • The Auditor-General tables a consolidated report of audit findings in Parliament • The Auditor-General also undertakes specialised “ non-financial” audits in high risk areas

17. Parliamentary Oversight • The Standing Committee On Public Accounts (SCOPA) exercises political oversight over departments financial management and control • Departments appear before SCOPA to present their annual reports • Departments also appear before SCOPA at its request to account for any matter that SCOPA has an interest in (e.g. Unauthorised expenditure, fruitless and wasteful expenditure, irregular expenditure, internal audit, fraud) • The respective Portfolio Committees (e.g. for Health, Defence, Education etc.) exercise political oversight over technical matters related to a department’s mandate

18. Conclusion (1/2) • Studies have shown that the control frameworks adopted in South Africa are conceptually sound ones, however, application is not always of the required standard • Failure of application is predominantly as a result of behavioural and technical problems, with behavioural issues being more prominent than technical ones • Behavioural problems usually manifest as: lack of discipline, lack of integrity, non-compliance with rules, not taking accountability and responsibility seriously, management overrides and lack of consequence management • Technical problems manifest as the failure to fully understand the operating environment and to adapt control systems to suit the peculiarities of the environment

19. Conclusion • Internal control goes to the heart of responsible management of public funds and government performance • It is crucial therefore to continually find ways to improve systems of internal control – and importantly – its application • That is the purpose of this plenary • South Africa wishes you all the best in this journey of discovery

20. Thank you