Review of the powers of the Auditor-General SA

1. Ww w Review of the powers of the Auditor-General SA Standing Committee on the Auditor-General – 9 June 2017

2. Reputation promise/Mission The Auditor-General of South Africa has a constitutional mandate and, as the Supreme Audit Institution (SAI) of South Africa, exists to strengthen our country’s democracy by enabling oversight, accountability and governance in the public sector through auditing, thereby building public confidence 2

3. Purpose of engagement The fight against corruption must find expression in Parliament as the centre of that fight, because of our constitutional obligation and also because our political obligation as representatives of the people Hon Themba Godi Chair of SCOPA 16 May 2017 The Auditor-General of South Africa (AGSA) hereby offers its unwavering support to Parliament in its call for action 3

4. Point of departure • The AGSA solicits the insights, guidance and assistance of the committee in respect of the following fundamental questions – • How does SCoAG ensure that the AGSA’s attention is focused on areas that pose the greatest risk to service delivery and achievement of government’s goals? • With this in mind, how does SCoAG empower the AGSA to execute its mandate effectively? • How does Parliament, through the AGSA, enforce implementation of our recommendations to improve public sector financial and performance management, and fosters respect for the rule of law? 4

5. Structure of presentation • Section A: The history and status quo • The role of Parliament and legislatures in a democratic state • The role of an independent supreme auditor in a democratic state • Attacks on the systems supporting service deliver and achievement of goals • Recent initiatives to restore the integrity of systems designed for financial and performance management • Section B: The future – towards an open, responsive and accountable society • The focus on auditing what matters • Ensure the implementation of recommendations • Enhanced reporting • Section C: Pulling it all together • Public Audit Amendment Bill, 2017 5

6. Section A The history and status quo 6

7. The role of Parliament and legislatures in a democratic state • The RSA – a democratic state founded on values that underpin an accountable, responsive and open democratic government • National Assembly represents the people of SA and ensures government by the people • Ensures service delivery and achievement of goals through the executive • National Assembly and provincial legislatures determine mechanisms for oversight and scrutiny • Constitution creates structures to aid oversight by legislatures (chapter 9s) • AGSA is a cornerstone of democracy 7

8. The role of an independent supreme auditor in a democratic state • The AGSA audits and reports to strengthen democracy • Section 188 (1) of the Constitution of the Republic of South Africa, 1996 • Mandate further extended by the Public Audit Act, 2004 (Act No. 25 of 2004) • Regulatory framework provides wide range of powers to execute the mandate effectively • These exclude the power to make binding recommendations • Value of an external audit • AGSA subscribes to the principles contained in ISSAI 12 – SAIs make a difference in the lives of citizens 8

9. Initiatives to counter the attack on systems • Root cause analysis in management reports coupled with recommendations • Audit methodology that requires auditors to follow up on previous recommendations • Commitment to quality of audits • Quarterly engagement programme • Support rendered to oversight committees in accordance with section 5(1)(b) of the PAA • Roadshows after completion of audit cycles that coincide with publication of general reports • Media briefings • Door-to-door visits to engage mayors, councils and municipal officials • Consequence management booklet • Close collaboration with National Treasury, Accounting Standards Board and identified departments 9

10. Historical reflection – acceptance and implementation of recommendations • Quality of annual financial statements in both PFMA and MFMA remains a challenge • Material non-compliance with legislation remains high in both PFMA and MFMA • Unauthorised, irregular and fruitless/wasteful expenditure remain high in both PFMA and MFMA • Lack of consequences or inadequate consequences for financial misconduct 10

11. Challenges still prevailing • Slow response to the call for improvement of the internal control environment • Instability/vacancies in key positions or key officials lacking required competencies • Inadequate consequences for poor performance and transgression of laws and rules. This is mainly due to the lack of leadership and absence of accountability. 11

12. Recent initiatives to restore integrity of systems • Quarterly key controls initiative focusing on – • Financial management • Performance management • Procurement and contract management • Compliance management • HR management • IT management • Financial health • Oversight and monitoring • 2. Improved audit methodology that will lead to better oversight, accountability and governance 12

13. Section B The future – towards an open, responsive and accountable society 13

14. Focus on auditing what matters – review of the audit portfolio • AGSA mandate includes all institutions required by national or provincial legislation to be audited by AGSA • Includes small and low risk institutions – boards, museums, trust funds and other accounting entities • AGSA time and resources allocated to these institutions dilute capacity to attend to other high risk areas • Chief State Law Adviser (CSLA) – these audits can be surrendered lawfully to private audit firms • Amendment of section 4 of the PAA will enable AGSA to opt out of these audits 14

15. Focus on auditing what matters - revised report content for selected engagements • PAA prescribes reasonable assurance engagements (audits) - section 20 • For small and low risk auditees the AGSA is inclined to consider limited assurance engagements (reviews) • Limited assurance engagements on a cyclical basis (as opposed to annually) also considered • CSLA – Limited assurance engagements or reviews on a cyclical basis will be lawful and possible through an amendment to section 20 of the PAA • Amendment of section 4 of the PAA will enable AGSA to opt out of these audits 15

16. Focus on auditing what matters - performance audits • Ad Hoc Committee – advised AGSA to build capacity to perform these audits on much broader scale • Lack of resources and appetite to engage in these audits, but still achieved successes • Capacity can benefit from – • Commitment by executive to appoint suitably skilled and qualified resources in key positions • Commitment by oversight bodies to monitor executive performance through inter alia performance audits • Refined mandate in the PAA to conduct standalone performance audits • Adequate provision for financial resources through various means, including annual appropriations for this pupose 16

17. Ensure implementation of recommendations • Ad Hoc Committee – AGSA recommendations not binding, therefore a call was made for a partnership between the AGSA and the National Assembly to ensure implementation • Lack of implementation had been brought to the attention of legislatures with a degree of success • EFF v Speaker of the National Assembly and Others; DA v Speaker of Parliament and Others a wake-up call for those charges with oversight responsibility and to enablers of such oversight • AGSA conducted local and international research with a view of amending its powers to ensure the implementation of recommendations following certain audit outcomes • Research was informed by two important principles – • The AGSA should not depart from its nature as a supreme audit institution • The amended powers should compliment functions of other organs of state rather than to duplicate of contradict them 17

18. Implementation of recommendations – models of SAIs 18

19. Implementation of recommendations - international benchmarking 19

20. Category A – European Court of Audit • Contrary to what the name suggests, the ECA has no judicial functions • Focuses on effectiveness of controls imposed by European Commission on its member states • Makes recommendations to member states, but no formal follow-up mechanism in place • Findings of illegal activity are tracked, but not required by law • Fraud indicators are reported to the European Anti-Fraud Office • Anti-Fraud Office will investigate, or refer to member state structures to take forward • Not a good track record of following up on recommendations – few reports occasionally selected to review implementation of recommendations after 3 to 4 years • Only now started to develop a database that will shape more regular follow-ups in future 20

21. Category A: Australian National Audit Office • Mandate very similar to the SAI South Africa mandate • Has statutory power to flag important matters for the attention of responsible ministers • No statutory power to enforce its recommendations • No statutory requirement to refer findings or lack of implementation of recommendations for investigation 21

22. Category A: Controller and Auditor-General of New Zealand • Highlights recommendations aimed at improving financial systems and management thereof • Only provides advice and support to auditees and TCWG • Does not take findings and recommendations further 22

23. Category A: Auditor-General of Canada • Also similar to other SAIs that follow the Westminster model • Enabling law allows SAI Canada to report financial impropriety to the Treasury Board for follow-up 23

24. Category B: Government Accountability Office (USA) • Based on the courts model and operates as a judicial body in the US government • The GAO audits and investigates • Issues legal opinions and decisions relating to public funds that are binding on the audited entities • Binding decisions and opinions ONLY issued after thorough QC process • Decisions and opinions subject to appeal to the courts, within 1 year of issuing • GAO performs a bid protest function • Bid protests are adjudicated by the GAO’s procurement law division • All work on the bid is interrupted while the GAO has 100 days to issue a binding decision • Bid protest function is a level of assurance to Congress that procurement laws are adhered to 24

25. Category B: Bulgarian National Audit Office • The BNAO does not operate as a judicial or quasi-judicial structure in the Bulgarian government • National Audit Office Act, 2015 – BNAO mandated to issue binding recommendations in final report • Recommendations may not be challenged in court and must be dealt with on a political level • Once issued, accounting officer has a reasonable period of time to implement • Accounting officer must report back to BNAO on the implementation of recommendations • If not – BNAO reports accounting officer to National Assembly, Council of Ministers or municipality • Failure to implement recommendations – in cases of disclaimers, BNAO hands over auditee to Minister of Finance to withhold funding until recommendations are implemented and audit opinion is possible • Criminal activity – BNAO must report to Office of the Prosecutor • Office of Prosecutor legally required to keep BNAO informed of progress and final outcome • SCM transgressions – reported to Public Procurement Agency for investigation • BNAO is mandated to recommend the dismissal of officials that violate the law and fail to implement recommendations 25

26. Category B: Comptroller-General of Peru • SAI “generates obligations” where an accounting officer fails in his/her duty, or breaks the law • Fundamental Regulation 2011 – 25 categories of liability that can be triggered by the findings in reports • Liabilities are administrative in nature • Example – violation of a procurement rule leads to prohibition to serve as a civil servant in the public sector for 5 years 26

27. Category B: SAI Kenya • SAI submits report with recommendations to Parliament • Parliament considers and makes further recommendations • Accounting officers have 3 months to implement recommendations • Failure to implement – deemed contempt of Parliament • Parliament may remove accounting office from his/her role or decide to demote to lower rank 27

28. Category C: Court of Audit of France • Status of a quasi-judicial body of the French government • Mandated to audit and adjudicate on accounts managed by institutions that receive public money (also private institutions) • When an audited account is found to be in order – issues an acquittal and account is discharged • When errors are detected – issues an I owe you against the defaulting accounting officer • Type 1 fine – executive responsible for submitting an accountability report late is fined • Type 2 fine – accounting officers are fined if they have unduly paid or failed to recover money on behalf of the state. Fine is equal to the damages suffered by the state. He/she becomes a debtor to the state • Professional liability insurance is extremely important • Minister of Finance can grant an abatement of arrears since amounts are too big to settle from a person’s own pocket 28

29. Category C: SAI Ghana and SAI Zambia • The Constitution of SAI Ghana mandates the AG to issue a surcharge certificate on certain findings • Qualifying findings for surcharge – overcharge of procurement, lack of documentation in procurement environment, and any illegal acts • Surcharge certificate effectively starts a legal process to recover the damages from accounting officer • The surcharge amount is equal to the damages suffered • A very similar mechanism is applied by SAI Zambia 29

30. Category C: Court of Accounts of the Union of Brazil • The SAI of Brazil recently demonstrated the value of enforcement powers in the constitution and cooperation among organs of state working towards a common goal • Keith Campbell – the story of Dilma Rousseff and Auditor-General’s teeth • The constitution of Brazil - Title I Chapter I Section IX Article 71 • Part VI: The Accounts Court shall control the use of any funds transferred from the Union by means of agreement, arrangement, adjustment or any similar instrument, to a state, a federal district or a municipality. • Part VIII: The Accounts Court will in the case of illegal expenses or irregular accounts apply to the responsible parties the sanctions provided for by law, which shall establish, among others, a fine proportional to the damages caused to the public treasury. • Part IX:The Accounts Court will determine a period of time for the agency or entity to take the necessary steps for the strict compliance with the law, if an illegal act is established. 30

31. Category C: Court of Accounts of the Union of Brazil (continue) • Part X: The Accounts Court shall stop the execution of the impugned act, in case it is not heeded, notifying the Chamber of Deputies and the Federal Senate of the decision. • Part XI: The Accounts Court shall present a formal charge to the competent power on any irregularities or abuses verified. Par (1) states that the National Congress shall adopt the “stopping act” in the case of a contract and immediately request the executive to implement the necessary remedial measures. Par (2) provides that if the National Congress fails to implement par (1), the Accounts Court shall decide on the matter. This means that the legislature gets the first chance to implement remedial action, within 90 days. Failure to do so grants jurisdiction to the SAI to take over that power. If the Accounts Court issues a fine, such fine is binding and has the effect of an execution instrument. • The Accounts Court of the Union consists of 9 judges 31

32. Implementation of recommendations – mechanisms to consider • Serious consideration should be given to the mandatory referral of undesirable audit outcomes • Several other mechanisms can be considered – • Statutory provision for formal follow-up on implementation (SAI Denmark) • Withhold of budgets in the case of disclaimers (SAI Bulgaria) • Administrative liability and demotion/prohibition against employment as a public official (SAI Peru/Kenya) • Civil and/or criminal action against public officials – fine, penalty or surcharge (SAI Ghana, France, Brazil) 32

33. Enhanced reporting • Appropriate reporting on the lack of consequence management is a key success factor • Findings and recommendations will be included in the management report (executive attention) • Lack of consequences and other undesirable outcomes will be reported to investigating agencies • Investigating agencies will keep the AGSA informed • AGSA will report on progress and outcomes of investigations in its general reports • Committees of legislatures can monitor progress through existing processes, i.e quarterly engagements conducted by SCOPA 33

34. Section C Public Audit Amendment Bill, 2017 34

35. The Bill on the review of the audit portfolio 35

36. The Bill on performance audits 36

37. The Bill on a system of referral of undesirable audit outcomes 37

38. The Bill on enhanced reporting • AGSA annually submits a report to the National Assembly on his activities • After every completed audit cycle the AGSA issues a general report on the overall audit outcomes • Outcome of matters referred for investigation to be dealt with as part of general reports • No need for amendment of the PAA to effect enhanced reporting 38

39. The Bill on investigations 39

40. The Bill on international audits 40

41. The Bill on remuneration and benefits of the AG 41

42. The Bill on recovery of audit fees 42

43. The Bill on funding of matters referred for investigation 43

44. The Bill on the establishment, role and composition of audit committee 44

45. The Bill on the establishment, role and composition of remuneration committee 45

46. Definitions and cosmetic changes • Outdated references will be addressed • Once the Bill is finalised, the definition clause will be reconsidered 46

47. THANK YOU 47