Strengthening Public Accountability through External Auditing: AGSA Initiatives and Challenges

1. Ww w Review of the Public Audit Act, 2004 – 17 March 2017

2. Reputation promise The Auditor-General of South Africa (AGSA) has a constitutional mandate and, as the Supreme Audit Institution (SAI) of South Africa, it 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. INTRODUCTION 3

4. The benefits of external auditing Thus, making a difference in the lives of citizens 4

5. AGSA mandate and process 5

6. Implementation of recommendations AGSA came up with several initiatives to ensure implementation of recommendations: • Management reports that detail not only the findings, but also the root cause (what caused the finding) and simple, clear and relevant recommendations to address the root cause • A quarterly engagement programme with accounting officers and executive authorities to share the status of controls • Supporting the oversight process through briefings to the public accounts committees and portfolio committees • Roadshows after each audit cycle to share the findings and recommendations with key ministers, provincial leadership and national and provincial legislatures • Briefing the media to emphasise important aspects of the reports tabled by the AGSA • Door-to-door visits by the Auditor-General to engage with mayors, councils and municipal administration • Providing a consequence management booklet to stakeholders which describes the legislative process in a simple manner • Working closely with the National Treasury, Accounting Standards Board, departments of public service, performance monitoring and evaluation and cooperative governance to find solutions towards improved financial and performance management 6

7. Audit outcomes (both PFMA and MFMA) – Quality of financial statements remains a challenge • 58 of the auditees with adverse and/ or disclaimed opinions, had similar opinions in the past five years. • Audit opinions would have been significantly worse if auditors did not identify misstatements for correction – only 44% would have been unqualified in 2014-15. • Root cause is persistent weaknesses in financial management controls. AFS submitted with no material misstatements 7

8. High levels of material non-compliance with legislation in both PFMA and MFMA Main contributor is material non-compliance with legislation on supply chain management (SCM) and prevention of unauthorised, irregular as well as fruitless and wasteful expenditure (UIFW) 8 Non-compliance with SCM legislation UIFW not prevented

9. Unauthorised, irregular and fruitless and wasteful expenditure continue to increase – PFMA and MFMA combined The irregular expenditure for 2013-14 includes the once-off occurrence of irregular expenditure by the Property Management Trading Entity (PMTE) amounting to R30 862 million. Unauthorised expenditure Irregular expenditure Fruitless and wasteful expenditure 9

10. Inadequate consequences and indicators of fraud and corruption not being investigated in local government (MFMA only) Material findings on non-compliance with legislation on consequence management – includes not investigating or correctly dealing with UIFW, financial misconduct and fraud • SCM findings on the following is of concern: • Employees and councillors with interest in suppliers • Limitations experienced in auditing SCM – i.e. the documentation is missing 10 Value of conflict of interest Value of limitations (no documentation)

11. Challenges that still prevent good audit outcomes The main root causes of auditees’ continuing challenges with regard to financial management and service delivery management, are as follows: • Slow response to improve internal controls and address risk areas • Inadequate consequences for poor performance and transgressions • Instability or vacancies in key positions or key officials lacking appropriate competencies Basic controls that should receive specific attention: • Effective leadership (political and administrative) • Audit action plans • Proper record keeping • Daily and monthly controls • Review and monitor compliance • Human resource management controls • Information technology controls 11

12. AGSA recent initiatives Status of record review • Engaging accounting officers in conversationsthat are insightful, relevant and have an impact Key control engagements / status of records review – objectives Key control engagements / status of records review – focus areas Identify key areas of concern that may derail progress in the preparation of financial and performance reports and compliance with relevant legislation and consequential regression in audit outcome Provide our assessment of the status of key focus areas that we reviewed Assess progress made in implementing action plans/ follow through with commitments made in previous engagements Identify matters that add value in putting measures and action plans in place well in advance to mitigate risks 12

13. AGSA recent initiatives continued Audit methodology We are improving our audit methodology so we can continue to add value and to enable our stakeholders to exercise oversight, accountability and good governance Implementation commenced from 2016-17 audit year 13

14. REVIEW OF THE POWERS OF THE AUDITOR-GENERAL 14

15. Review of the powers of the AG – Chief Justice of the RSA • The AGSA continuously searches for solutions to address the lack of consequence management in the public sector • In March 2016, the Constitutional Court handed down a judgment in the Nkandla matter that focused renewed attention on the status, powers and responsibilities of independent constitutional institutions • Key pronouncements taken from the Nkandla case are - • Built on ISSAI 7 – to be effective, the AG needs appropriate mechanisms to follow up on audit recommendations • AG should not expect implementation of his recommendations if the ones who must implement, are the authors of whatever must be fixed through AG recommendations • Parliamentarians’ role is to maintain oversight, but we should not expect of them to ensure implementation of all AG’s recommendations. They are differently skilled. 15

16. Review of the powers of the AG – Chief Justice (continued) • Best solution – AG is best skilled to ensure that his recommendations are implemented to his satisfaction • AG must therefore supplement the role of the legislatures and strengthen their hands to fulfil their duties • Public resources will be managed responsibly, and audit outcomes will improve, only if failure to implement AG recommendations will attract serious legal consequences • Alternative solutions to implement recommendations are available, but these must eventually culminate in a statutory provision that will be difficult to challenge • The AGSA should carefully consider its resource requirements, should the AG’s powers be augmented 16

17. Review of powers – an AG perspective • The precedent set by Nkandla judgment presented new ideas and opportunities to review the powers of the AG to enhance consequence management in the South Africa public sector • Purpose of the review of AG powers is to strengthen the AG’s ability to restore the administrative and financial integrity of systems and processes to facilitate service delivery, and the pursuit of goals, for which public money has been appropriated • The project researches, evaluates and considers a number of options available to the AG • Likely that the enhancement of powers will take the shape of a referral of financial crime and repeated failure to address financial management and governance concerns to appropriate investigating and law enforcement agencies • AG not prevented though from utilising other legitimate avenues, outside of the PAA, to achieve the desired result 17

18. Review of powers – a practical example on AG perspective • Regularity audit – financial statements, financial management, performance against pre-determined objectives and compliance with laws and regulations • Integrate other capabilities (information systems auditing, investigations and performance auditing) in regularity audit process to ensure the AFS is free from material misstatements and indicators of financial misconduct or crime • Once mismanagement or crime indicators are identified, the AG will – • Make recommendations to management, for follow-up during subsequent audit process, OR • In serious cases, immediately refer breaches to investigating agencies for further interrogation • A similar approach will be followed for performance audits, information systems audits and investigations • All of the above can be accommodated within the existing provision of the PAA 18

19. Amendment of the Public Audit Act, 2004 • Alternative solutions should eventually find their way into the statutes to give credibility to AG’s powers • Office of the Chief State Law Adviser (CSLA) engaged to facilitate the amendment of AG’s powers, as well as other, administrative matters that need revision • CSLA - • Confirmed constitutionality of the amended powers • Recommends inclusion of the power to refer undesirable audit outcomes for investigation under the current section 5(1) of the PAA • Recommends a broad formulation to accommodate future changes; detail should be included in other statutory instruments, such as regulations or the audit directive 19

20. Other amendments for discussion • The PAA was assented to on 14 December 2004 with a retrospective commencement date of 1 April 2004 • Our environment has changed significantly and requires an enabling law that speaks to our current needs • Proposed amendments for SCoAG’s information – • Mandate to conduct performance audits • Mandate to conduct investigations • Mandate to conduct international audits • Collection of fees • Additional amendments will be consulted with the Committee at an appropriate time 20

21. Mandate to conduct performance audits • Section 5(1)(d) of the PAA mandates the AG to conduct special audits • Special audits include performance audits and other discretionary services • Section 20(3) mandates the AG to report on the 3 Es as part of its annual regularity audits 21

22. Mandate to perform investigations • Section 5(1)(d) also mandates the AG to perform investigations into the affairs of any institution referred to in sections 4(1) and 4(3) of the PAA • When in the public interest or upon receipt of complaint or request 22

23. Mandate to perform international audits Section 5(2)(a) of the PAA provides that the AG may cooperate with persons, institutions and associations, nationally and internationally 23

24. Recovery of audit fees • Section 23 of the PAA mandates the AG to charge and recover fees for audits and related services • The bulk of the institution’s revenue consists of fees and other income is earned on investments (section 36) • Recommended review of the AG’s funding model 24

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