Auditor General Workshop on Analysis and Use of Quarterly and Annual Reports

Meeting report

Presentation to the Committee on How to Use the Quarterly and Annual Reports
Mr Phute Phukubje, Senior Manager from the Office of the Auditor-General of South Africa (AGSA), began the presentation with an explanation of the organisation’s constitutional mandate as the Supreme Audit Institution (SAI) in the country. Auditing enabled oversight, accountability and governance in the public sector and strengthened public confidence. The aim of the presentation was to help the Committee better understand how the Quarterly and Annual Reports of Departments and Entities should be scrutinised.

Mr Phukubje presented slides detailing the different sections of reports and highlighted aspects which should be particularly analysed and scrutinised.

The “SMART” criteria should be applied to Performance Targets; targets should be Specific, Measurable, Achievable, Relevant and Time-bound (a specific deadline must be given). Examples were used to demonstrate how the “SMART” criteria could be applied to a business plan (See slides).

The structure of an Annual Report was presented, with significant areas for the Committee highlighted. 

The Foreword summarised the year and indicated the significant changes, achievements, delays and improvements. The General Information section covered the organisation’s structure; a summary of the programme; its vision, mission and legal and constitutional mandates. International ministry visits, key projects, progresses and submissions to the legislature would also be covered.

Programme Performance covered the voted funds summary, outlining the aim of the vote; the key measurable objectives; the programmes and key achievements. An Audit Report, as required by the Public Audit Act, must present findings on whether this performance information was valid, accurate and complete. Management processes and controls for oversight and reporting on service delivery were also assessed. These Audit conclusions would be included in the Management Report of an entity. The Committee would need to question what percentage of specific targets had been achieved and the reasons for any under-achievement. Any variances between targets and achievements should be analysed closely. 

In the Human Resources Report, the Committee should concentrate on issues of overtime; employment and vacancies as this would directly impact on service delivery. Employment changes were significant, particularly reasons given for resignations, as this reflected the culture of the Department, and performance rewards, particularly if a department had not achieved its targets. Issues of service delivery; expenditure by programme; salaries and allowances; job evaluations; foreign workers and leave utilisation; HIV and AIDS and health promotion programmes; Labour relations and skills development; injuries on duty and utilisation of consultants would also be covered in the Human Resources Report. 

When analysing the Reports on Financial Statements, Mr Phukubje highlighted the importance of the Report of the Audit Committee. This report summarised the year’s financial activities and confirmed the number of meetings held throughout the year, the decisions made and how these helped the Department or Entity in attaining a positive outcome. The Management Report detailed the Accounting Officer’s Report and should address measures to correct or improve any problematic areas in the future.

Mr Phukubje listed the structure and format of the Auditor General’s Report. The different Audit Opinions given could be: Unqualified (clean)- the financial statements were presented in all material respects. Unqualified with matters; the financial statements were presented fairly in all material respects with findings on non-compliance or internal control. Qualified (except for): the auditor concluded that, except for specifically listed material misstatements, the financial statements were a fair reflection. Adverse: the auditor disagreed with management’s presentation of the financial statements to the extent that it was not considered a fair reflection of the financial position, financial performance and cash flows. Disclaimer: there was a lack of appropriate audit evidence such that the auditor was unable to form an opinion on the financial statements as a whole.

The Emphasis of matter section covered matters which needed to be highlighted even in an Unqualified Audit. Issues such as material losses and impairments, significant uncertainties and the restatement of corresponding figures would be covered. The Status of Internal Control of the financial statements, predetermined objectives and compliance with laws and regulations was reported, and should to be analysed by the Committee, under the categories of Leadership, Financial and Performance Management and Governance. The Committee should assess the root causes behind failures in each area.

The shifting of funds within a programme and the virement, as listed on the Appropriation Statement, should be particularly scrutinised. An Accounting Officer could shift up to eight percent of funds from one programme to another, but needed to inform the Minister within seven days.

In the Statement of Financial Performance the Committee should focus on expenditure on goods and services, Transfers and Subsidies, Surplus and Deficit for the year. Expenditure on compensations, capital assets and a comparison with the previous year would also be covered in this section.

The Notes on Irregular Expenditure, particularly with regard to costs incurred due to the contravention of legislation and fruitless and wasteful expenditure which could have been avoided had reasonable care been taken, should be carefully scrutinised.

Discussion
Ms J Killian (COPE) noted that the utilisation of consultants had not been highlighted as an issue in the Human Resources section. She asked if this was not significant for the Committee in determining whether there was adequate skills transfer and staff development.

Mr Pukhubje agreed that this was a critical aspect for the Committee to emphasise and evaluate.   

Ms T Ndabeni (ANC) asked if the Audit Opinion was based on an assessment of only the documentation or whether the quality of work was also verified. Was it the Committee’s responsibility to assess this aspect?

Mr Phukubje responded that paperwork was the starting point of the evidence examined, but that it was physically verified.

Ms Corne Myburgh, Business Executive, AGSA, added that verification was done on a sample basis, with checks for completion and official project validation.

Ms Kilian asked if any aspect of the Audit assessed performance in terms of ‘value for money’.

Mr Phukubje replied that a Performance Report would give a thorough opinion on whether value for money had been achieved. This presentation was focussed on information given in the Regulatory Report, however certain mechanisms ensured that value for money was given some consideration in a Regulatory Audit.

Ms W Newhoudt-Druchen (ANC) requested clarity on whether a Disclaimer reflected well or poorly on a department.

Mr Phukubje replied that a Disclaimer reflected very poorly on a department. Due to missing information, the AG was unable to form an opinion on the financial statements. This indicated that the department’s affairs were chaotic.

Mr Kekane asked for clarity on which Audit Opinions were to be considered positive indicators and which negative.

Ms Myburgh replied that an Unqualified Report was what all departments and entities should strive for. All documentation was complete and could be trusted. There were no findings on predetermined objections. The department or entity concerned had sound financial controls. Unqualified with matters meant that the financial statements were a fair representation, but there was either non-compliance or findings on predetermined objectives. This indicated that the department or entity needed better controls and systems in order to accurately report on performance. A Qualified Report was a more serious problem. Certain components were inaccurately disclosed and reported. The Report was considered accurate and reliable ‘except for’ these incorrect or unverifiable components. An Adverse opinion indicated that, across the majority of the account balances, the evidence found disagreed with the financial statements presented by management and were therefore found to be ‘materially incorrect’. This was an extremely problematic outcome. The Disclaimer meant that the Auditor General had asked for documentation which could not be presented, usually due to poor document management. As a result the Auditor General could not form an opinion.

The Chairperson noted that the Committee did not typically get access to the detailed Manager’s Report, only the Annual Report. He asked if the Committee could get the more detailed report in order to better understand the issues.

Mr Phukubje responded that the Manager’s Report was often impractically long and detailed. The Executive Report, within the Annual Report, was a summarised version. The Committee could access the full Manager’s Report through Parliament at any time.

The Chairperson asked whether the gravity of ‘fruitful and wasteful’ expenditure varied in relation to the amount in question.

Mr Phukubje replied that the amount was not relevant. One Rand was material and therefore needed to be disclosed.

Ms A Muthambi (ANC) asked if the Auditor General verified whether legal settlements made out of court were fruitless and wasteful.

Mr Phukubje replied that this was investigated. If a payment had to be made as part of the settlement then the root cause for the payout was examined. If the Department was found to be at fault because due to procedural non-compliance, the payment would be considered fruitless and wasteful.

Ms Newhoudt-Druchen asked for clarity on the meaning of the term ‘restatement of corresponding figures’.

Mr Phukubje answered that the term highlighted a mistake from the previous year which had been corrected in the current year, affecting the figures.

Ms Newhoudt-Druchen asked if a ‘golden handshake’ would be considered fruitless and wasteful.

Mr Phukubje answered that if the golden handshake was found to be expenditure made in vain, which could have been avoided, it would be considered fruitless and wasteful. If the expenditure could be justified then it would not.
Ms R Morutoa (ANC) asked for an example of good grounds for a golden handshake.

Mr Phukubje gave the example of a reward given for valuable voluntary work done. An example of a wasteful golden handshake would be when an employee was fired and later found to have done nothing wrong. If reasonable care had been taken, the employee would not have been fired and therefore costs would be considered fruitless and wasteful.

Ms Kilian noted that in instances where disciplinary action was unsuccessful and employees were reinstated this sometimes resulted in double payments for a single position. Was this considered fruitless and wasteful?
 
Mr Phukubje answered that this would be considered fruitless and wasteful expenditure.

Ms Newhoudt-Druchen asked what the Committee should analyse in respect of leadership, governance and financial management. She noted that in some instances the media picked up on things the Committee had not.

Ms Myburgh replied that the Committee should analyse any findings presented in the Audit Report on the internal control deficiencies given as the reason for the qualification.

The Chairperson suggested that Ms Newhoudt-Druchen’s concern could be due to the fact that Management Reports were sometimes leaked to the media. This meant that the media had a more detailed report than the Committee had evaluated. This sometimes made Parliament look inefficient in detecting issues.

Ms Muthambi asked if the Audit Committees’ effectiveness was evaluated.

Mr Phukubje responded that if the Audit Committee had complied with guidelines then they could not be considered ineffective. In Some instances the Audit Committee has done their part and a department still receives a negative outcome.

Ms Kilian asked if part of the problem was not over-optimistic and unrealistic goal that were not measurable or achievable. This created the perception of a totally dysfunctional entity or department. What was the Auditor-General doing to ensure that departments and entities reduce their goals and focus on their core mandates.

Ms Myburgh answered that it was difficult for office of the Auditor-General to tell departments to reduce their goals as they needed to remain independent so that they could review and offer impartial reports. In the past some workshops had been arranged in conjunction with the Treasury for certain departments This might be something to consider again in future.

Ms Kilian asked for a definition of ‘fruitless’ as opposed to ‘wasteful’ expenditure.

Mr Phukubje responded that there was no difference; the terms went together.

Ms Killian asked if highly irregular matters with high costs involved, such as the firing of a Director- General with an ensuing legal conflict, could ever be condoned or if there had to be disciplinary action.

Mr Phukubje responded that while such a matter could be condoned, it would still need to be reflected in the financial statements. No department could run away from that.

Ms Myburgh added that while disciplinary action was not always necessary, there must be an investigation to determine follow-up action.

Ms Kilian commented that the presentation had been valuable and thanked AGSA. She asked if they might be willing to attend specific meetings in future to offer further guidance.

The Chairperson asked if the Auditor General would be able to assist the Committee in future.

Ms Myburgh responded that the AGSA would gladly assist the Committee in the future.

The Chairperson thanked the Office of the Auditor General for their time and helpful input.

The meeting was adjourned.