Implications of Public Audit Amendment Act: Auditor-General briefing

Joint Standing Committee on Financial Management of Parliament

27 August 2019
Chairperson: Ms P Mabe (ANC) and Ms G Mahlangu (ANC)
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Meeting Summary

Public Audit Amendment Act

The Auditor-General briefed the Committee on the on the expansion of the mandate of the Public Audit Act through the inclusion of new amendments.

The heart of the AG’s presentation was on material irregularity, where it was reported that its definition was framed to be broad so that auditors could be able to look deeper into the audit because in the past the Act did not give auditors the space to centre their attention on material irregularity. The elevation of material irregularity would make it simpler for auditors to know what they have to look at, and do away with the use of miscellaneous accounts by entities and departments.

The AG provided the Committee with the definition of material irregularity as: “any non-compliance with, or contravention of, legislation, fraud, theft or a breach of a fiduciary duty identified during an audit performed under this Act that resulted in or is likely to result in a material financial loss, the misuse or loss of a material public resource or substantial harm to a public sector institution or the general public.”
The AG indicated this definition has been tried and tested, contained no grey areas, and has planted the AG firm on the ground because of the input that was gotten when it was developed.

The AG enlightened the Committee the amendments were mandating the AG to refer material irregularities to relevant public bodies for further investigation; take binding remedial action for failure to implement the AG’s recommendations for material irregularities; and issue a certificate of debt for failure to implement the remedial action if financial loss was involved. The AG, however, noted there were considerations that were built in the regulations before the issuance of a debt certificate and the accounting officer was afforded representation in the process. An independent committee, comprising of experts outside the Office of the AG, would be established to run the process.

The real objective of the amendments was not to arrest anybody, but to issue a certificate of debt to the relevant body for further investigation, and the elevation of material irregularity was seen to be good for account reconciliations. The new regulations of the Act would apply to any case of irregularity that was still continuing or not yet closed.

Members asked if there would be an enquiry before the issuance of a debt certificate on material irregularity; if there has been any legal opinion sought on the definition of “material irregularity” and what informed the auditors in the selection of the 9 auditees. They further compalined about the lack of consequent management and remarked that the AG could not be expected to be the police, prosecutor, and judge when irregularities get reported to Hawks and, as Members, they never got to hear about the final outcome.


 

Meeting report

Briefing by Auditor-General
Mr Kimi Makwethu, Auditor-General, AGSA, took the Committee through the amendments of the Public Audit Act. His main focus was on “material irregularity”. The amendments, he told the Committee, were in the booklet that was circulated to Members during the meeting. Before, the Public Audit Act did not provide scope for auditors to focus on material irregularity, but only on audit outcomes and deviations.

The elevation of “material irregularity” was to make it simpler for what auditors have to look at in an audit. The definition provided for “material irregularity” was framed to be broad, so that auditors could have an appreciation to look deeper into the audit. He then defined “material irregularity” as “any non-compliance with, or contravention of, legislation, fraud, theft or a breach of a fiduciary duty identified during an audit performed under this Act that resulted in or is likely to result in a material financial loss, the misuse or loss of a material public resource or substantial harm to a public sector institution or the general public.”

To drive his point home, he made an example about a municipality in the Free State that was given R21.7m to build a sport facility. The AGSA visited the site to compare the expenditure against the product. The AGSA only found a fenced field, and that was declared as material irregularity. Another case happened in North West where an upgrade of a road network of 8 km had to be undertaken. The AGSA had found work was done on a 3km stretch. The AG identified the risk of material irregularity.

He further pointed out if the material irregularity was not appropriately and timeously addressed by the accounting officer or relevant authority, in response to being notified thereof, the mandate of AGSA was to allow for three possible courses. The first step was to refer the material irregularity to a public body for an investigation. This could be the Public Protector or the Hawks. The second step was to perform an action or investigation. The AGSA has to report material irregularity in the audit report of the entity or department because the audit report goes with the financial statements, which eventually features in the annual report of the entity or department. This would help to canvass the matter identified and bring it to the attention of the accounting officer. The accounting officer would be given 20 to 30 days to fix the material irregularity or take action. The third course was to issue a certificate of debt for failure to implement the remedial action if financial loss was identified.

He also indicated that there were considerations that have been built in the regulations. The accounting officer would get a briefing about the problem. The transgressor / accounting officer has to be given a representation to determine whether a financial loss was suffered or would be suffered.

Lastly, he reported that the AGSA has selected 9 auditees which mainly consists of municipalities. These auditees were selected based on their unclean latest audit outcomes or unqualified outcomes with findings, except if there was a material finding on prevention or follow-up of irregular expenditure; high irregular expenditure over the last three years; and sufficient coverage across spheres of government and provinces. The real objective of the AGSA was not to get involved in anybody’s arrest, but to issue a certificate of debt to the relevant public body for further investigation. The elevation of material irregularity was seen to be good for account reconciliations and to curb the establishments of miscellaneous accounts.

Discussion
Mr T Brauteseth (DA) expressed concern that the amendments were not going to change much because you could refer the entity or department to a relevant body, but nothing would happen as has taken place in the past, especially since the AG has indicated it did not want to arrest anyone. Secondly, he asked if there had been any legal opinion sought on the definition of “material irregularity” because all the three identified elements had to be satisfied. As it stood, the definition was very wide.

Mr Makwetu explained that the referral has changed many things because accounting officers were no longer leaving audit matters to the hands of the juniors. The accounting officers have now started becoming involved in every stage of the audit. He stated that auditors were not in need of whistleblowers because they have been trained to pick up deviations and violations of SCM practices. The definition of “material irregularity” has been tried and tested. It was understood. In the context of financial controls and applying probity on finances, there were no grey areas. There has been no third option. The AGSA was on the firm ground on the matter because of the input it received when it was developing the definition.

Ms D Lesoma (ANC) wanted to understand what informed the auditors in the selection of the 9 auditees.

Mr Makwetu made it clear the AGSA has been doing audits for many decades to a point it has developed risk intelligent ways of doing things. It also depended on the technical knowledge of the auditors because they have been trained to unpack invoices and could detect if the person controlling the budget was far less competent for the job. For example, there were people who would refer to an asset register as an ascension register.

Mr J Steenhuisen (DA) commended the AG for the presentation and excellent work he has been producing over the years. But he noted the AG could not be expected to be the police, prosecutor, and judge when these irregularities get reported to Hawks and, as Members, they never got to hear about the final outcome. There has never been consequence management. He suggested the AG should report some of these findings to the Committee, so that the transgressing entities and departments should be brought to book. Hence there were repeat offenders.

Mr S Emam (NFP) asked if there would be an enquiry before the issuance of a debt certificate on material irregularity.

Mr Makwetu clarified that the rules were making a provision for a process to be followed before the certification. The process would be led by an independent committee which would comprise of people outside of the AGSA. These people would be knowledgeable in legal and accounting matters, and the AG would appear before this committee on invitations to answer concerns raised by it.

Mr M Rayi (ANC) enquired if the Act would still apply in a continuing case of irregularity.

Mr Makwetu replied that if a particular irregularity was continuing, it would still fall under the new regulations of the Act.

Ms Mabe noted that concerns from the Members indicated they wanted the AG to enter the remedial action space. Due to time constraints the Committee could not continue its engagement with the AG and any other questions would be addressed in a following meeting with the AG.

The meeting was adjourned.

 

 

 

 

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