Auditor-General of South Africa Annual Report 2021/22

Meeting report

Briefing by the Audit Committee on Audit committee report feedback to Standing Committee on Auditor-General

Mr John Biesman-Simons, Chairperson, AGSA Audit Committee, briefed the Committee on the report for the 2021/22 financial year. The briefing noted the statutory duties and responsibilities of the Audit Committee. The briefing highlighted the activities of the Audit Committee. These activities included information on the external audit and evaluation of the annual financial statements, internal audit, risk management, assessment of the finance function, and the Chief Financial Officer (CFO).

External audit and evaluation of the annual financial statements

• The Audit Committee assessed the external auditor’s independence, as required by section 39(2)(b) of the Public Audit Act (PAA), and recommended their reappointment to the SCoAG, which appoints the external auditor annually.
• The Audit Committee was satisfied that Crowe JHB, the external auditor, was independent and not conflicted in any way, and has conducted the external audit for the 2021/22 financial year under the direction of the engagement partner, Mr Raakesh Khandoo.

Internal audit

• Ngubane Management Company (Johannesburg) Proprietary Limited was the AGSA’s internal auditor, completing the last year of its three-year contract with the AGSA.
• The Audit Committee concluded that, considering the work done in the current year by the internal auditors, and the reliance they place on other assurance providers and their written assessment, the system of internal control in place at the AGSA is adequate and is operating effectively.
• In view of the end of the contractual arrangement with Ngubane, the audit committee embarked on a procurement process to appoint a new outsourced internal audit service provider for the AGSA for the next three years.

Assessment of the finance function and CFO

• The Audit Committee assessed the composition, experience, and skill set of the finance function, as well as the performance and expertise of the former CFO, and is satisfied that those were appropriate to fulfill their responsibilities.
• The Audit Committee welcomed the new CFO and is confident that the finance function will continue to fulfill its financial management responsibilities for the organisation.

Conclusion on the integrated annual report

In the Audit Committee's opinion, the AGSA's internal control and risk management system is adequate and is operating effectively, with some minor deficiencies that can easily be rectified. The Audit Committee recommended to the DAG that he may sign the annual financial statements and that the DAG and AG may sign the integrated annual report.

(See presentation)

Discussion

The Chairperson said that all the members of the Audit Committee had confirmed the report as tabled by the Chairperson of the Audit Committee. The Chairperson highlighted two areas that the Members wanted attention focused on. One was the area related to the reappointment of the external auditors for a further one-year period. The other was the area that related to the internal audit through the processes in terms of procurement. The Audit Committee confirmed that it had worked without any hindrance, interference, or areas that would hinder its capacity to do thorough work. The Audit Committee had highlighted that there were areas that had been identified. There was confirmation by the auditors on the acceptable standard. Administrative issues were being followed internally, which were manageable areas. Reference had been made to IT which had been very worrisome. The Audit Committee had highlighted what was taking place within that scope and the area that related to the internal controls and the capacity. The capacity had been beefed up through the appointment of the Chief Technology Officer. This area was critical for the IT revamp and the capability of the Office of the Auditor-General. He noted the framework that the Audit Committee was looking into in terms of the risk, which provided the Audit Committee with the key elements relating to the key areas. The Chairperson appreciated the report. He asked the Members if there were any questions.

Mr O Mathafa (ANC) said he did not have a question. He supported the Chairperson’s response to the presentation. He thanked the Audit Committee for providing a clear assessment report to the Committee. He noted the recommendation for the appointment of external auditors. He appreciated the efforts of the AG in ensuring that a high standard of recruitment was maintained. He noted the statement that there had been an improvement in the identified performance indicators from the previous assessment. Maybe what was missing, or maybe what he had missed, was which specific indicators were flagged in the previous assessment. How far had they been improved? Even if it was a percentage or number, it would have assisted the Committee because that was just a statement, which the Committee welcomed, to show that the AG was responsive to the areas that the Audit Committee was raising. He welcomed the presentation and commended the work done by the Office to assist the Audit Committee assessment, as and when required.

The Chairperson thanked Mr Mathafa for his comments. It needed to be noted that the AG was still going to provide detail on some of the areas which have been reflected by the Audit Committee, especially on the performance side.

Ms P Mpushe (ANC) said that there was clarity that she needed on the old equipment that was being used, that had been referred to. Mr Biesman-Simons said there needed to be research and assessment to change it. Was the Audit Committee in the process of doing that so that it was able to be updated?

Mr Biesman-Simons said it was a good question that had been raised. Indeed, it was a high priority for the AGSA. The Chief Technology Officer was in the meeting. He was not sure if the Chairperson wanted to go to the level of detail of asking the Chief Technology Officer to give a summary of the work in progress.

The Chairperson said that was why he had referred to the fact that the AG was still going to table the report, noting that some of the elements that had been asked would be carried through the report in detail. The Committee accepted the summation that the Audit Committee gave. What Mr Mathafa was referring to was a percentage area for improvement. He thought reference had been made to the fact that 30 areas were flagged. Out of 30, some were achieved, and the Audit Committee had to follow four. Currently, the Audit Committee was left with four areas of challenge. That was the area that the Chairperson thought the Audit Committee would want to emphasise. He noted the Chief Technology Officer. He assumed those areas would be addressed in the AG’s report.  

Mr Biesman-Simons said that the DAG would be reporting and that there would be a slide on the progress of the technology optimisation journey. It would be appropriate for the Committee to hear what the DAG had to say, and if it was appropriate, then the Members could ask questions then.

The Chairperson recalled that when the Committee visited the Office, there had been a very good discussion with the executive, led by the AG. The risk areas were somewhat highlighted relating to pushbacks and legal challenges. Some attention would have to be scaled up on the side of whoever did internal oversight of operations in the Office. The Committee had seen that through a few challenges recently. One of those had been the rough challenge, despite some indication of success against it in defence of the outcomes of the Office of the Auditor-General. The more in-depth the implementation of the PAA became, some areas related to that form of risk ought to be attended to in terms of the legal unit. That was a specific area of attention. There was also the internal environment, which might as well be an environment that would need some focus, looking into the recent past events that had been highlighted. The Committee appreciated the attention that had been given to such and the success thereof. The Committee appreciated the diligence of the Audit Committee in attending to such matters which could threaten the AG’s intended heightened integrity, in attending to its own work. This was something that the Committee really needed to appreciate. The Committee would get back to the AGSA on the decision of the appointments when it had finalised the discussions of the report. The Committee would revert back to the AGSA on such areas. The Committee appreciated receiving this report. He appreciated those members of the Audit Committee who joined the meeting while abroad. He thanked the Chairperson of the Audit Committee.

Briefing by Auditor-General South Africa on the 2021/22 Integrated Annual Report

Ms Tsakani Maluleke, Auditor-General of South Africa, said that the Annual Report that the AGSA had tabled by the end of September 2022, in line with its obligations, was an important instrument for accountability for the Office. It transparently accounted for the performance of the institution over the year. It was still the year in which the AGSA dealt with the difficulties of the Covid-19 pandemic. In that year, the AGSA also had to contend with the July 2021 unrest, which disrupted operations in Gauteng and KZN provinces. It was a time when the AGSA was dealing with heightened expectations from stakeholders, not just from the amended powers and the MI processes but also in terms of the expectations for the AGSA to do further work. This included real-time audits. The year being reported on marked the last year of the operations under the strategy called the ‘4V strategy’. That strategy was informed by the vision set by the late Kimi Makwetu. As of 1 April 2022, the AGSA was working on a new strategy called ‘culture shift 2030’. This report indicated that the ‘4V strategy’ served the Office extremely well. It shaped the Office’s responses to an ever-changing set of dynamics it had to operate. The account that would be shared with the Committee gave a sense of an Office that continued to perform, even in these contexts. In this period, the AGSA undertook 1060 audits across the country. These audits covered local government, provincial government, national government, and state-owned entities. The AGSA did this work alongside the real-time audits which came from the demands brought about by the need for extended transparency, accountability, and assurance regarding government’s response to the Covid-19 pandemic. Alongside doing this work, the AGSA also contended with Covid. Thus, the AGSA’s timelines suffered significantly. The AGSA only met 41% of its legislated timelines for signing off the audits of PFMA and MFMA. Since then, the AGSA has worked extremely hard and has been able to deal with those backlogs. The AGSA was now operating based on its standard operating model, which was to get the AGSA to complete between 80 to 90% of its audits on time.

Ms Maluleke and Mr Vonani Chauke, Deputy Auditor-General, briefed the Committee on the AGSA’s Integrated Annual Report 2021/22. The Integrated Annual Report highlighted, amongst others, national and provincial audit outcomes, local government audit outcomes, material irregularities, vaccines real-time audit, and litigation against the AGSA. The IAR also noted the AGSA’s Constitutional, non-constitutional, and citizen engagement. The latter half of the presentation dealt with the AGSA’s workforce, organisational culture, and technology optimisation journey.

National and provincial audit outcomes

• The report highlights that central to the financial health problems at SOEs are the poor state of corporate governance, coupled with a weak internal control environment, instability at a leadership level, non-compliance with legislation, and a lack of consequence management.
• Overall, the 5% improvement in national and provincial audit outcomes indicates slow progress in the journey towards wholesale good governance.

Local government audit outcomes

• Local government was characterised by accountability and service delivery failures, poor governance, weak institutional capacity, and instability. The number of clean audits slightly increased, but the improvement was not widespread.
• Disclaimed audit outcomes persisted, although a technical limitation on the financial statements is also an indicator of a lack of service delivery in those communities, as observed by our audit teams. These failures have a direct impact on the lived realities of citizens.
• Using consultants in addition to available permanent financial officials at a substantial price tag did not provide the intended outcome of submitting financial statements for auditing without material errors.
• Clean audits continue to represent less than a fifth of the local government budget.

Status of identified material irregularities

• By 15 April 2022, there were a total of 327 MIs on the system at various stages in the process. It was estimated the total financial loss of these MIs was R14.7 billion.
• The AGSA issued its first remedial action in the performance period to the Departments of Defence and Human Settlements, Prasa, and the Ngaka Modiri Molema District Municipality.
• The AGSA also raised MIs for not submitting financial statements for auditing.

Litigation against the AGSA

• During the past 24 months, the AGSA has faced an increase in the number and complexity of legal challenges, or threats of legal challenges, over the audit and audit-related services rendered.
• While resolving disputes in a court of law is a democratic process, it creates pressure and a difficult psychological environment for audit teams to perform their duties without fear, favour, or prejudice. The AGSA has reviewed its dispute resolution process and has brought it to this meeting for consultation with the esteemed Committee.

Progress on technology optimisation journey

• The AGSA’s technology strategy is currently being reviewed to ensure that matters of digital transformation and support for strategic goals are included. The AGSA has optimised the ICT operating model for greater efficiency, refined job profiles, and confirmed the roles required to fulfill the strategy.
• The audit software phase 1 market analysis has been completed. The ‘What good looks like’ subcommittee undertook the analysis of the four major audit firms and the Council for Scientific and Industrial Research to benchmark their audit software. The AGSA also benchmarked against supreme audit institutions.
• The AGSA appointed a service provider to review our current PeopleSoft capability. Further research will determine the cost of the recommended new ERP solution and identify suitable vendors in the market.
• The AGSA appointed a service provider to develop the case management solution to automate the MI process. Active work on the system began in January 2022 and is expected to be completed by the end of January 2023.
• The AGSA’s disaster recovery plan simulated test in March 2022 was successful and will form part of its testing going forward.
• The AGSA completed its digital transformation roadmap, which maps the steps needed to become a digitally transformed organisation. The roadmap outlines three steps: laying the foundation, organisational recalibration, and value creation. Laying the foundation is complete and includes a digital transformation maturity survey and documenting the audit value chain.

(See presentation)

Discussion

The Chairperson thanked the AG and DAG for the report. He hoped the Members were taking notes on the critical areas of the functionality of the Office of the AGSA. He thanked the AG and DAG for an elaborate account of the matters within their authority regarding the Office. He asked the Members if there were any comments or questions.

Mr H Hoosen (DA) said he wanted to raise two matters. The first one is related to the report of the AG. The Members could all agree that the one thing that they could not fault the AG’s Office for, which had been a culture for many years, was the quality of the reporting that came out of the AG’s Office and the work the Office did in pointing out the varying weaknesses that exist in the varying Government Departments in terms of irregular expenditure and all those related matters. The AG’s Office had for years done an excellent job there. He could not point out anything that was concerning. He noted where the Committee’s responsibility had to shift. For a long time, public representatives were very frustrated about all of these reports that pointed out the weaknesses of various Departments, the high levels of corruption, and maladministration. There was frustration with the lack of accountability for the things that would come out in those reports. This was why Parliament decided to give the AG’s Office much more power in terms of accountability. The role of the AG’s Office was largely twofold. One, was to point out to Parliament where the problem areas were. Since the Public Audit Amendment Act was passed in Parliament, the AG Office had much more power. In terms of the reporting aspect, there was little that one could talk about. He highlighted where the AG’s Office needed to shift its focus. This was around the area of accountability. The public was becoming increasingly frustrated with the high levels of corruption within the country. The AG’s Office was one of those tools that the Government used to reduce the propensity for corruption. The public wanted to see that where there had been maladministration and wastage of the public purse, that action was taken against those individuals and that the money was recovered.

When he listened carefully to the AG’s report, more than 90% of the time was allocated to reporting, and there was nothing wrong with that. However, there was still very little focus on the actual accountability part. The AG had mentioned that about R14 billion worth of MIs were issued. That had immediately raised an alarm bell for him. He understood that some of those MIs were related to procedural irregularities and not necessarily a financial loss. He wanted to hear from the AG, what amount from that R14 billion was directly related to financial loss because that amount was important. He noted that if he went to his constituency and said that the AG had found R14 billion worth of MIs which had been issued but yet there was only one certificate of debt that had been issued, that was a concerning figure. It told him that notwithstanding such high levels of irregular expenditure and corruption; only one certificate of debt had been issued. That was where the focus needed to be. If there were people in Government that were not doing their job, wasting money, especially now that the AG had said that a large number of those MIs were related to procurement. That pointed to high levels of corruption. That was just not acceptable. He wanted to get the AG’s views and comments on how it was going to take this area much more seriously, hold people accountable and recover much more of that money. Perhaps there needed to be another opportunity where the AG could set out the excess of 300 MIs where it picked these things up and what action had been taken so far so that the Committee would be able to get much more information on it. In fairness to the AG, the time was too short for her to go into that detail. He would be grateful for a response to that. He appealed for another opportunity for the AG to present to the Committee a full, more detailed report on the excess of 300 MIs that had been issued and where exactly the AG was in that value chain to ensure that it was recovering some of the monies that had been lost or action that had been taken against those individuals.

He discussed the DAG and the post-retirement benefits. He agreed with the comment that it was improper for the Committee to get involved in the AG’s operational matters. He, like many other Members, had been engaged by some of those individuals who had been retired. Those individuals had engaged Members on their views and how they were affected. He had made it pretty clear that it was not proper for him or the Committee to get involved in those operational matters. Courteously, he communicated that to the retired individuals. He highlighted where the Committee did have an interest. He noted a comment that someone had made to him that the proposal by the AG’s Office was not legal and in terms of the law. He heard the comment made in the presentation that the offer was fair, but he wanted to be satisfied that the manner in which that was being settled was in all respects legal so that he could satisfy himself. He had no intention of getting involved in those operational matters of how the AGSA wanted to settle it. His only interest was that it was legal in all respects and in accordance with the Act. He thanked the AG’s Office for the presentation. He appreciated it.

Mr Mathafa welcomed the presentation. He had two questions. The one was sufficiently dealt with by Mr Hoosen in terms of the amount that was being reported, the R18 billion loss, and the number of certificates of debt. Were there any other institutions or entities that should be issued such a certificate? He discussed the number of audits that were completed for this year. The AG had mentioned 1060. Using the previous IAR as a baseline, it indicated that the AGSA had conducted 1065 audits. Even though it was not a significant number, it would be interesting to find out how did the drop occur? Why were there fewer auditees for this year compared to the previous financial year? He agreed fully with Mr Hoosen in terms of the audit quality. Listening to the AG was also encouraging that the audit and performance quality indicators were improving. The Office of the AGSA was showing commitment to its work. He thanked the DAG for sticking to the agreement that was made in the previous two or three meetings that, as far as the matter of the CPO was concerned, the Committee would be kept abreast. The Office would inform the Committee of the interventions and when the matter would be put to finality. The Committee was happy that that promise was coming through as agreed. He was pleased to see that controls were being put in place as the AG had previously committed that there would be tightening of internal controls. The risk exposure exercise was indicative of the commitment that was made that there would a review and strengthening of internal controls so that some of the mistakes that were picked up as a result of this particular exercise were never repeated. The Committee welcomed that and was encouraged that such was happening.

Ms Mpushe said that she welcomed the presentation. She commended the Office's work in executing its mandate, more so in terms of the representation of women and the capacitation thereof. She noted that the issue of material irregularities required a strategy. She was interested in the plans of the auditees to address the irregularities. She was also interested in the representation of people with disabilities within the AG’s Office.  

Ms Z Kota-Mpeko (ANC) appreciated the presentation. She supported what the AG said about efficiency and responsibility in the Office. She understood that people wanted the AG to go outside to ensure that the propensity for corruption was brought down. That was a process. The AG was ensuring that at home everything was good. She discussed the CPO matter. It did not have a timeframe. It was open-ended. She would have liked a situation whereby the AGSA moved away from the rough patch it found itself in and fell in with the rest of the team.

The Chairperson thanked the Members for the questions raised. He hoped Members took note of the existing standard in terms of the financial standing which had been highlighted by the AG, mainly on municipalities and the enterprises which were within the public eye. Therefore, it looked like there were above 40 auditees that had received unqualified audit reports. Mainly those were smaller Departments. It then told a story about the budget slice in the hands of those outside that definition. This was a worrisome situation. This required the Committee to have a thorough look, not necessarily on the audit side but at the same time, how the audit had benefited from the real-time approach during Covid. He noted how this could relate to some kind of test on one or two of those auditees that carried that huge sum from the public purse.

The optimisation of technology related to the capacity of the Office, which the Chairperson of the Audit Committee had indicated that maybe there would be some form of urgency that would be applied to attending such matters. He noted that when the Members were at the Office, the AG had a thorough discussion on such matters. There was a need to up the game on those matters.

He discussed the issue of the dispute resolution mechanism. It carried both internal and external parts. The Committee needed to discuss it when it finalised the reports and went back to the AG’s Office. This expressed how the Office could use that mechanism propensity to enhance professionalism and to uphold the high regard in terms of the ethical conduct which went with it. The Committee needed to get into that in terms of looking at the modelled framework that was going to assist in resolving such disputes. The Office needed to look into how all interested parties could look into the accounting standards, as had been the case with the rough issue. The Committee would look into how that kind of mechanism had been used and how it could benefit the process going forward. It might be that some kind of test on the actual framework would need to be looked into.

The Members had expressed themselves on the medical aid scheme. It was something that needed to be kept administrative. The Committee would have to consider whether the legality observation had passed muster around those areas. This needed to be done to ensure that the standard was well-kept.

The Members had commented on the MIs and the R14.7 billion, based on the 327 MIs on the actual quality of the audit. He noted that the AG had put her thumb on the question of stability at the leadership level and how that contributed on the positive or negative side as far as the audit outcomes were concerned. Instability was negative and stability was positive. This concerned both the executive and the accounting officers around these areas which needed attention as far as the auditees were concerned. It was within the Committee’s own interest to have their matters, look into them in detail and be able to make its own analysis then get back into the Office of the AG.

The Chairperson asked the AG and DAG if they had any comments after these inputs.  

AG Maluleke responded that after listening to the Members, it was quite clear that a full engagement be set up on the MI process. The AGSA would then be able to give the Committee a sense of where it was in implementing it and what it was found with some level of specific detail on the particular MI. The AGSA would then be able to get guidance from the Members on how it would move forward. The AGSA was willing and open to getting insight on how it could get better at implementing that instrument. In terms of the R14.7 billion, there was a lot of detail behind it regarding specific MIs. Some of it was being recovered by the accounting officers. Some of it was delayed in recovery because the counter party was either in court or in a liquidation process. The best thing the AGSA could do was set up that session early in the next term to go through the detail of these MIs. That would respond to a number of inputs from Members. Even if it was a view to say that the AGSA should consider doing more in this space, the AGSA was open to hearing that. The AGSA wanted to ensure that implementing this instrument met the expectations of Parliament, as legislators that put the instrument together.

She discussed the post-retirement medical aid. She confirmed to Members that the offer made was based on a legal opinion. It was based on legal advice. It was based on best practice from other employers that had long dealt with these kinds of arrangements that existed for many years. It was done within the authority of the AG, as confirmed by the High Court in its ruling at the end of last year. The AGSA was happy to share with the Committee the ruling so that it had the detail. The AGSA could provide the Committee with a summary of that ruling so there was no doubt about the legality of the decision and the process toward getting to that decision. The AGSA could have offered the same thing long ago, but the court case ran from 2016 to 2021. Once it was concluded, once the ruling was out, there was certainty about the matters being disputed and then the AGSA was able to proceed with the buy-out. She noted it was voluntary. Every beneficiary, whether they were still employed or already retired, had the full agency to make a decision one way or the other. For those who chose not to opt into the offer, the AGSA would not abandon its legal obligations in maintaining the subsidy. The issue was about decision-making and at what level that happened. That happened appropriately at the level of AG. It had been confirmed by the High Court.

She discussed the timeframes for closing the gaps. The Audit Committee was working with the executive team to monitor and track the implementation of those actions. She gave every assurance that the level of responsiveness by the executive team was something that could be counted on in terms of implementing corrective action.

She discussed the matter of people with disabilities. The AGSA had set a target of 2% representation of people with disabilities, consistent with the national targets. The AGSA started the journey with 0.42% of people with disabilities. There were now 60 AGSA people with declared disabilities. That made up 1.59% of the institution. That representation was not yet at 2% but the AGSA was getting much closer to it because it had been a focus of the institution for a number of years.

She discussed the matters around technology. She appreciated the Chairperson’s comments about the urgency and the AGSA would certainly look into it. She discussed the matter of the real-time audit and its impact on the auditees. Some of it would be covered when the AGSA dealt with the PFMA audit that was coming now. She provided an example of the UIF and how it dealt with matters concerning the benefit scheme. The UIF was closing some gaps that the AGSA had identified through the real-time audit. What that told the AGSA was that there was responsiveness following the real-time audit. The same thing happened with SASSA, in making sure that it did not deny people who ought to benefit from the grant and that it did not pay people who should not benefit from the grant. When the AGSA did the real-time audit on SASSA this time around on the flood relief, it found that because SASSA had responded to the matters raised in the Covid real-time audit, there were fewer findings. There was nothing material in terms of how they managed the benefit. This indicated that some auditees were responding the way the AGSA expected.

She thanked the Committee for allowing the AGSA to share the work of the Office. The AGSA benefited from the contributions made by the Committee, the continued attentiveness to work done by the Office, and the support provided by the Committee in line with the Constitution. She appreciated how the Committee held the AGSA to account regarding how the institution was run. These engagements always left the AGSA with a few things to do better and encouraged the AGSA to continue with the journey, especially when the Committee gave good feedback and challenging feedback.

The Chairperson thanked the AG for her response. There was an indication from the AG, which he agreed with, that the MI process and the outcomes would need thorough engagement between the Committee and the Office of the AGSA. This was something that the Committee needed to programme soon. The Committee needed to prioritise this to have a tight flow of the issues. R14.7 billion was not a small matter even if it was under irregular-related financial expenditure. Some elements would be related to the specific loss out of those. The Committee accepted the AG’s view that there should be a session around those matters. It would be appreciated if the AGSA provided the Committee with a summary of the court ruling so that that outline formed the legal basis of such decisions and what the Committee would need to oversee. The Chairperson thanked the AG and her team. The audit work was becoming a bit difficult in the way it would want to see how auditees would want to benefit from the positive outcomes and therefore, the pushback angle became steeper in various ways. It was good that the matters related to ethics were drilled deeper into those who operated in that environment. The AGSA’s achievements in terms of quality objectives gave hope. It was a very encouraging indicator. The Committee encouraged the Office to fly higher. The Committee needed to give itself time to look into this aspect related to the public entities that were schedule two auditees. They started by failing to submit financials, leading them to total failure around their liquidity. The Committee needed to pay attention to those that failed to make those financials available for the audit by the Office of the AGSA in good time. The Committee might need to focus on that in the programme and call to account for those that might be on that route so there was accountability. The Committee had time in its programme to finalise aspects related to the report. It was qualitative and very detailed. It was very encouraging. It showed an institution at work. The Committee had already started to read about the AGSA’s findings on various Departments, entities, and auditees.

The Chairperson thanked the AG and her team and the Members in the meeting. 

The meeting was adjourned.