Public Audit Amendment Bill: Draft Regulations briefing

Standing Committee on Auditor General

20 November 2018
Chairperson: Ms N Khunou (ANC) (Acting)
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Meeting Summary

The Portfolio Committee received a briefing from the Auditor-General and his executive team on the Regulations arising from the Public Audit Amendment Act, 2018, Act No. 5 of 2018. The Auditor General explained that the Public Audit Amendment Bill was passed by the Committee in May 2018 and had been considered by the National Council of Provinces in June 2018. Since then the Office of the Auditor-General had been trying to figure out how to make the Public Audit Amendment Act work in a way that realised what had been intended. The Auditor-General informed the Committee that he was mandated to make regulations as per the Act within 90 days of the commencement of the Act

The Auditor-General reported that the Office of the AGSA had not only worked on regulations to carry out the intentions of the Act, they had also worked on a strategy for ensuring that all staff in the Office as well as all accounting officers and other stakeholders, including private audit firms, and the Special Investigating Unit of the South African Police Service were well informed of the Act, how it was to be implemented and the consequences for those who were guilty in the terms of the Act. The team had put together a programme to demystify, clarify and advertise the amendments. A Public Audit Amendment Act indaba had been held for senior functionaries in the Office of the Auditor-General.

The Auditor-General explained that the regulations looked at enforceable action. The key expansion of the mandate of the Auditor-General was to refer material irregularities to relevant public bodies for further investigations; take binding remedial action for failure to implement the Auditor-General’s recommendation; and to issue a certificate of debt for failure to implement the Auditor-General’s recommendations if there had been financial losses.

The Auditor General intended to adopt a phased-in approach, beginning in 2018/19, by selecting auditees from the approximately 1000 audits conducted in any one year according to a number of criteria. The intention was to avoid taking on too much work in the first year. The Auditor-General would be auditing nine departments, 10 public entities and 11 municipalities in terms of the new Act and Regulations in 2018/19. Departments with more than R1 billion in irregular expenditure over the past three years; the top 10 contributors to irregular expenditure over the past three years amongst public entities and municipalities, and at least one auditee in each province would be considered as those auditees would have the highest risk factors.

There were also regulations on public sector auditing by auditors in private practice to provide greater transparency of the process. Where auditees were not audited by the Auditor-General, the private audit firm would be obliged to follow the same steps as dictated in the Public Audit Act. The regulations would include the nature and categories of matters in respect of which the Auditor-General could carry out investigations and special audits. Regulations on audit fees would allow for consultation with National Treasury on the nature, frequency and scope of audits for smaller, low risk entities. Audits fees above 1% of an entity’s budget would become a direct charge against the National Revenue Fund.

The Public Audit Amendment Act 2018 was going to result in a journey of major change. The financial impact for the Office of the Auditor-General would be in terms of short-term project support, including financial and human resources, including specialist and legal support.

The Auditor-General informed the Committee that the Public Audit Bill was signed into law on that day.

Members applauded the AGSA and his team and welcomed the fact that the Office will have more teeth. In addition, they asked what was to be done where accounting officers were no longer in office but transgressions had taken place when they were in office; would the new accounting officers be held responsible; how many more staff were required by the Auditor-General, and at what level; what if the private practice did not have the skills or capabilities to do the audit and why was R1 billion a criterion and not R500 million, considering the seriousness of a material irregularity.

Members further asked about the offences contained in the Act and whether the Auditor-General would consider each one a separate offence or would people be charged with a single offence; would other organisations, such as the Special Investigating Unit, charge those guilty of an offence; how was the Auditor-General going to deal with Certificates of Debt and getting people to account and be held accountable; did the Auditor-General look at appropriate insurance against risks and if not, why not and did AGSA bring the matter under- or over-insured to the attention of the auditee.

The Acting Chairperson requested the Auditor-General to make the minor amendments proposed by Committee Members. The regulations would be put to the Committee for adoption at its next meeting.

Meeting report

Opening remarks
The Acting Chairperson thanked everyone for availing themselves at that time of the evening. One of the key milestones of the Fifth Parliament was giving the Auditor-General the teeth to bite. In the past, it was easy for anyone to do as they wished. Some of the legislation passed by Parliament had been difficult to implement because the regulations had not been taken seriously. She hoped that the regulations that the Auditor-General was going to present would make implementation easy while also making it easy for Parliament to monitor and make sure that things were done correctly. She handed over to the Auditor-General.

Auditor-General Report
Mr Kimi Makwetu, Auditor-General, AGSA, thanked the Acting Chairperson for the opportunity to interact with the Committee on the regulations. The Bill had passed by the Committee in May and had been considered by the National Council of Provinces in June 2018. Since then, the AGSA had been trying to figure out how to make the Public Audit Amendment Act (PAAA) work and to realise what had been intended in the Act. AGSA was at the tail end of the process, waiting for the regulations to be signed. The regulations had been ready for some time.

He informed the Committee that he had seen in the government gazette that day that the Public Audit Amendment Act, 2018, Act 5 of 2018, had been signed into law by the President. It confirmed a rumour that he had heard.

He did not want the Amendments known only to those in the executive management of AGSA. He put together a team to demystify, clarify and advertise the Amendments. Legal, audit, and other sectors had got together and prepared a PAAA indaba for all functionaries from Senior Managers and above, including the provincial staff. Those people would see the difference in the new Bill and he was happy to say that there was a hugely positive response to the Amendments.

The Regulations looked at enforceable action. The Auditor-General reminded the Committee that he was mandated to make regulations as per the Act within 90 days of the commencement of the Act. He believed that he was within the timeframe. He added that he had sent the relevant documents to the Committee on 16 October 2018. He hoped that Members had had time to go through the documentation. He also had to prepare the form and content of the Certificate of Debt.

The key expansion of the mandate of the Auditor-General was to refer material irregularities to relevant public bodies for further investigations; take binding remedial action for failure to implement the Auditor-General’s recommendation; and to issue a Certificate of Debt for failure to implement the Auditor-General’s recommendations if there had been financial losses.

The Auditor-General intended to adopt a phased-in approach, beginning in 2018-19, by selecting auditees according to a number of criteria from the approximately 1000 audits conducted in any one year:
-Latest audit outcome if not clean or unqualified with findings – except if there was a material finding on prevention or follow-up of irregular expenditure;
-Departments with more that R1 billion in irregular expenditure over the past three years;
-Top 10 contributors to irregular expenditure over the past three years – public entities and municipalities;
-At least one auditee in each province.

He would be auditing nine departments, 10 public entities and 11 municipalities. The type of material irregularity that the AGSA would be looking for was material non-compliance that resulted in a material financial loss. That would take care of the top 30 known risky environments.

There would also be regulations on auditing by auditors in private practice to provide greater transparency of the process applied when selecting the audits of public entities and other discretionary audits. Where auditees were not audited by the AGSA, the private audit firm would be obliged to follow the same steps as dictated in the Public Audit Act and that would also apply to non-compliance and deviations.

The regulations would provide for the nature and categories of matters in respect of which the Auditor-General could carry out investigations and special audits. Regulations on audit fees would allow for consultation with National Treasury on the nature, frequency and scope of audits as far as it impacted on the determination of audit fees, and the defrayment of audit fees above 1% of the entity’s budget as a direct charge against the National Revenue Fund.

The PAAA was going to result in a journey of major change: a personal journey for each staff member and a journey for the organisation. The financial impact would be in terms of short-term project support including financial and human resources, specialist and legal support, staff consultations and external engagements. In the long-term, the organisational environment would require skills and capacity building, particularly additional specialised skills, and external engagements.

The Auditor-General informed the Committee that the Act had been signed but he had not yet seen the commencement date.

Discussion
The Acting Chairperson asked Mr N Singh (IFP) to put his questions as he had to leave to attend another meeting.

Mr Singh stated that, having waited 10 years for the Auditor-General to get some teeth, he congratulated him and his team. He explained that he would be leaving but he would get a report on the responses the following day.

In terms of the external engagement programme, Mr Singh suggested that the Auditor-General let Committee Members have a copy of the programme. He assumed stakeholders would include municipalities, politicians, accounting officers and other bodies such as the Special Investigating Unit (SIU). The Auditor-General needed to be sure that they could cope with the work. What was to be done where accounting officers were no longer in office but transgressions had taken place when they were in office? Would the new accounting officers be held responsible?

Mr Singh had noted a reference to additional staff required, such as three legal officials. How many more staff were required and at what level? He suggested that the Auditor-General would have to change the date in the Notice that referred to the Public Audit Act from 2004 to 2018. How far back would the Auditor-General go back? To which financial year?

Ms Z Dlamini-Dubazana (ANC) congratulated the Auditor-General and his staff and noted that he would be giving sleepless nights to those who did not want to behave and who took his office lightly. She thanked the Members of the Committee for supporting the Bill and noted that it should go in the legacy report.

Ms Dlamini-Dubazana asked about Part 3 of the Regulations which was on the referral process. She said that if it was a process, there should be steps. She thought that point 6, the notice of investigation, should be number 2 or number 5 because it was a process. The Auditor General would be informing people that he would be investigating and only after the person had been informed, then would the steps follow, as indicated. She thought that notification had to be first.

She noted that the issuing of the Certification of Debt had to be done in a ”reasonable period”. The Auditor General had explained that the timeframe was dependent on the complexity, so the sentence should start:”Based on the complexity of the process, the Auditor-General will…”  There was a definition of a “public body” but the document referred to public body investigations. The document should rather refer to “public body law enforcement”.

Ms Dlamini-Dubazana referred to the withdrawal of a private practice from an audit. The Auditor-General had given a light example, but what if the private practice did not have the skills or capabilities to do the audit? That would lead to a dispute but what would happen if the private practice lost the dispute and had to complete the audit, but did not have the skills to do so? The reliability was a concern for her. She needed an explanation of how that would be dealt with as she was quite confused.  Concerning the resignation of an auditor in private practice, she quoted the regulation: “The auditor in private practice may resign from that audit only if the auditor has given the detailed reasons to the Auditor-General.” She stated that the passage went on to say that the reasons had to come from the executive authority but she thought that the auditor in private practice should give the reasons.


Mr M Ntombela (ANC) had been covered by his colleague in respect of the discharge of an auditor in private practice. He asked about the phased approach and the selection criteria. Why R1 billion as a criterion? Why not R500 million, considering the seriousness of a material irregularity?

Mr A McLaughlin (DA) thanked the Auditor-General and his staff for the presentation. His question related to the second case study that the Auditor-General had described in his presentation. Would AGSA consider the separate offences as one offence or would certain offences be left for other people to deal with? For example, if the billing process was not correct, that was an offence; continued use of the contractors was a second offence; non-compliance with contractual conditions was a third offence, and fraud was a potential fourth offence. Would AGSA break them up into separate offences or would it be one offence?

Mr A McLaughlin asked how many additional personnel, country-wide, would be need to get the thing going as there was a lot of work to be done. Concerning the defrayment of audit fees, was that the same 1% that AGSA had spoken of previously or was it an additional 1%? 1% of what? Was it 1% of each individual audit fee or 1% of the collective amount owing? Did the Auditor-General look at appropriate insurance against risks and if not, why not? Did AGSA bring the matter under- or over-insured to the attention of the auditee?
 
Mr M Shackleton (DA) commented that he was not against the regulations as it was a process that would give the Auditor-General some teeth. He was pleased that it came from inside the Auditor-General’s office as it was what the AGSA believed would give it teeth. But as Mr Singh had said, if the Auditor-General worked with other institutions, such as SIU, apart from them needing to know that significant work would be coming their way, those offices would need more money and more personnel and government needed to understand that. He had seen how the budget of the previous Public Protector, Thuli Madonsela, had been cut, and was worried that the budget might not be provided. It had to be understood that institutions, such as the Special Investigating Unit, had to capacitated to make the Act work.

Ms P Benghu-Kombe (ANC) was pleased with the work done by the Auditor-General, as well as the Standing Committee.  Had the Auditor-General set up a timeframe for those accounting officers or relevant public bodies to refer their materials and to investigate the irregularities?

The Acting Chairperson welcomed the regulations and was waiting impatiently for the implementation of those regulations. She noted that the Auditor-General had to use private firms because the Auditor-General did not have capacity as there were 1 000 auditees. How was the Auditor-General going to deal with Certificates of Debt and getting people to account and be held accountable?

She added that in a Standing Committee on Public Accounts (SCOPA) meeting, Members had been told that employees in government could resign even when they were in the middle of an investigation and the investigation was then halted. What would happen when a Certificate of Debt had been issued and the official subsequently resigned? SIU had told Members that there was nothing in law to prevent employees resigning. Parliamentarians took it for granted that accounting officers knew what they were doing but when the accounting officers were called to the SCOPA, they did not know the Treasury regulations. How was the Auditor-General going to take them onboard? Accounting officers had to be trained so that they knew exactly what was going to happen. She did not want to see problems when the implementation began.

The Acting Chairperson stated that the SABC had told Members of SCOPA that they did not want government vetting; they wanted their own vetting. CAs had a Board and they were regulated but was there a special code of conduct for those working under the Public Finance Management Act so that people could not say that they did not know about the code of conduct. She added that the Auditor-General had spoken about steps to be taken, but there was no timeframe. If there was no timeframe, it would be difficult to make it work. How long would the steps take? Would it be three months? The Committee needed to know how many months. Finally, she concurred with Mr Ntombela who had asked about R1 billion. What about others who might just relax? The Committee wanted to see consequences.

The Auditor-General explained that the R1 billion irregular expenditure over three year threshold was for the first year only. He knew that it would be a train smash if AGSA tried to implement the new regulations with all auditees at the same time. R1 billion would give him somewhere to start.  After the first year, anyone with material irregular expenditure would be targeted. Those who had accumulated R1 billion irregular expenditure over three years would possibly be the ones with the biggest fraud. In year one, the AGSA was looking at minimum risk. It was not going to be a recurring qualifying figure. It was just for year one. In future years, whatever material irregularity one had, it would be tested against the regulations. He did not want to catch all 1 000 in the first year as that would stretch his resources.

In respect of resignations as well as withdrawal of external auditors, the Auditor-General said that regulations allowed AGSA to create an expectation. He quoted Regulation 5(3)(b):
“(3) If the Auditor-General intends to withdraw its consent to the appointment of an auditor in
private practice in terms of section 25(1)(b) of the Act, he or she must—
 (b) afford the auditor in private practice and the institution an opportunity to within 20
days of receipt of the notification to submit written representations to the Auditor-
General;”

It was usually about the independence of the firm. Having identified a major issue, the AGSA would draw the attention of the auditor to the matter and inform the auditor that the Auditor-General had the intention to withdraw the appointment. That firm had to be given 20 days to explain why the intention to withdraw their mandate was not well placed, so that AGSA listened to what the auditor had to say. After consideration of motivations in writing, it was necessary to give the private auditor notice of the Auditor-General’s decision and the reason for his decision. The regulations guided the process.

The same thing would occur if there was an intention to issue a Certificate of Debt. The AGSA would ask for written representation. The timeframes in the regulations were to ensure that no one was caught by surprise, but at the same time, one was given space to express oneself.

Timeframes were difficult to prescribe upfront. Where it was possible, timeframes had been inserted. For example, an auditor could pick up an irregularity at the tail end of a five-year period of material irregular expenditure and that would take considerable time for the Accounting Officer to investigate. He referred to the case of the mental hospital facility in the Northern Cape which stretched back 13 years. He had been to the hospital the previous month and it was never meant to be a 13-year project. If an auditor did an audit at the current time and picked up an irregularity ten years ago, it was impossible to say how long it would take to investigate. A situation like that would be complex and people would have left, so putting in a timeframe would trip up AGSA. However, he did not want the turnaround to be too long. A reasonable period would be tied down to, for example, 90 days in the communication to the accounting officer once AGSA had some idea of the scope of the problem. It just was not possible to tie the timeframe down in the regulations because there would be a mixed bag of complexities.

The Auditor-General explained that the same situation applied to the referral.  There could not be a limit of say, 180 days, because some of the things were too complex for such a timeframe. An investigation could not be limited because the investigators might need to extend the investigation. Unlike the Presidency that had to give a timeframe because it was too busy to follow-up on investigations, AGSA would regularly follow-up and check how far the investigations were. The Auditor-General would follow up because it was his mandate and he would have to report on progress in the Annual Report.

The engagements with the accounting officers had already started. All of the DGs had met and been given foresight of what was contained in the Act and the regulations. The engagement would be cascaded further to work with them on the detail. AGSA had assigned teams to work in provinces in the new year. The same thing would happen with accounting officers in national departments, other entities and municipalities so that people would understand what would happen in an audit. He would share the programme with Members but had not been able to do so until his office knew that Act had been passed and when the Regulations would be passed. It was in the plans to trigger the process as soon as the legislation was in place.

The Auditor-General explained that if the audit fee exceeded 1% of net assets of the entity, then anything over the 1% would be recovered from National Treasury. That was the current dispensation. But AGSA would look at the scope of work in an entity and if AGSA could reduce the time and work involved to express an opinion for a non-income generating environment, it would do so, which would result in audit costs being reduced. National Treasury had not been able to budget before, but now it could.

AGSA looked at the role of the risk and audit committee and the extent of work done by the Committee to assess risk. Some entities did not take insurance as it was very expensive to insure and the risk was low. He would ask his colleagues to elaborate.

As far as collaboration was concerned, AGSA had aligned with SIU and Public Protector but had been unable to move ahead quickly as he had not had clarity on the signing of the Act. Now that the Act had been signed, he would be moving ahead quickly and would have a discussion with them so that they would understand if he had to refer certain items to them.

Concerning ethics and the code of conduct, the majority of people in the office were exposed to the code of conduct for auditors and CAs. It was a person’s choice to adhere to the code or ignore it but he always told them that they were ignoring the code of conduct at their own risk. People knew how to react when someone tried to bribe a person with a nice car or to persuade them to ignore an irregularity. There were auditors who blew the whistle when someone tried to reward them for ignoring a finding. Selling one’s name as a CA came at a high price. Some things could mean the end of a person’s career as a CA could lose his or her licence and not be able to work as an auditor for the next 30 years. The code of conduct was promoted in the office, but people were not policed. However, because of the kind of people he had, there was usually a trigger and people acted appropriately. The Auditor-General watched over it and followed up any complaints.

Ms Tsakani Ratsela, Deputy AGSA, arranged for various members of the team to respond to questions not responded to by the Auditor-General. Adv Marissa Bezuidenhout, Business Executive: Legal Services in the Office of the Auditor-General, would respond to the question on what happened when a person resigned during an investigation and to the question on the offences. Ms Ratsela requested Ms Alice Muller, Corporate Executive: Audit, to respond to the questions about insurance, additional staff and implementation.

Adv Bezuidenhout responded to the question on accounting officers who had left or resigned during the process of a certificate of debt. She was aware that Mr Singh had been asking about those people who quickly left the minute something started getting a bit hot, and often ended up in a different government department. The AGSA had been very aware of that situation when developing the regulations. The AGSA wanted to catch those Accounting Officers who were in charge when the particular material irregularity took place. The AGSA did not want to allow those accounting officers to escape a Certificate of Debt or remedial action going forward. Under part 5 of the regulations dealing with irregularities, a sub-regulation dealt specifically with accounting officers and board members, including former accounting officers and former members of boards. For purposes of definition in respect of a Certificate of Debt, an accounting officer would also include a former accounting officer or a former member of an accounting authority or a board. It had been very specifically articulated in the regulations.

To make 100% sure that the Auditor-General did not face challenges from someone who had left; the AGSA had requested a senior counsel opinion. Holding an accounting officer personally accountable would depend on when the accounting officer had left. If it is right at the beginning when a material irregularity had been identified and raised as an irregularity, the responsibility lay with the person in the role. Even if the original person left, liability initially lay with the person in the role. However, as one progressed, that liability became, at some point, personal. When was that point? That point in time was when the accounting officer had had plenty of time to address an irregularity and had failed to do so when in the role and with the legal powers to do so. At that point the Certificate of Debt was issued and that certificate would follow him or her and he or she would face the legal consequences of a Certificate of Debt.

Adv Bezuidenhout stated that the question of how far one went back had been discussed extensively with the Committee. The question was whether one applied the regulation retrospectively and the answer was in the negative. The Amendments were not retrospective so it depended on whether the audit report that contained that recommendation was issued after the commencement of the Act. It did not matter when the actual material irregularity had taken place. If addressed in any report after the commencement date of the Act, the irregularity could be addressed. In other words, it could go further back than the current year.

Adv Bezuidenhout responded to Mr McLaughlin’s question about whether offences were addressed individually or as a whole. The AG could legally differentiate. One incident could have multiple offences. The Auditor General could send one aspect to the SIU and deal with the others. It was also permissible for the Auditor General to refer an incident to more than one public body, depending on mandate of the body.

She responded to Ms Dlamini-Dubazana’s question about whether the year of the Act should be changed. She explained that the Public Audit Amendment Act would be dated 2018 but the principal Act remained Public Audit Act, 2004. That was the enabling law but when looking for the law that changed the 2004 law that would be the Public Audit Amendment Act 2018.

Ms Alice Muller stated that AGSA did not currently scope insurance in all the audits. Regarding additional staffing, the AGSA had dentified a need for 18 people in the legal department and in the investigation unit which would manage the referral and the Certificate of Debt process and also in the audit, research and development unit, the quality control unit and other support functions. AGSA was not able to make a final determination of staff needed until after the regulations had been phased in and the additional work could be established, as well as additional resources needed.

The Deputy Auditor-General stated that a couple of drafting issues had been raised which she would pick up with the drafters because Ms Dlamini-Dubazana had made a good point about referrals and the process. It was a matter of clarity. The Acting Chairperson had made a comment about the accounting officers, not only in terms of the Amendment, but also in terms of their general understanding of rules and regulations governing the Public Finance Management Act. That was an issue that could not be over-stated. AGSA had to create awareness, but it also had to have pro-active engagement throughout the year so that there was greater awareness of what could trip up accounting officers.

The Acting Chairperson thanked the Auditor-General and his staff for the clarity. She thanked the Auditor-General. Everyone was celebrating the President’s signing of Act 25 of 2018. They were now waiting for the implementation.

The Acting Chairperson stated that the Committee did not have a quorum so that the Committee could not adopt the report. The Secretary suggested that the Committee could meet on Wednesday during lunch as there were a lot of reports to be adopted. She would send the documents prior to the meeting.

The Auditor-General asked if that evening’s meeting meant that he had submitted the regulations and that they would go to the National Assembly for adoption.

The Acting Chairperson requested the Auditor-General to include the suggested amendments in the regulations and return them for the next meeting. Once approved, the regulations would be tabled for reading in the House as soon as possible. Everyone had done a great job.

Closing Remarks
The Acting Chairperson thanked the Auditor-General and his staff and wished them a safe journey.

The meeting was adjourned.


 

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