2020/21 PFMA Audit Outcomes: Auditor-General briefing

Meeting report

The Standing Committee on Public Accounts met early to handle internal business, but was inquorate. After waiting fifteen minutes for other Members to join the meeting, the Committee decided to adjourn until the Auditor-General’s briefing.

AGSA briefing: National and provincial audit outcomes
Ms Tsakani Maluleke, Auditor-General, said that the 2020/21 financial year, from 1 April 2020 to 31 March 2021, had been a difficult year for South Africa and globally. That the audits had been completed under the circumstances was a credit to the teams within the auditees and to the team at the Auditor-General of South Africa (AGSA).

She reviewed the key messages that AGSA had presented to the Committees in March 2021, when it had reported on the 2019/20 financial year. AGSA had said then that there had been some improvements in the 2019/20 audit outcomes, but that it had not yet seen evidence of the changes that were necessary to ensure sustainable improvements in the integrity, transparency, and accountability of public institutions. 

Overview of outcomes

Ms Maluleke said that the briefing encompassed a total of 425 public institutions audited by AGSA under the Public Finance Management Act (PFMA). For those institutions, the revised 2020/21 audit outcomes were as follows:
· 114 clean audits (27%);
· 187 unqualified audits with findings (44%);
· 73 qualified audits with findings (17%);
· Two adverse audits with findings (0.5%);
· 12 disclaimed audits with findings (3%); and
· 37 outstanding audits (9%).

She said that, overall, there was encouraging progress, but there was also a lot of work still to be done. 114 clean audits was a good outcome, especially because those institutions represented 19% of the total expenditure budget. Those institutions were, at the minimum, “well-run” – a clean audit did not entail that an institution was performing well against its mandate and annual performance plan, but it was a “good start” for accountability and for improved performance in the future. Many of the clean audits were among smaller departments, especially in the provinces, and there was now an opportunity to shift the focus to service delivery and to look more closely at the content of their performance plans. The number of clean audits had been increasing since the start of the current administration in 2018/2019 – in the year under review, 28 institutions had gained clean audit status, and 18 had lost it. Her team also informed her that there were 31 further institutions which were very close to a clean audit.

Moreover, she was pleased that a total of 301 audits (71%) had been unqualified on financial reporting. However, many of the institutions that had received unqualified audits with findings or qualified audits with findings had received that same outcome in previous years, implying “complacency” about improving audit outcomes.

She added that no government departments had received adverse or disclaimed audits. Most of the institutions that had received disclaimers had received them in past years. At the national level, repeat disclaimers included the National Skills Fund, the Compensation Fund, the Passenger Rail Agency of South Africa (Prasa), and other state-owned entities (SOEs).

Outstanding audits

Ms Maluleke said that as of 1 December there had still been 34 audits outstanding, but the presentation reported on the 37 audits that had been outstanding as of 19 November. She discussed the main reason for the delay in each case. The most common reason was that the institutions had not submitted their financial statements – that was the case at the South African Airways (SAA) group, South African Express, the Denel group, the Compensation Commissioner for Occupational Diseases, the Government Printing Works, and four provincial entities, three of which were in the North West. There were also some delays due to technical disputes, which was the case at three Western Cape departments.

Government departments

She provided an overview of the departmental audits, highlighting that the audit outcomes of the 40 key service delivery departments – health, education, public works, and human settlements – continued to lag behind those of other departments. 47 of all 163 government departments (29%) had received clean audits, but only two of those, both in the Western Cape, were at key service delivery departments. Most key service delivery departments had stagnant audit outcomes. One key risk arising from this was at the health departments – health departments needed credible records if they were to defend themselves against medical negligence claims, which were prevalent and which threatened the departments’ financial viability.

AGSA also reported on performance audits it had conducted on several infrastructure projects in the key service delivery departments. She said that Mr N Singh (NFP) had called for this kind of performance audit in the past. 

State-owned enterprises

The 15 SOEs audited by AGSA had received the following audit outcomes:
· One clean audit, at the Development Bank;
· Four unqualified audits with findings, at the Airports Company, Armscor, Central Energy Fund, and Forestry Company;
· Two qualified audits with findings, at Transnet and the SABC;
· One disclaimed audits with findings, at the Nuclear Energy Corporation; and
· Seven outstanding audits.

Ms Maluleke said that the audit outcomes of the SOEs were regressing, reflecting weaknesses in governance, financial management discipline, performance reporting, and compliance. These had to be attended to urgently.

She also provided a breakdown for the other 247 public entities, which were responsible for two adverse audits, 11 disclaimed audits, and 29 outstanding audits.

Provincial outcomes

Audit outcomes in most of the provinces had been improving, with the exception of Mpumalanga, which required particular attention. AGSA had given disclaimers to institutions in the Free State (one), Gauteng (one), and the North West (three). The Western Cape had, for another consecutive year, achieved the highest number of clean audits, at 14 clean audits.

Reporting and compliance

Ms Maluleke discussed the quality of financial and performance reporting among auditees, highlighting that many auditees had not provided credible reports at the outset of the process, but rather had unduly relied on the auditors to help correct and improve the reports. Non-compliance was improving, but it remained high – 264 (69%) of auditees had material findings – especially against financial reporting standards.  

Cumulative irregular expenditure was at R166.85 billion, incurred across 286 auditees, though that figure was subject to change once further investigations were completed. AGSA was noting that much of the irregular expenditure was not related to supply chain management. For example, the National Student Financial Aid Scheme (NSFAS) had incurred irregular expenditure of R77.49 billion, a substantial increase from R0.52 billion in 2019/20 and almost half of the cumulative total, but the reason for the irregularity had been non-compliance with bursary regulations.

She also provided an overview of the financial health status of auditees, which she said was an ongoing concern. Financial health was “of concern” at 119 auditees (58%), and AGSA had identified that intervention was required at 36 auditees (12%), including:
· 14 government departments, especially health and education departments;
· 19 public entities; and
· Three state owned-enterprises.

Material irregularity process

AGSA had gradually started to implement the extended powers it had been given under the Public Audit Act. In 2020/21, it had brought 237 material irregularities to the attention of accounting officers and authorities. 17 had been resolved, meaning that the accounting officers had responded to the irregularity adequately. 220 remained unresolved, including:
· 60 for non-compliant payments;
· 53 for delayed payments;
· 22 for repeat disclaimers; and
· Two for suspected fraud.

69% of the relevant accounting officers were taking appropriate action to address the material irregularities, but others had not. The latter group included, at the national level:
· Prasa (nine material irregularities);
· Department of Defence (five material irregularities);
· Department of Cooperative Governance and Traditional Affairs; and
· Department of Public Works and Infrastructure.

Ms Maluleke explained how AGSA had responded in each of these cases. She appealed for oversight over the material irregularity process, both from executive authorities and from legislatures. Oversight bodies should also support the other public bodies who were involved in the process – there were some matters in which there were delays from the State Attorney, the Hawks, or the Special Investigating Unit. She suggested that the list of material irregularities should be supplied to other parliamentary committees, who could ensure accountability among the accounting officers.

(See Presentation)

Discussion

Chairperson Somyo said that AGSA’s briefing provided a comprehensive account of the 2020/21 year, and contained insights which would assist Parliament in enforcing accountability. He agreed that parliamentary oversight over the material irregularity process would be important. He invited Members to ask questions.

Mr Z Mlenzana (ANC) said that he thought Members would need time to go through AGSA’s full report before reflecting on the Committees’ way forward. However, he wanted to know about the relationship between AGSA and the Department of Planning, Monitoring and Evaluation (DPME). How often did the two meet? He encouraged constant interaction between them – though he knew that AGSA had statutory independence, while DPME was located in the Presidency, he thought it was important for them to work together.

Ms Maluleke replied that she thought it might be useful for the Committees to meet again with AGSA to have a deeper discussion once Members had read the full report. She welcomed Mr Mlenzana’s recommendation about DPME, and AGSA would certainly ensure that it met even more frequently with DPME and collaborated more effectively. Although AGSA was independent, its role was to support the whole sector in shifting towards better accountability and transparency.

Mr Mlenzana noted Ms Maluleke’s exhortation to accelerate accountability. If it was feasible, he thought that this campaign should be given concrete timeframes – perhaps it should be a campaign for all public institutions to receive a clean audit in the 2023/24 financial year. He knew that the end of the 2023/24 financial year was barely over two years away, but the fact that 71% of audits had been unqualified in the year under review suggested that it was a doable goal if all stakeholders worked hard. He was particularly concerned about institutions that had received repeat disclaimer outcomes – he called them “serial disclaimers,” because they were “killing the nation.” It was especially worrying if there were some officials who “refuse[d] to come to the party.”

Ms Maluleke thought the 2023/24 target would be worth pursuing. The campaign for accelerated accountability should be framed not as a matter of chasing clean audits, but as an encouragement for all institutions to “do better.” Even institutions which had received clean audits should seek to do better. She agreed that “serial disclaimers” should no longer be tolerated.

Mr Mlenzana said that he had also been going to ask whether AGSA had started “biting,” since the amendments to the Public Audit Act had given it teeth. However, this question had been addressed towards the end of the briefing, when it became clear that AGSA was certainly taking action. If she wished to, Ms Maluleke could elaborate on the remedial actions that had been taken. 

Mr O Mathafa (ANC) said that the briefing had been very detailed and would help Parliament to improve its oversight in the future. He wanted to understand the relationship that AGSA had with shareholder ministries. For example, did AGSA engage with the Minister of Public Enterprises about the SAA and Denel audits? Ms Maluleke had touched on this while answering Mr Mlenzana’s question about DPME, but she could elaborate if she wished. He was asking because he was also a Member of the Standing Committee on Appropriations, which had heard during a departmental briefing that Denel’s management had failed to implement its approved turnaround plan. If an entity had problems implementing such a plan internally, it was likely that it would also find it difficult to comply with the auditing process, because, in his understanding, the audit was also led at the managerial level. A related question was therefore whether AGSA was able to communicate to Cabinet or Parliament about deficiencies it detected within auditees’ management. That way, oversight bodies could help strengthen and capacitate weak management structures.

Elaborating on AGSA’s relationship with DPME, Ms Maluleke said that AGSA had for some time been reviewing departments’ annual performance plans before Parliament approved those plans. The intention was to help ensure that Parliament approved annual performance plans that were well poised to drive effective service delivery and, importantly, well poised to address audit findings, so that the departments could fix things before they became too problematic. The AGSA had been conducting those reviews for some time, and it was now talking with DPME about how AGSA and DPME could collaborate, so that that they did not duplicate their efforts and so that their work was well synchronised. Thus AGSA and DPME were actively looking at how they could collaborate better, especially in the coming financial year.

She said that AGSA engaged with shareholder ministries as a matter of course. The minister responsible for each auditee had ample opportunity to engage with the AGSA team and hear their feedback. The same engagements were also held with the accounting officers. Those engagements would continue to occur. AGSA was seeing that attention to public entities tended to “slip,” and it wanted to put the public entities back at the centre of its engagements with accounting officers, executive authorities, and legislative bodies. 

Mr Mathafa said that he welcomed the 114 clean audits, but noted that 18 institutions had lost their clean audit status during the year under review. Among the 114 which had clean audits, were there similarities in operating procedures which could be presented as best practice? For example, when AGSA was interacting with auditees, it would be helpful for it to be able to suggest management methods which other institutions had used to achieve a clean audit. That could be particularly helpful for the auditees which had AGSA had identified as being very close to achieving a clean audit.

Ms Maluleke replied that Members might recall that AGSA had published preventative controls guides in late 2020. Those had been made available to Members of Parliament, accounting officers, and executive authorities. Today, AGSA would be publishing a new infrastructure management guide, which recommended preventative controls for infrastructure projects on the basis of the best practice emerging from AGSA’s observations. AGSA would ensure that it provided access to the new guide to everybody who had an interest in it.

Ms B Van Minnen (DA) asked whether she had understood correctly from the briefing that there were delays not only in consequence management but also in investigations conducted by other agencies, including the National Prosecuting Authority (NPA). If that was correct, this would be the second time in two days that the Standing Committee on Public Accounts had been informed of such delays, and it would have to address that problem urgently.

Ms Maluleke replied that there were delays in some matters that AGSA had raised with the NPA, the Hawks, and other agencies. There could be a whole host of reasons for the delays, including capacity issues or prioritisation issues. In the full report which it was tabling, AGSA set out the current status of every material irregularity, so Members would be able to see where the “blockages” tended to be. For example, one blockage, especially in pursuing recoveries, was at the office of the State Attorney. The delays were one of the reasons that AGSA was appealing to executive authorities to pay attention to the material irregularities and their processing. AGSA also viewed the report as an opportunity to equip Members of Parliament with key insights on specific matters, which they could follow up on when public bodies appeared to account before parliamentary committees.

Mr B Hadebe (ANC) noted that Ms Maluleke had said that data loss at the Government Printing Works had delayed its audit. What type of data had been lost? The Government Printing Works held sensitive information.

Ms Maluleke replied that the data loss primarily related to financial information, so, in her understanding, it had primarily been about the accounting systems at the Government Printing Works.

Mr Hadebe said that he had been excited to see the number of clean audits, but that excitement had been short-lived once he had heard the rest of the briefing. In the year under review, 28 institutions had gained clean audit status, but 18 had lost it. What were the main reasons for the regression, and to what outcome had those institutions generally regressed? Lessons should be drawn from those institutions. He could not really view the audit outcomes as an improvement – it seemed that the institutions were going in circles, and were unable to sustain clean audit status once they had achieved it. What Parliament wanted to see were sustained clean audits, but only 86 institutions had sustained their clean audit status in the year under review.

Ms Maluleke replied that institutions which lost their clean audit status tended to receive unqualified audits. For example, in the year under review, Armscor had received an unqualified audit with findings, after receiving a clean audit in 2019/20. The main problem at Armscor had been discipline in its financial reporting – it ran manual systems and had slipped up on some of its reconciliations, and had therefore submitted financial statements which contained material errors. Such errors qualified as non-compliance, because the PFMA explicitly provided that accounting officers and authorities had to put in place strong systems to guarantee credible financial information on an ongoing basis. That provision of the PFMA clearly had not been complied with if there were material errors in the financial statements.

She said that the regressions, or the lack of stability at the clean-audit level, were a sign that there was not yet enough stability in financial management discipline and controls. AGSA’s preventative controls guide partly aimed to help executive authorities and Parliament to keep accounting officers focused on continuously strengthening the systems of accountability and transparency, so that entities not only achieved but also sustained clean audits. AGSA always said that though it was difficult to get a clean audit, it was even more difficult to sustain a clean audit. A sustained clean audit indicated that the entity’s systems were relatively stable, and it took time to reach that level of stability. Public institutions and their senior managers had to be incentivised, inspired, and monitored, so that they persisted in building strong, stable systems.

She added that AGSA teams had reported that there were 31 public institutions which had been very close to achieving a clean audit. Of those, 24 had failed to receive a clean audit solely because their financial statements had not been credible. Those institutions had corrected their financial statements during the audit process, but the statements had not been credible when they were first submitted. That again indicated that the stability and discipline of financial management was not quite sufficient. As she had mentioned during the briefing, many auditees used the audit process as an opportunity to correct errors, so that they ended up with credible financial statements but only at the end of the audit (see slide 12).

Mr Hadebe asked whether the presentation covered all public institutions or only those audited by AGSA. He was aware that AGSA did not audit Eskom, but he had hoped that the briefing would provide some insights on Eskom – there were serious challenges there.

Ms Maluleke said light-heartedly that Mr Hadebe was clearly longing for the day when AGSA would audit all public institutions. AGSA audited all government departments, but not all public entities – for example, it did not yet audit Eskom, Broadband Infraco, or the Industrial Development Corporation, so those entities were not included in the presentation. For the last ten years or so, AGSA had been taking on further audits of the bigger public entities, and it had been doing so at a very fast pace over the last six or seven years. The full AGSA report did provide some insight on the outcomes of the public audits not conducted by AGSA. When the private sector auditors briefed Parliament about those outcomes, AGSA also attended. In AGSA’s view, it had a responsibility to cover the entire space of public audits, including all public entities. 

Ms C Seoposengwe (ANC) said that the Committees should hold a follow-up meeting with AGSA, as Ms Maluleke had proposed. Other Members had raised most of her points, but she also thought that it was important for Parliament to confirm that clean audits corresponded to good service delivery. For example, in regard to the departments of health, there were concerns about service delivery at clinics and public hospitals – were they open 24-hours-a-day, did they have medicines, and so on? Parliament had to conduct more vigorous oversight visits, to investigate whether entities’ clean audits corresponded to good service delivery at their sites.

Chairperson Somyo said that Ms Maluleke had mentioned that there were sometimes technical disputes between AGSA and auditees, which were resolved by approaching the National Treasury to confirm the correct interpretation of regulations. For example, there were Western Cape departments whose audits had been delayed because of such disputes. How could this process be improved? Relatedly, what role did the Accountant-General play in helping to finalise audits and resolve disputes?

Ms Maluleke replied that the office of the Accountant-General had been vacant for several years. In AGSA’s experience, when there had been an Accountant-General in office, the dispute resolution process had been more effective and efficient. In the auditing process, Treasury was responsible for establishing norms and standards, and AGSA was responsible for testing compliance against those norms and standards. If the norms and standards were unclear, disputes arose with auditees, and AGSA had to confirm the correct interpretation with Treasury. For example, during the briefing, she had mentioned that the Department of Defence had disputed one of its material irregularities, and AGSA had gone to Treasury to confirm that it was interpreting the regulations correctly. It was a challenge when Treasury took a long time to get back to AGSA, and it was key to address the vacancy at the Accountant-General.

She said that the Road Accident Fund was another of the institutions whose audit had been delayed. The Fund had submitted its financial statements on time, but there was an outstanding dispute about the Fund’s accounting treatment of a particular set of liabilities. The Fund had changed its accounting policy, and AGSA believed that the new approach was inappropriate, so, before finalising the audit, it had been important for AGSA to approach Treasury to find out whose view was correct. One might argue that AGSA should go ahead and come to its own conclusion – but, given Treasury’s responsibilities as provided for by law, it was important for Treasury to participate in matters which had material implications for the way in which public finance accounting and reporting systems operated. If the vacancy at the Accountant-General was filled, that would make the audit process much quicker and easier. It would provide important certainty, not only to AGSA but also to the auditees, around correct financial reporting procedures and the correct interpretation of reporting and procurement regulations. The vacancy was highlighted in AGSA’s full report, and the problem was reaching a point where it required greater attention.

Chairperson Somyo said that the vacancy at the Accountant-General was a “sticky point” that the Committees might have to pursue with Treasury. In the absence of an Accountant-General, things might “fall apart,” and the ability of AGSA to deliver on its mandate might be undermined.

Chairperson Hlengwa thanked AGSA for another “job well done.” He thought that the work now fell largely on Parliament, which had to follow up on AGSA’s findings and probe matters further. There was clearly a problem in the SOE sector, and it was worsening every year, for a variety of reasons. One lingering question was whether the PFMA in its current form was appropriate for SOEs. An SOE had to have a dual outlook – it was a public institution, but it was also operating in a business environment, in which competitiveness might require agility and flexibility. Many of the SOEs had competitors in the private sector. The “Post Office headache” was another example – the Post Office was competing with PostNet and other private couriers, and it now wanted to implement an R8-billion turnaround strategy. He thought that government should avoid “throwing financial solutions at non-financial problems.” He thought AGSA would be in a good position to assess whether the PFMA allowed SOEs the kind of agility they needed to succeed on behalf of the state. Of course, by raising doubts about the PFMA, he was not seeking to absolve the SOEs of non-compliance – compliance remained non-negotiable.  

Chairperson Somyo said that, as other Members had already said, there were some questions that should be discussed in depth in a follow-up meeting after Members had reflected upon the full report. Chairperson Hlengwa had already received briefings from some of the audit teams, so he was familiar with the audit outcomes and might ask questions which required deeper discussion. Ms Maluleke could choose which she wished to respond to in the current meeting, and the other matters could be deferred to the follow-up meeting.

Ms Maluleke said that she thought that the PFMA should be discussed in an organised and frank way, so that AGSA and Members could reach agreement on the requisite balance between accountability and agility, whether in the PFMA itself or in concordant regulations. She thought that it would be better to have a focused discussion at a later date than to talk in general terms.

Chairperson Hlengwa said that, if he remembered correctly, AGSA had been planning to take over the audit at Eskom. Could the Committees have an update on that? How was that transition progressing?

Ms Maluleke replied that AGSA had felt that it would have been unwise to take on the Eskom audit for 2020/21. It had audited Transnet for the first time in 2020/21, and was also implementing the new material irregularity processes, so it had not had the necessary capacity to take on an audit of the scale, complexity, and importance of the Eskom audit. In her experience, AGSA had to be measured and steady in taking on additional audits. The Eskom audit had therefore been allocated to an external auditor, a private firm. A few AGSA personnel were working with the private firm to complement its work, so as to improve the quality of the audit – Eskom had thus received some input from AGSA in addition to the input from the private firm, which was the lead auditor.

Chairperson Hlengwa said that he thought that the Compensation Fund had again received a disclaimed audit, as it had for close to a decade. He thought Parliament had to “press the reset button” in respect of the situation at the Compensation Fund. Parliament had instructed that a forensic investigation should take place to look into the root causes of the problems. He was also concerned about the audit action plan that the Compensation Fund was employing, or was supposed to be employing. The Fund was “one of the worst offenders.”

Ms Maluleke replied that she thought that the Committees should receive a briefing on the Compensation Fund audit from the relevant audit team. The team would be able to share its assessment of the audit action plan. It could also share its own plans for increasing the level of support it provided to management, to the executive authority, and to oversight bodies. Those plans might even include real-time audits, so that AGSA could provide oversight bodies with real-time updates on the implementation of the audit action plan.

Chairperson Hlengwa said that Ms Maluleke should be given the latitude to be frank with the Committees about the performance of Parliament and the legislatures in their oversight and assurance-provider roles. She had mentioned that AGSA’s material irregularities process was only one aspect of the system, and that all stakeholders had to play their parts. Were Parliament generally and the line-function committees specifically – probably above all the Standing Committee on Public Accounts, which he chaired – actually adding value? Where were they falling short, and where could they improve? AGSA would perform another audit in the current year, and Parliament was part of that process and system, so it should reflect on its performance and if necessary “press the reset button.”

Ms Maluleke replied that, as AGSA kept repeating, this was a moment to focus on driving improved accountability, and, as Chairperson Hlengwa had said, all stakeholders had to participate diligently in those efforts. The presentation and the full report contained some recommendations to Parliament, which should help it to conduct more effective oversight over the executive and the accountability mechanisms. AGSA would like to hear what Members made of those recommendations and which they wanted to implement, as well as how AGSA could assist with implementation. She thought that the information about material irregularities and service delivery would help direct Parliament’s efforts in the forthcoming months.

Since Ms Maluleke had specifically said that Mr Singh would appreciate AGSA’s performance audits, Chairperson Hlengwa added that Mr Singh was at the Chief Whips’ Forum and had tendered an apology for his absence.

Closing remarks

Chairperson Somyo said that AGSA’s report, as well as Members’ own comments, raised several important issues. Firstly, it was urgent to build stability around financial management, both in departments and at the SOEs. Secondly, the financial performance and status of some SOEs called for intervention, mainly by Treasury. Thirdly, it was urgent to improve the standard of accountability. That was relevant to the speedy resolution of material irregularities by accounting officers. Fourthly, the standard of financial statements also required attention – both their quality and their punctuality had to improve, especially so that fewer audits would be delayed. And, finally, auditees should work towards long-term sustainability and stability, and had to be held accountable in that respect. 

He said that Members would read the full report and reflect on the way forward on various areas of interest to each Committee, and then the Committees would hold follow-up meetings with AGSA. He thanked Ms Maluleke and wished her well for that afternoon’s media briefing on the audit outcomes.

Chairperson Hlengwa reminded Members of the Standing Committee on Public Accounts that the Committee was meeting with the Minister in the Presidency that evening.

The meeting was adjourned.