Ww w Review of the powers of the

Ww w Review of the powers of the Auditor-General SA Standing Committee on the Auditor-General – 9 June 2017

Reputation promise/Mission The Auditor-General of South Africa has a constitutional mandate and, as the Supreme Audit Institution (SAI) of South Africa, exists to strengthen our country’s democracy by enabling oversight, accountability and governance in the public sector through auditing, thereby building public confidence 2

Purpose of engagement The fight against corruption must find expression in Parliament as the centre of that fight, because of our constitutional obligation and also because our political obligation as representatives of the people Hon Themba Godi Chair of SCOPA 16 May 2017 The Auditor-General of South Africa (AGSA) hereby offers its unwavering support to Parliament in its call for action 3

Point of departure The AGSA solicits the insights, guidance and assistance of the committee in respect of the following fundamental questions – 1. How does SCo. AG ensure that the AGSA’s attention is focused on areas that pose the greatest risk to service delivery and achievement of government’s goals? 2. With this in mind, how does SCo. AG empower the AGSA to execute its mandate effectively? 3. How does Parliament, through the AGSA, enforce implementation of our recommendations to improve public sector financial and performance management, and fosters respect for the rule of law? 4

Structure of presentation Section A: The history and status quo v The role of Parliament and legislatures in a democratic state v The role of an independent supreme auditor in a democratic state v Attacks on the systems supporting service deliver and achievement of goals v Recent initiatives to restore the integrity of systems designed for financial and performance management Section B: The future – towards an open, responsive and accountable society v The focus on auditing what matters v Ensure the implementation of recommendations v Enhanced reporting Section C: Pulling it all together v Public Audit Amendment Bill, 2017 5

Section A The history and status quo 6

The role of Parliament and legislatures in a democratic state v The RSA – a democratic state founded on values that underpin an accountable, responsive and open democratic government v National Assembly represents the people of SA and ensures government by the people v Ensures service delivery and achievement of goals through the executive v National Assembly and provincial legislatures determine mechanisms for oversight and scrutiny v Constitution creates structures to aid oversight by legislatures (chapter 9 s) v AGSA is a cornerstone of democracy 7

The role of an independent supreme auditor in a democratic state v. The AGSA audits and reports to strengthen democracy v. Section 188 (1) of the Constitution of the Republic of South Africa, 1996 v. Mandate further extended by the Public Audit Act, 2004 (Act No. 25 of 2004) v. Regulatory framework provides wide range of powers to execute the mandate effectively v. These exclude the power to make binding recommendations v. Value of an external audit v. AGSA subscribes to the principles contained in ISSAI 12 – SAIs make a difference in the lives of citizens 8

Initiatives to counter the attack on systems v. Root cause analysis in management reports coupled with recommendations v. Audit methodology that requires auditors to follow up on previous recommendations v. Commitment to quality of audits v. Quarterly engagement programme v. Support rendered to oversight committees in accordance with section 5(1)(b) of the PAA v. Roadshows after completion of audit cycles that coincide with publication of general reports v. Media briefings v. Door-to-door visits to engage mayors, councils and municipal officials v. Consequence management booklet v. Close collaboration with National Treasury, Accounting Standards Board and identified 9 departments

Historical reflection – acceptance and implementation of recommendations v. Quality of annual financial statements in both PFMA and MFMA remains a challenge v. Material non-compliance with legislation remains high in both PFMA and MFMA v. Unauthorised, irregular and fruitless/wasteful expenditure remain high in both PFMA and MFMA v. Lack of consequences or inadequate consequences for financial misconduct 10

Challenges still prevailing v. Slow response to the call for improvement of the internal control environment v. Instability/vacancies in key positions or key officials lacking required competencies v. Inadequate consequences for poor performance and transgression of laws and rules. This is mainly due to the lack of leadership and absence of accountability. 11

Recent initiatives to restore integrity of systems 1. Quarterly key controls initiative focusing on – v v v v Financial management Performance management Procurement and contract management Compliance management HR management IT management Financial health Oversight and monitoring 2. Improved audit methodology that will lead to better oversight, accountability and governance 12

Section B The future – towards an open, responsive and accountable society 13

Focus on auditing what matters – review of the audit portfolio v AGSA mandate includes all institutions required by national or provincial legislation to be audited by AGSA v Includes small and low risk institutions – boards, museums, trust funds and other accounting entities v AGSA time and resources allocated to these institutions dilute capacity to attend to other high risk areas v Chief State Law Adviser (CSLA) – these audits can be surrendered lawfully to private audit firms v Amendment of section 4 of the PAA will enable AGSA to opt out of these audits 14

Focus on auditing what matters - revised report content for selected engagements v PAA prescribes reasonable assurance engagements (audits) - section 20 v For small and low risk auditees the AGSA is inclined to consider limited assurance engagements (reviews) v Limited assurance engagements on a cyclical basis (as opposed to annually) also considered v CSLA – Limited assurance engagements or reviews on a cyclical basis will be lawful and possible through an amendment to section 20 of the PAA v Amendment of section 4 of the PAA will enable AGSA to opt out of these audits 15

Focus on auditing what matters - performance audits v Ad Hoc Committee – advised AGSA to build capacity to perform these audits on much broader scale v Lack of resources and appetite to engage in these audits, but still achieved successes v Capacity can benefit from – § Commitment by executive to appoint suitably skilled and qualified resources in key positions § Commitment by oversight bodies to monitor executive performance through inter alia performance audits § Refined mandate in the PAA to conduct standalone performance audits § Adequate provision for financial resources through various means, including annual appropriations for this pupose 16

Ensure implementation of recommendations v Ad Hoc Committee – AGSA recommendations not binding, therefore a call was made for a partnership between the AGSA and the National Assembly to ensure implementation v Lack of implementation had been brought to the attention of legislatures with a degree of success v EFF v Speaker of the National Assembly and Others; DA v Speaker of Parliament and Others a wake-up call for those charges with oversight responsibility and to enablers of such oversight v AGSA conducted local and international research with a view of amending its powers to ensure the implementation of recommendations following certain audit outcomes v Research was informed by two important principles – § The AGSA should not depart from its nature as a supreme audit institution 17

Implementation of recommendations – models of SAIs Model Characteristics and location Napoleonic system (courts of auditors) Both judicial and administrative functions Integral part of judiciary Legally binding judgments and opinions Employ mostly legal practitioners Europe and some African countries Westminster system Focus on financial statements with less focus on compliance No judicial functions Employ professional auditors Mostly found in Commonwealth countries Board system Commission (decision-making) with General Executive Bureau Mostly found in Asian countries Hybrid system Elements of Westminster and board systems SAI South Africa 18

Implementation of recommendations international benchmarking CATEGORY A CATEGORY B CATEGORY C European Court of Audit Government Accountability Office (USA) Court of Audit of France Australian National Audit Office Bulgarian National Audit Office Auditor-General of Ghana Controller and Auditor. General of New Zealand Comptroller-General of Peru Auditor-General of Zambia Auditor-General of Canada SAI Kenya Court of Accounts of the Union (Brazil) SAI Denmark 19

Category A – European Court of Audit v Contrary to what the name suggests, the ECA has no judicial functions v Focuses on effectiveness of controls imposed by European Commission on its member states v Makes recommendations to member states, but no formal follow-up mechanism in place v Findings of illegal activity are tracked, but not required by law v Fraud indicators are reported to the European Anti-Fraud Office v Anti-Fraud Office will investigate, or refer to member state structures to take forward v Not a good track record of following up on recommendations – few reports occasionally selected to review implementation of recommendations after 3 to 4 years v Only now started to develop a database that will shape more regular follow-ups in future 20

Category A: Australian National Audit Office v Mandate very similar to the SAI South Africa mandate v Has statutory power to flag important matters for the attention of responsible ministers v No statutory power to enforce its recommendations v No statutory requirement to refer findings or lack of implementation of recommendations for investigation 21

Category A: Controller and Auditor-General of New Zealand v Highlights recommendations aimed at improving financial systems and management thereof v Only provides advice and support to auditees and TCWG v Does not take findings and recommendations further 22

Category A: Auditor-General of Canada v Also similar to other SAIs that follow the Westminster model v Enabling law allows SAI Canada to report financial impropriety to the Treasury Board for follow-up 23

Category B: Government Accountability Office (USA) v Based on the courts model and operates as a judicial body in the US government v The GAO audits and investigates v Issues legal opinions and decisions relating to public funds that are binding on the audited entities v Binding decisions and opinions ONLY issued after thorough QC process v Decisions and opinions subject to appeal to the courts, within 1 year of issuing v GAO performs a bid protest function v Bid protests are adjudicated by the GAO’s procurement law division v All work on the bid is interrupted while the GAO has 100 days to issue a binding decision v Bid protest function is a level of assurance to Congress that procurement laws are adhered to 24

Category B: Bulgarian National Audit Office v The BNAO does not operate as a judicial or quasi-judicial structure in the Bulgarian government v National Audit Office Act, 2015 – BNAO mandated to issue binding recommendations in final report v Recommendations may not be challenged in court and must be dealt with on a political level v Once issued, accounting officer has a reasonable period of time to implement v Accounting officer must report back to BNAO on the implementation of recommendations v If not – BNAO reports accounting officer to National Assembly, Council of Ministers or municipality v Failure to implement recommendations – in cases of disclaimers, BNAO hands over auditee to Minister of Finance to withhold funding until recommendations are implemented and audit opinion is possible v Criminal activity – BNAO must report to Office of the Prosecutor 25

Category B: Comptroller-General of Peru v SAI “generates obligations” where an accounting officer fails in his/her duty, or breaks the law v Fundamental Regulation 2011 – 25 categories of liability that can be triggered by the findings in reports v Liabilities are administrative in nature v Example – violation of a procurement rule leads to prohibition to serve as a civil servant in the public sector for 5 years 26

Category B: SAI Kenya v SAI submits report with recommendations to Parliament v Parliament considers and makes further recommendations v Accounting officers have 3 months to implement recommendations v Failure to implement – deemed contempt of Parliament v Parliament may remove accounting office from his/her role or decide to demote to lower rank 27

Category C: Court of Audit of France v Status of a quasi-judicial body of the French government v Mandated to audit and adjudicate on accounts managed by institutions that receive public money (also private institutions) v When an audited account is found to be in order – issues an acquittal and account is discharged v When errors are detected – issues an I owe you against the defaulting accounting officer v Type 1 fine – executive responsible for submitting an accountability report late is fined v Type 2 fine – accounting officers are fined if they have unduly paid or failed to recover money on behalf of the state. Fine is equal to the damages suffered by the state. He/she becomes a debtor to the state v Professional liability insurance is extremely important v Minister of Finance can grant an abatement of arrears since amounts are too big to settle from a person’s own pocket 28

Category C: SAI Ghana and SAI Zambia v The Constitution of SAI Ghana mandates the AG to issue a surcharge certificate on certain findings v Qualifying findings for surcharge – overcharge of procurement, lack of documentation in procurement environment, and any illegal acts v Surcharge certificate effectively starts a legal process to recover the damages from accounting officer v The surcharge amount is equal to the damages suffered v A very similar mechanism is applied by SAI Zambia 29

Category C: Court of Accounts of the Union of Brazil v The SAI of Brazil recently demonstrated the value of enforcement powers in the constitution and cooperation among organs of state working towards a common goal v Keith Campbell – the story of Dilma Rousseff and Auditor-General’s teeth v The constitution of Brazil - Title I Chapter I Section IX Article 71 • Part VI: The Accounts Court shall control the use of any funds transferred from the Union by means of agreement, arrangement, adjustment or any similar instrument, to a state, a federal district or a municipality. • Part VIII: The Accounts Court will in the case of illegal expenses or irregular accounts apply to the responsible parties the sanctions provided for by law, which shall establish, among others, a fine proportional to the damages caused to the public treasury. • Part IX: The Accounts Court will determine a period of time for the agency or entity to take the necessary steps for the strict compliance with the law, if an illegal act is established. 30

Category C: Court of Accounts of the Union of Brazil (continue) • Part X: The Accounts Court shall stop the execution of the impugned act, in case it is not heeded, notifying the Chamber of Deputies and the Federal Senate of the decision. • Part XI: The Accounts Court shall present a formal charge to the competent power on any irregularities or abuses verified. Par (1) states that the National Congress shall adopt the “stopping act” in the case of a contract and immediately request the executive to implement the necessary remedial measures. Par (2) provides that if the National Congress fails to implement par (1), the Accounts Court shall decide on the matter. This means that the legislature gets the first chance to implement remedial action, within 90 days. Failure to do so grants jurisdiction to the SAI to take over that power. If the Accounts Court issues a fine, such fine is binding and has the effect of an execution instrument. • The Accounts Court of the Union consists of 9 judges 31

Implementation of recommendations – mechanisms to consider v Serious consideration should be given to the mandatory referral of undesirable audit outcomes v Several other mechanisms can be considered – § Statutory provision formal follow-up on implementation (SAI Denmark) § Withhold of budgets in the case of disclaimers (SAI Bulgaria) § Administrative liability and demotion/prohibition against employment as a public official (SAI Peru/Kenya) § Civil and/or criminal action against public officials – fine, penalty or surcharge (SAI Ghana, France, Brazil) 32

Enhanced reporting v Appropriate reporting on the lack of consequence management is a key success factor v Findings and recommendations will be included in the management report (executive attention) v Lack of consequences and other undesirable outcomes will be reported to investigating agencies v Investigating agencies will keep the AGSA informed v AGSA will report on progress and outcomes of investigations in its general reports v Committees of legislatures can monitor progress through existing processes, i. e quarterly engagements conducted by SCOPA 33

Section C Public Audit Amendment Bill, 2017 34

The Bill on the review of the audit portfolio Challenge AGSA proposal CSLA solution Too many very low risk audits are compulsory for small auditees or auditees with minimal turnover and diverts the AGSA’s focus from higher risk areas which are closely linked to service delivery and achievement of government goals Expand the AG’s discretion to opt out of mandatory audits on low risk audits for small and low turnover auditees The proposal by the AGSA can be lawfully implemented. Refer to section 1 of the Bill, 2017 35

The Bill on performance audits Challenge AGSA proposal CSLA solution Mandate to conduct standalone performance audits is not clearly described Some auditees argue that findings may only be raised as part of regularity audit Provide for a bold provision that mandates the AG to conduct performance audits and to report on them The proposal by the AGSA will be lawful Refer to section 2 of the Bill, 2017 36

The Bill on a system of referral of undesirable audit outcomes Challenge AGSA proposal CSLA solution The PAA mandates the AG to ‘cooperate with persons, institutions and associations, nationally and internationally’ This provision is broad, and may be subject to challenges by those affected by the referral A clear articulation of the referral mechanism in the enabling statute will ensure that the AG adheres to the principle of legality when referring undesirable audit outcomes to other agencies for further investigation and remedial action The AGSA proposal will be lawful Refer to section 2 of the Bill, 2017 37

The Bill on enhanced reporting v AGSA annually submits a report to the National Assembly on his activities v After every completed audit cycle the AGSA issues a general report on the overall audit outcomes v Outcome of matters referred for investigation to be dealt with as part of general reports v No need for amendment of the PAA to effect enhanced reporting 38

The Bill on investigations Challenge AGSA proposal CSLA solution Section 5(1)(d) mandates the AG to perform investigations into the affairs of any institution referred to in sections 4(1) and 4(3) of the PAA, or when AG considers it to be in the public interest or upon receipt of complaint or request The scope is too broad and leads to too many requests to perform investigations, which in turn places severe strain on resources Limit source of requests or complaints to legislatures, committees of legislatures, executive authorities, accounting officers or accounting authorities Retain the discretion to receive complaints and requests from all sources, but insert a clause that requires regulation of AG discretion in written policy to ensure absolute certainty Note that such policy already exists, and that the reference in the bill serves the purpose of further clarifying the discretion of the AG. Refer to section 2 of the Bill, 2017 39

The Bill on international audits Challenge AGSA proposal CSLA solution Section 5(2)(a) of the PAA Insert a clear mandate to Refer to section 2 of the provides that the AG may perform international audits Bill, 2017 cooperate with persons, in the PAA institutions and associations, nationally and internationally The Ad Hoc Committee found in 2007 that the PAA did not mandate the AG to perform international audits and that section 5(2)(a) was insufficient justification for those audits 40

The Bill on remuneration and benefits of the AG Challenge AGSA proposal CSLA solution Section 7 of the PAA was amended by section 15 of the Remuneration of Office. Bearers of Independent Constitutional Institutions Amendment Act, 2014 The Remuneration Act lays down a process for the annual consideration of the AG’s salary, allowances and benefits Unclear what benchmarks the Independent Commission will use to make recommendations in respect of AG’s salary, allowances and benefits PAA amendment to empower Scoag to annually request the Speaker to initiate review process with the Presidency PAA amendment to empower Scoag to facilitate consultation with the remuneration committee (remco) SLA advised against proposal to empower Scoag to request Speaker to initiate review process. Already a function of the Independent Commission SLA supports mandatory provision to empower Remuneration Committee to make recommendations to Independent Commission Refer to section 3 of the Bill, 2017 41

The Bill on recovery of audit fees Challenge AGSA proposal CSLA solution Section 23 of the PAA mandates the AG to charge and recover fees for audits and related services The bulk of the institution’s revenue consists of fees Other income is earned on investments (section 36) Fee collection, especially on local government level, remains a huge challenge and the AGSA must look for alternative ways to collect outstanding audit fees Amendment of section 36 to create a special account in which the National Treasury shall retain local government audit fees, for the benefit of the AGSA Advised against the proposed amendment to create an account of this nature This matter must be accommodated in a Money Bill passed in accordance with section 77 of the Constitution Refer to wording proposed for the Money Bill in discussion paper 42

The Bill on funding of matters referred for investigation Challenge AGSA proposal CSLA solution The referral mechanism may be ineffective if recipient agencies lack the resources to perform investigations into those referrals The PAA to be amended to Refer to section 7 of the provide for the budgeting of Bill, 2017 funds to pay for investigations performed by other investigating agencies Requesting an appropriation for the purpose of these investigations is another option under section 36(1)(b) 43

The Bill on the establishment, role and composition of audit committee Challenge AGSA proposal CSLA solution Section 40(1)(a) mandates the DAG to establish an audit committee Section 40(1)(b) requires consent of the AG when DAG appoints members to the committee Majority of members may not be in the service of the AGSA; the chairperson must be independent Section 43(3)(b)(ii) requires the audit committee to control and direct the internal audit function Appointment of members by the DAG creates inherent conflict Best practice requires all members to be independent Internal audit does not operate under the control of the audit committee Insufficient liaison between the audit committee and Scoag AG must appoint members All members must be independent from the AGSA Amend to align PAA with the role of committee in practice Provide for mandatory engagement, at least annually PAA to regulate tenure Refer to section 8 of the Bill, 2017 44

The Bill on the establishment, role and composition of remuneration committee Challenge Remco is appointed as an advisory structure outside the administration of the AGSA [section 5(2)(b)] Role and composition are not regulated in the PAA AGSA proposal CSLA solution Provide for the Refer to section 2 of the establishment, role, Bill, 2017 composition and tenure of Remco Equip Remco with power to make recommendations to the Independent Commission with regard to AG’s salary, allowances and benefits 45

Definitions and cosmetic changes v Outdated references will be addressed v Once the Bill is finalised, the definition clause will be reconsidered 46

THANK YOU 47