The enhanced powers of the AGSA are a vote of confidence in the auditing/accounting industry. This is a clarion call to all our peers to support both these amendments and other critical professional tools that will ensure wholesale clean administration to benefit the most vulnerable and deserving in our society, and one way for us to redeem the dented image of our once noble profession.
Two years ago, Parliament unanimously voted to enhance the Public Audit Act (PAA) – the legislation that governs the operations and auditing mandate of South Africa’s national audit office. The amendments came into effect on 1 April 2019.
While these added powers were granted to the head of the supreme audit institution, I believe they are also a much-needed vote of confidence in the country’s auditing/accounting industry, which has in recent years taken a number of heavy, reputation-denting blows – many of them self-inflicted.
So, as we mark and reflect on the second anniversary of these enhanced powers, we call upon all our colleagues in the auditing/accounting industry, in both in the public and private sectors, to strengthen their interest and to participate in the process of ensuring that public funds are spent effectively and efficiently in the public interest.
How do these new powers work?
The amendments introduced the concept of a material irregularity (MI) in the audit of the financial statements of any entity that is subject to an audit by the Auditor-General (AG).
This means that whenever the AG performs an audit, the staff working on the audit must satisfy themselves, through various tests of transactions, account balances and systems of control, that there has been no non-compliance with, or contravention of, any financial statute; that the entity is not exposed to situations of fraud that could result in a financial loss, the loss of a public asset, or substantial harm to a public institution or the general public; and that the entity is not being prevented from providing certain services due to the financial losses incurred.
Should the audit team identify an MI, the AG must report this matter to the accounting officer and ask them to explain the transaction and provide any documentation that may support the explanation. If a financial loss has been incurred, the accounting officer needs to indicate to the auditors what steps will be taken to recover the loss or, if the loss is ongoing, what steps will be taken to prevent the loss from continuing. If the auditors determine that there is a material irregularity that resulted in a financial loss, the accounting officer will be required to quantify the extent of the financial loss. The accounting officer is given up to 20 working days in the course of the audit to deal with these matters by responding in writing to the AG.
Once an MI has been identified or is suspected, the AG is empowered to:
- Refer any suspected material irregularity identified during an audit performed under the PAA to a relevant public body for investigation, and the relevant public body must keep the AG informed of the progress and the final outcome of the investigation
- Take any appropriate remedial action
- Issue a certificate of debt, as prescribed, where an accounting officer or accounting authority has failed to comply with remedial action
These amendments are not punitive but are intended to strengthen accountability mechanisms. When reporting MIs, we support accounting officers and authorities by bringing to their attention irregularities that could have a significant impact on finances, resources and service delivery, while also empowering them to take the appropriate steps in terms of legislation in a timely manner.
This will lessen the adverse effects of such irregularities on auditees, set the right tone for accountability, highlight the need for consequences and encourage a behavioural change at the highest levels. As we report the MIs in the audit reports, we also enable public accounts and portfolio committees to perform their oversight function – focusing on the most material matters affecting auditees.
In essence, we use our additional powers only when the accounting officer or authority is not dealing appropriately and swiftly with the MIs. We do not measure success by the remedial action and certificates of debt we issue, but rather by whether accounting officers and authorities are taking the actions they are legally obligated to take.
The regulations have also been shaped specifically to support the process of fair, transparent and legally sound administrative justice, by providing the accounting officer or authority with an opportunity to take the actions required to deal with the material irregularities.
Approach for identifying material irregularities
Over the past two years, the national audit office has incrementally and systematically implemented these amendments at selected auditees across the three tiers of government.
The office has also been phasing in the implementation of the MI definition. In 2018/19 the focus was on non-compliance with legislation scoped in for audit as part of the normal audit that resulted, or is likely to result, in a material financial loss. In 2019/20 we expanded this definition to include all irregularity elements (i.e. all non-compliance, fraud, theft and breaches of fiduciary duty). For the 2020/21 audits, we plan to implement the full definition.
We have also increased the number of auditees at which the MI process is implemented from 25 in 2018/19 to 146 in 2019/20. When selecting the auditees at which we implemented the MI process, we applied the 80:20 principle, focusing on auditees where we are likely to have the greatest impact without spreading our resources and processes too thin by implementing at all our auditees at once.
In our latest consolidated general report on national and provincial audits, we report that by 28 February 2021 we had notified the accounting officers and authorities for the selected national and provincial auditees of 75 material irregularities. All of these material irregularities related to non-compliance with legislation that resulted in a material financial loss. The estimated financial loss associated with these material irregularities is R6,9 billion.
Citizens of our country are increasingly demanding accountability from those charged with governance and oversight. Such societal calls for transparency and service also extend to those of us in the auditing/accounting industry. We must execute our given mandates in a way that will help to improve the lot of those who look up to us – the citizens – and use the professional tools at our disposal ethically and for their benefit.
As the national audit office, we are fully committed to implementing the enhanced powers given to our office without fear, favour or prejudice. The success of our amended powers will be evident when a culture of responsiveness, consequence management, good governance and accountability by accounting officers and authorities becomes the norm.
Jan van Schalkwyk is the acting Deputy Auditor-General of South Africa