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QUALIFIED AUDITORS’ REPORTS

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What’s gone wrong?

A short time ago, we laid my mentor, and spiritual father to rest. He was 85 years old and one of the founders of the auditing profession in South Africa. Just before his death we had a discussion on, amongst other things, the auditing profession and the changing world in which we live. When I told him about the many qualified auditors’ reports in the public sector, he was amazed. During his illustrious career, he only had to qualify audit reports four times. And, he told me, they had caused him sleepless nights, with him and the clients concerned doing everything in their power to prevent the qualifications.

Shortly after the death of my mentor I read an article in which Mr Terrence Nombembe, the auditor-general of South Africa, mentioned that only 2% of all municipal authorities and only 4% of provincial government departments in the country receive unqualified (clean) auditors’ reports.

The above statistics are shocking, to put it very mildly, and are an indication of the chaotic state of financial reporting in the public sector and the accompanying matters mentioned by the auditor general in auditors’ reports. The question is, what is it that is causing these shocking conditions in the public sector in South Africa? The reasons are many and, in this article, an attempt is made to indicate some of those that are more important.

The first reason for this troubling situation is probably that many politicians have little if any respect for legislation (such as the ‘so-called’ PFMA and the MFMA) that regulates financial matters in the public sector in South Africa. Numerous councillors of local authorities and other politicians simply do not care about a qualified audit report. I was at a meeting where a provincial auditor general, presented his draft qualified auditors’ report to a committee before its presentation to the full council meeting. He pointed out that, in his opinion, material fraud had been committed in a transaction that he intended to refer to in his report.

A prominent councillor, for perhaps fifteen minutes, threw, in a manner of speaking, all of his toys out of the cot, accusing the auditor-general that he had not yet “adjusted to the new South Africa” and that the local authority’s money actually “belonged to the ‘people’” and that politicians could do as they wished with it.

After I had pointed out to him that the office of the auditor-general was entrenched in the constitution, that the relevant legislation stipulated the manner in which the auditor-general must do his work, that a local authority in fact worked with “trust money”, and that members of the ruling party were not above the law and able to commit fraud as they pleased, I was, to say the least, not very popular!

Getting an unqualified auditors’ report demands a “team effort” from the politicians, officials, the audit committee, and so forth. One of the problem areas in South Africa is that many members of the ruling party seem to be above “good governance” of the country. These members have no wish to address or even to bring to light the poor service delivery, fraud and corruption, nepotism etc., of which many fellow party members make themselves guilty.

Following on the above is the interference of politicians in the day-to-day managment of an institution. The shocking statistics regarding unrecoverable debts of local authorities is a glaring example of how numerous councillors are happy to violate council policy when officials begin cutting off electricity etc. in their wards, and politicians realise that their “popularity” is suffering.

I have referred above to the role played by the audit committee and internal audit, amongst other things, with reference to the audit. Various reports on good corporate governance make it clear that members of audit committees must be financialy literate (financial expertise) as prerequisite to serving on such a committee.

For many politicians, however, “expertise” (applicable knowledge and experience) is a dirty word, and individuals are often appointed as members of audit committees without their having basic accounting, auditing or risk management skills. A person that cannot even “read” (understand) the financial statements of an institution can unfortunately provide no contribution whatsoever to the activities of the audit committee of such an institution.

The same argument applies with regard to the internal audit function in the public sector. In public sector institutions, it is often about an obsession with “power” and “control”. People who are appointed as “directors” or senior staff of internal audit sections, often do not have sufficient training and experience to do justice to the auditing of a multi-million rand audit of a large local authority or state department with its complicated accounting and computer systems. Very often, these incompetent people are actually appointed because they do not have the ability to carry out a proper audit, to bring to light weaknesses and fraud, and, in a manner of speaking, to “rock the boat”. The convenient political counter-argument, that there is not sufficient expertise available, does not hold water.

There is enough expertise in South Africa – although if people with expertise are sought, who are not prepared to abandon their principles or to be a lackey of a political party, then there is certainly a shortage of such “experts”. Legislation does not demand that a public sector institution establish its own internal audit section. If the internal audit function of a public institution is contracted out to an external auditor, for instance, a more professional service could in many cases be delivered for the same or even a lower cost than what an incompetent own internal audit section costs the institution.

Let’s close off with the sleepless nights that the four qualified audit reports caused my old mentor. He practised (and this has NOTHING to do with the “previous” dispensation or racism) in an era when it was a SHAME to receive a qualified audit report. It should always be a shame to receive such a report. Unfortunately, the approximately 3% of government institutions receiving unqualified auditors’ reports in South Africa have become the exception to the rule. A qualified auditors’ report is no longer a shame – it has sadly become the norm.

The question is often asked whether South Africa will develop into a second Zimbabwe. Every person that loves this country must pray, and must do all in his/her power, to help prevent this. If the politicians no longer have respect for the law, for good financial reporting and control systems or for offices of government such as that of the auditor general; if they are no longer deeply concerned about qualified auditors’ reports, and do not do something tangible when the auditors’ reports of government institutions are qualified, then perhaps a second Zimbabwe is not so unthinkable after all!

Prof. Dave Lubbe BProc, MCompt, DCom, CA(SA) is a professor in auditing at the University of the Free State where he specializes in corporate governance and business ethics.