As part of the value chain of advising accounting officers and accounting authorities, the Auditor-General of South Africa (AGSA) has evaluated the role that audit committees play in terms of improving the financial management of departments that they serve in.
Members often find themselves as members of a public sector audit committee, be it in a municipality or a public entity or department. The Auditor-General of South Africa has found that financial statements and performance reports containing material misstatements are being reviewed by audit committees.
One of the major challenges that the audit committee plays is the role of oversight of the assurance processes including management, internal audit and external audit with different mandates, but all achieving the same objectives of responsibly managing and assuring the spending of public funds against a service mandate. One of the main differences within the public sector is that the audit committee is a statutory advisory committee rather than a sub-committee of the overall decision-making body of the board of directors. This result in the implementation of recommendations being left to the accounting officer and management of the organisation.
The AGSA, in the national and provincial audit outcomes report of 2020, specifies that material misstatements were not identified by, among others, the chief financial officer, internal audit and the audit committee, resulting in financial statements and performance reports being submitted for audit with material misstatements that had to be corrected through the audit process.
The following root causes of these errors were identified by the AGSA:
- Action plans of auditees to correct controls were either not implemented or effectively developed to address the weaknesses identified.
- Record keeping remains an issue with only 42% of auditees being assessed as having effective controls in this regard. This means that when a document is requested by the auditors, it is not easily accessible.
- Regarding constant controls on reporting financial and non-financial information at each quarter, 76% of auditees assessed do not do this regularly with the result that roughly half of the auditees submitted annual financial statements free from material misstatements.
- Information technology controls are generally assessed as weak. This not only exposes entities to reporting issues but, more concerning, to undetected misappropriation of funds.
Critically, we ask ourselves what the members of the audit committee can do to play a role in the value chain of financial and performance reporting. Audit committee members are not there on a daily basis, nor does the committee have sufficient time to physically agree whether a subsidiary ledger agrees to the financial statements.
So, when it is found that misstatements occur in performance reports and financial reports, what role can the audit committee play?
Management has the primary responsibility to implement the controls for producing credible financial statements and performance reports. Internal audit provides the assurance to accounting officers and legislatures that the controls are designed and implemented effectively. A common practice is that internal audit reviews the financial statements for compliance with the respective standards and that supporting schedules agree to the annual financial statements. The external auditors expect that financial statements are prepared without material misstatements. However, as indicated by the AGSA, roughly 50% of entities are preparing annual financial statements that have material misstatements that are identified and corrected through the audit process.
Audit committees can play the following pivotal roles:
- Reviewing systems, policies and processes around financial reporting and quarterly reporting
- Requesting management to complete financial statements and performance reports for every quarterly meeting rather than receiving summarised information
- Proactively reviewing the combined assurance processes of organisations, including proactive risk management and assurance
- Approving internal audit plans with assurance on the internal controls over financial and performance reporting, and if need be extending to a review against the applicable standards
- Critically evaluating management action plans to address external audit and internal audit findings, including assessing whether the action plans will practically address the issues raised
- Monitoring the action plan and obtaining explanations on reasons for not implementing
Critically reviewing the annual financial statements and performance report against the knowledge of the entities, as well as expectations of the performance based on the observations during the year
- Proactively engaging with the AGSA and internal audit on critical reporting risks prior to the financial statements and performance reports being prepared, and
Continuously reporting to the oversight bodies including the executive authority of the reporting process and likely risks emanating from the financial and performance reporting processes
In isolation the audit committee may not be effective, but with all the relevant role stakeholders playing their part, the reporting of financial and performance information can achieve the desired results with minimum costs so that government can deliver on its mandate to the public.
1 Auditor-General of South Africa, Consolidated General Report on National and Provincial Audit Outcomes for the 2019−2020 financial year, www.psacf.co.za. Also see the public sector audit committee forum’s website for more guidance for public sector audit committees.
George Higgins CA(SA), chairperson of the working group of the Public Sector Audit Committee Forum, owner of IDG Consulting (Pty) Ltd, and an Audit Committee member