In this article, the world’s three different categories of anti-corruption strategies (auditing models) are explored, as well as the country’s own anti-corruption strategy, which is underpinned by the Auditing Professions Act of 2005 (APA). It is further investigated how the APA can be used in the public sector to ensure better accountability.
The COVID-19 Personal Protective Equipment (PPE) recent tender irregularities epitomise South Africa’s corruption crisis. The Special Investigations Unit (SIU) reported to the Standing Committee on Public Accounts (SCOPA) on 19 August 2020 that it was investigating a total of more than R5 billion in PPE procurement for tender irregularities.
In general, Supreme Audit Institutions (SAIs) have three different categories of anti-corruption strategies they can choose from. Furthermore, South Africa has its own unique and effective anti-corruption strategy, which is underpinned by the Auditing Professions Act 26 of 2005 (the APA). However, as the former deputy auditor-general of Pakistan once stated: ‘Needless to say that merely passing an accountability law would not introduce a robust framework of accountability. It would only be the starting point. The accountability law has to be backed up by appropriate structures.’ It is often said that South African policies and legislations are good on paper but are never implemented. Which is the case with section 45 of the APA, which has not been implemented from a public sector audit’s perspective. This is the reason that this article investigates how the APA can be used in the public sector to ensure better accountability. In fact, section 27(1) of the Public Audit Amendment Act 5 of 2018 (the Amendment Act) already requires the use of the APA in public sector audits as well.
Auditor-generals’ institutions are often seen to belong to one of three institutional frameworks:
- The Westminster model − also known as the Anglo-Saxon or Parliamentary model − is used in the United Kingdom and most Commonwealth countries as well as in many sub-Saharan African countries, some European countries, and Latin American countries such as Peru and Chile. Key features include a national audit office headed by an independent Auditor-General or equivalent which submits audit reports to a committee of Parliament (often the Public Accounts Committee).
- The Judicial or Napoleonic model is used by France, many Latin countries in Europe, Turkey, francophone countries in Africa and Asia, and several Latin American countries including Brazil and Colombia. Here the SAI, often a Court of Accounts or Cour des Comptes, forms part of the judicial system and forms judgments on the use of public funds by government officials.
- The Board or Collegiate model is used by many Asian countries including Indonesia, Japan and the Republic of Korea, and some European countries such as Germany and the Netherlands. This approach has similarities to the Westminster model, except that an audit board or boards produces audit reports and submits these to Parliament.
South Africa uses a Parliamentary model, because once the audits are completed, the audit reports are submitted to SCOPA. South Africa also incorporates a little bit of the Courts model with a certificate of debt issuable by the auditor. However, the current South African system has major loopholes, because SCOPA does not exercise its powers to make recommendations regarding financial misconduct to the respective government entities’ disciplinary boards in terms of sections 84 and 85 of the Public Finance Management Act 1 of 1999 (the PFMA). That is also evidenced by the fact that the disciplinary boards themselves have not been implemented by the Treasury. A simple way of implementing disciplinary boards would be to give audit committees disciplinary board powers.
Over and above the Westminster model − which is not fully implemented − South Africa has another unique anti-corruption strategy, which is also ineffective. South Africa’s auditing framework departs from the Westminster model from the fact that section 45 of the APA gives an obligation to an auditor to report a reportable irregularity (RI) to the Independent Regulatory Board of Auditors (IRBA) without delay, thereafter within three days notify management in writing and provide them a copy of the report, and furthermore within 30 days of sending the initial report send another report to IRBA to inform them whether the RI is still taking place. The only deficiency is that those auditors’ powers are not used in public sector audits, possibly due to a fallacy that the APA only applies in the private sector. Section 27(1) of the PAA clearly states that the auditor that is auditing in the public sector must also perform his duties in terms of the APA as well. Therefore, this article logically argues that if the APA can be used in the public sector to deal with material irregularities (MI) rather than the Amendment Act, there can be a significant reduction of fraud and error in the public sector. This is also based on the fact that the APA has much better enforcement mechanisms than the Amendment Act, as is being argued in this article.
A number of factors are driving fraud and error in the public sector. This article refers to only two such drivers. These are the incomplete disclosure of irregular expenditure and an unwillingness of management to address known internal control deficiencies. The manifestation of fraud inevitably involves the contravention of a law or regulation. In the case of government entities, it is the contravention of a simple but key PFMA section 40(3)b(i) requirement to disclose details of all irregular expenditure by the accounting officer in the annual financial statements that often becomes problematic. That also accounts for a majority of modified audit opinions. The contravention of that simple legal requirement is one of the ways in which fraud can be committed by management, because it amounts to ‘concealing facts that could affect the amounts recorded in the financial statements’ according to ISA 240. As ISA 240 describes that: ‘fraudulent financial reporting often involves management override of controls that may appear to be working effectively’. Incomplete disclosure of irregular expenditure is an override of internal controls.
The incomplete disclosure of irregular expenditure by the accounting officer also has a pivotal implication for the auditor in expressing his opinion. The contravention of laws and regulations affecting ISA 250 has a material effect on fair presentation (like the incomplete disclosure of irregular expenditure) which could result in the auditor issuing a qualified or adverse audit opinion and therefore the auditor has a duty to report an RI to the IRBA in terms of sections 45(1) and (2) of the APA. In turn, the IRBA has a duty to relay that RI to the concerned entity’s disciplinary board or audit committee which will have powers to reprimand the accounting officer in terms of sections 84 and 85 of the PFMA. However, the disciplinary board would have to also comply with labour relations practices in applying sections 84 and 85 of the PFMA towards the accounting officer.
Sound internal controls that can enforce the full disclosure of irregular expenditure are crucial because ‘strong financial management systems, based on effective financial reporting and the disclosure of any deviations, have a dissuasive effect on those who might engage in corruption.’ Therefore enforcing full disclosure of particulars of the irregular expenditure in terms of section 40(3)b(i) of the PFMA will promote compliance with the regulations as well as transparency. It is the nature of fraud to be secrete. Hence, transparency could thus prevent fraud and corruption. Furthermore fraud thrives on an ability to rationalise it, according to ISA 240. However, there can be no rationale against sound financial controls and stringent financial reporting or transparency.
In a media release, Auditor-General Kimi Makwetu attributes ‘the stunted growth towards the desired audit outcomes largely to those charged with governance being slow to implement, or totally disregarding, audit recommendations made by his office,’ Fraud risk is created in terms of ISA 240 where there is a problematic or unusual relationship between auditor and management, including an unwillingness to address identified deficiencies in internal control on a timely basis. In terms of section 45 of the APA, an unwillingness by management to address identified internal control deficiencies is an RI, because it could result in a financial loss. Once it is reported to the IRBA, it will compel the accounting officer to address the internal control deficiencies as soon as an RI is reported.
Critical to note is that an RI in terms of the APA ensures better accountability because of the 30 days given to the management board to address it (the auditor has to report back to the IRBA within 30 days whether the RI is still taking place) as opposed to the MI in terms of the Amendment Act which has no deadlines or timelines of when it needs to be addressed. In essence, this means that this issue can take up to the next audit to address because of the length of the process involved, since remedial action involving a certificate of debt in terms of section 5A of the Public Audit Amendment Act only starts after an unspecified reasonable time of the issue of the audit report. Again, the auditor would need to first take some time to afford the accounting officer an opportunity to make representations and consider those representations before issuing a certificate of debt − ironically, to be executed by the very same executive authority (political head) or legislature who would have failed to resolve an MI in the first instance.
However, a fundamental flaw of the Amendment Act is that it does not resolve the fraud risk often created by a problematic relationship between the auditor and management – including an unwillingness to address identified deficiencies in internal controls by management. As far back as 2016 it was established that ‘the Auditor-General and SCOPA reports often repeat recommendations year after year but there’s little improvement.’ This was also highlighted by Makwetu in a 20 November 2019 media release. Yet, there is still no solution for it. Even the Amendment Act still does not resolve this challenge, because the certificate of debt in terms of section 5A(3) of the Amendment Act is only issuable for the actual financial loss, meaning the actual fraud and not fraud risk, whereas the RI in terms of section 45 of the APA includes steps that can be taken by the auditor for fraud risk as well.
Furthermore, the Amendment Act also does not address the indication of fraud given by the management override of internal controls through incomplete disclosure of irregular expenditure. This results in a majority of qualified and adverse audit opinions in the public sector, whereas section 45 of the the APA has steps that the auditor can follow to address the management override of internal controls that could cause a financial loss.
This article explored how can fraud and corruption be prevented, mainly by the APA of 2005. Fraud and corruption could be prevented provided a disconnect −which is the non-implementation of disciplinary boards in terms of secctions 84 and 85(d) and (e) of the PFMA of 1999 by the Treasury is addressed. That is because for the APA of 2005 to be effective. The disciplinary boards should be able to provide independent oversight on government entities once IRBA has reported to them, based on an RI that would have been received from the auditor.
The implementation of auditors’ powers in terms of the the APA of 2005 has the potential to reform the auditing profession worldwide, because the auditor’s powers towards preventing fraud and corruption is something that has always been a mystery. Does an auditor have enough powers to prevent fraud and corruption?
1 Muhammad A Khan, Management accountability for public financial management, World Bank, 2013.
2 Alastair Evans, The role of supreme audit institutions in combating corruption, Transparency International, 2018.
3 Dimitros V Skiadas, EC: The role of the European Court of Auditors in the battle against fraud and corruption in the European communities, Journal of Financial Crime 6(2):178−185, 1998, https://doi.org/10.1108/eb025881.
4 Alastair Evans, op cit.
5 Dimitros V Skiadas, op cit.
6 Kimi Makwetu, AG media release, Auditor-General calls on government leaders to ‘act now’ to halt the trend of ‘disappointing’ audit results, 20 November 2019.
7 NM. Zonke NM, Dynamics obstructing public financial management, good governance, and accountability in South Africa, Arabian Journal of Business and Management Review 6(6), 2016, DOI 10.4172/2223-5833.1000260.
8 Kimi Makwetu, op cit.
AUTHOR | Bafo Thomas Khanyeza MCom (Acc) CA(SA), Senior Lecturer at Unisa