PAA amendments the key expansion to our...
Transcript of PAA amendments the key expansion to our...
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Audit Report For
Accountability
AGSA 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.
Key expansion of our mandate
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Refer material
irregularities to
relevant public bodies
for further investigations
Issue a certificate
of debt for failure to
implement the remedial
action if financial loss
was involved
Take binding
remedial action for
failure to implement the
AG’s recommendations
for material irregularities
Material irregularity (MI) legislation
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The PAA amendments
Why the regulation?
• To provide for the process, time frames and form of written and oral representations
by accounting officers and accounting authorities before a CoD is issued
• To provide for the form and content of a CoD
• To provide for the enforcement of key steps in the MI process
• 5(1A) – referring suspected MIs to relevant public bodies
• 20(4) – make recommendations on MI in the audit report
• 5A(2) – issue remedial action when recommendations are not implemented
• 5A(3) – issue directive to AO/AA to determine and recover loss
• 5B(1) – issue CoD to AO/members of AA
• 5B(2) – serve CoD on EA to collect the amount lost
• 5B(6) – table CoD in relevant legislature
What is a material irregularity?
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any non-compliance with, or contravention of, legislation,
fraud,
theft or
a breach of a fiduciary duty
identified during an audit performed under this Act
that resulted in or is likely to result in …
a material financial loss,
the misuse or loss of a material public resource or
substantial harm to a public sector institution or
the general public.
Irregularity
Impact
Material
irregularity
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Irregularity Impact
Examples of material irregularities
Non-compliance with the SCM legislation
requiring a competitive bidding process.
A material financial loss due to goods
being priced at above market value.
Suspected bribery of an official to approve
the payment for services not received.
A material financial loss due to no value
being received for the money paid.
A board of a public entity not exercising
their duty of utmost care in investing the
funds of the entity.
A material loss in the value of the
public entities investments.
A repeat disclaimer audit opinion. Substantial harm to the auditee as oversight
and accountability are significantly weakened.
Neglect in maintaining the
infrastructure for sanitation.
Substantial harm to the community as a result
of contamination of the water sources.
Overview of the MI process – as per the regulations
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MI/suspected MI NOT APPROPRIATELY ADDRESSED by AO/AA
Audit process
Refe
rral pro
cess
Cert
ific
ate
of
debt p
roce
ss
Rem
ed
ial p
roce
ss
Perform INVESTIGATION
Take further ACTIONS based on outcomes
REFER TO PUBLIC BODY for investigation
Receive OUTCOME of investigation
Receive PROGRESS REPORTS
Follow up in SUBSEQUENT AUDITS
Include RECOMMENDATION in audit report
FOLLOW UP if remedial action implemented /if not implemented
ORAL REPRESENTATION to advisory committee who makes recommendations
FOLLOW UP if recommendation implemented
MI resulted in FINANCIAL LOSS
MI DID NOT result in financial loss
ISSUE REMEDIAL ACTION if recommendation not implemented
WRITTEN REPRESENTATION by AO/individual members of AA
REPORT TO EA and LEGISLATURE or other body/take legal action/
any appropriate other action
Issues CERTIFICATE OF DEBT
EA RECOVERS DEBT
The audit process
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DECIDE whether
• MI should be
referred to a
relevant public
body and/or
• Recommendation
should be
included in audit
report to enable
remedial action or
• An investigation
should be done
FOLLOW UP
in subsequent
audits until
fully resolved
IDENTIFY
MI/suspected MI
INCLUDE info on
the MI in audit
report and
• Recommendations
or
• That MI was
referred to a
public body
• That MI is being
investigated
AO/AA FAIL
to submit by
stipulated
time
AO/AA
has TAKEN
appropriate
action
AO/AA has
NOT TAKEN
appropriate
action
REQUEST proof
from AO/AA by
stipulated time
on actions taken
• To stop
irregularity
• To prevent/
recover loss
or other
impact
• Against
responsible
person
Reg 4(1)
Reg 4(3)
Reg 4(3)
Reg 4(2) Reg 4(4)
Reg 3(3)
Reg 3(3)
Reg 3(2)
MI regulations on the Referral process
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RECEIVE progress updates from public body
REFERRAL ACCEPTED with commencement date
REFERRAL NOT ACCEPTED
(not within mandate, scope
or functions)
IDENTIFY other public body for referral
RECEIVE report on outcome of investigation
Report progress in AGSA annual and general reports
Reg 4(5) Reg 5(2) Reg 5(4)
Reg 5(4)(b)
Reg 5(4)(a)
Reg 6
NOTIFY AO/AA and EA of referral
Reg 7(1)
Reg 7(1)
Reg 7(2)
Public body PUBLISHES REPORT/FINDINGS
Reg 8
FOLLOW UP in subsequent audits if appropriate actions have been taken in response to investigation
IDENTIFY
appropriate
public body
SUBMIT
referral and
supporting
documents
RECEIVE
acknowledgment
of receipt and
whether referral
accepted
MI regulations on the Remedial process
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INCLUDE
recommendation
in audit
report to be
implemented
by stipulated
period
FAILS TO SUBMIT
proof of
implementation
by stipulated time
Recommendation
IMPLEMENTED
Recommendation
NOT IMPLEMENTED
Reg10(1)
Reg10(1)
Reg10(1), 10(2)
Reg 9(2)
If applicable, FOLLOW UP in subsequent
audits until fully resolved
NOTIFY AO/AA and EA of remedial action to be
taken by stipulated time. For financial loss, include
DIRECTIVE to QUANTIFY FINANCIAL LOSS and
RECOVER FROM RESPONSIBLE PERSON
OR
Reg11(3)
DETERMINE if remedial action was implemented
and notify AO/AA and EA of result
Remedial action
NOT IMPLEMENTED
Follow CERTIFICATE
OF DEBT process
Next slide (CoD)
Remedial action if
INVOLVING FINANCIAL LOSS
FAILS TO SUBMIT PROOF
of remedial action taken
TAKE FURTHER ACTIONS
• Notify EA, appropriate legislature or body, or
• Legal action, or
• Any other actions within mandate
Remedial action if NOT
INVOLVING FINANCIAL LOSS
Remedial ACTION
IMPLEMENTED
If applicable, FOLLOW UP in
subsequent audits until resolved
Reg11(2) Reg11(2)
Reg12(1)
Report progress in AGSA annual and general reports
MI regulations on the Certificate of Debt
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DETERMINE
financial loss if
not determined
or inaccurately
determined by
AO/AA
NOTIFY AO
or individual
members of
AA who failed
to implement
remedial action
of intent to
issue CoD and
request written
representation
within 20 days
Receive
WRITTEN
representation CoD
NOT TO
BE ISSUED
ASSESS
whether
AGSA
should
continue
with CoD
Receive NO
WRITTEN
representation CoD
TO BE
ISSUED
NOTIFY AO or
individual members
of AA intent to
continue with
issuing CoD and
INVITE AN ORAL
REPRESENTATION
to advisory
committee by
stipulated date
APPOINT
advisory
committee
CONTINUE ON
NEXT SLIDE
Reg 11(4)
Reg 15(2)
Reg 16(1) Reg 16(1)
Reg 17 Reg 16(1)
Reg 16(2)
Reg 14, 20(1), 20(3)
CoD NOT
TO BE
ISSUED
MI regulations on the Certificate of Debt (continued)
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CONTINUED FROM
PREVIOUS SLIDE
Reg 18, 19(1)
ORAL
REPRESENTATION
by AO/individual
member
of AA and
consideration
by advisory
committee
RECEIVE
RECOMMENDATIONS
from advisory
committee
CONSIDER
recommendations
and MAKE
DECISION and
inform AO/
individual
member of AA
SERVE
COPY OF
CoD on EA
who should
recover
debt and
provide
progress
PROGRESS made with recovery
INADEQUATE PROGRESS with recovery
INFORM EA of intention to report
failure to relevant legislature REPORT FAILURE to
relevant legislature
Reg 19(2)
Reg 20(2), 20(4)
Reg 20(5)(a), 20(6) Reg 20(5)(b)
SERVE CoD on
AO/ individual
member of AA
in prescribed
form and
signed by AG
RECEIVE progress
reports on
recovery of debt
CoD NOT
TO BE
ISSUED
DOES NOT RECEIVE
progress reports
Reg 21(2)
Reg 21(3)
Reg 21(3)
Reg 21(3)
Report progress in AGSA annual and general reports
Main legal considerations
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Are the amendments to the PAA constitutional?
Possibility of overreach?
Does the law permit strict liability in the manner it is envisaged in the Amendment Act?
The Amendment Act commenced on 1 April 2019. Are the amendments retrospectively applicable?
Which audits and audit related services do these amendments apply to?
How will the rights of AAs/AOs be protected?
How effective will these enforcement powers be if AOs/AAs will simply resign?
Is it lawful to adopt a phased implementation approach?
Importance of adhering to the provisions just administrative process
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The Promotion of Administrative Justice Act, 2000 (PAJA) defines administrative action as any decision taken, or
failure to take a decision, by an organ of state when -
Exercising a power in terms of the Constitution or a provincial Constitution, or
Exercising a power or performing a public function in terms of any legislation which adversely affects the
rights of any person and has a direct, external, legal effect.
Remedial action and Certificate of debt = Administrative action.
Administrative action is subject to judicial review on the basis of rationality and procedural fairness under PAJA.
Importance of adhering to the provisions just administrative process (continued)
Right to administrative justice is protected in the Bill of Rights in the Constitution
Section 33 of the Constitution guarantees the following –
Lawful, reasonable and procedurally fair administrative action
Right to be given written reasons.
Administrative action that fails to meet these requirements can be reviewed and set aside
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Alignment of the PAA and regulations to administrative justice requirements
The PAA and Material Irregularity Regulations fully align to the audi alteram partem-rule
Affected AA/AO receives notice and have the right to reply for example –
Notification of the existence on an MI, and right to reply
Notification of consideration to issue certificate of debt
Right to submit written reasons why certificate of debt should not be issued
Right to make oral representations before independent advisory committee
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Material irregularity vs irregular expenditure
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What is the Irregular Expenditure Material Irregularity
Definition
Expenditure incurred in contravention of,
or that is not in accordance with a
requirement of any applicable
legislation.
Non-compliance with, or contravention of, legislation,
fraud, theft or a breach of fiduciary duty identified
during an audit that resulted in or is likely to result in a
material financial loss, the misuse or loss of a material
public resource, or substantial harm to a public sector
institution or the general public.
Difference:
Irregularity
The irregularity is only non-compliance
with legislation when incurring
expenditure.
The irregularity is any non-compliance (not limited to
expenditure) as well as fraud, theft or a breach of
fiduciary duty.
Difference:
Impact
The impact is not specified, as the PFMA
requires the accounting officer or authority
to determine the impact.
There can be irregular expenditure that
did not result in any losses, misuse of harm.
The irregularity must have resulted in or there must be
indicators that it is likely to result in a material financial
loss/ misuse of loss of a material public resource or
substantial harm to a public sector institution or the
general public.
Material irregularity vs irregular expenditure (continued)
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What is the Irregular Expenditure Material Irregularity
Difference:
Value The value is the expenditure to date. A material irregularity does not necessarily have a value.
Example
A lack of competitive bidding process for
the awarding of a contract of Rm20.
The irregular expenditure is all the
payments made on the contract to date
(e.g. Rm10).
A lack of competitive bidding process for the awarding
of a contract of Rm20 resulting in a material financial loss
as the same service could have been delivered at a lower
price (e.g. Rm18).
The financial loss is Rm2 (what was lost and what can still
be lost).
Legal obligations of an AO/AA to address an irregularity
If an AO/ AA is made aware of an irregularity (non-compliance, fraud, theft or a breach of fiduciary duty) the PFMA, treasury
regulations and instructions notes typically prescribe the following steps to be taken:
1. Perform a preliminary investigation to determine the facts and collect information on what caused the transgression, who is
responsible and whether a financial loss was suffered (or will be).
If applicable
2. Prevent any losses or further losses
3. Institute a formal investigation if there are indications of fraud, corruption or other criminal conduct. If confirmed take further
action e.g. report the matter to the SAPS
4. Recover any financial losses from an external party
5. Take steps against the responsible official (which can include a financial misconduct investigation)
6. Recover any financial losses from the responsible officials
The policies and procedures of an auditee typically describes how these steps should be taken and the timing thereof.
The same steps should be taken if an AO/AA is notified of a material irregularity
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Example - MI Process for an irregularity that caused a material financial loss (remedial route)
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1
Notify the AO/AA of
the MI - provide 20
working days to
respond on actions
taken and planned
[Regulation 3(2)]
May 2019
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Identify the MI during
the 2018-19 audit
April 2019
3
Conclude based on
AO/AA response if
appropriate action is
taken or planned.
June 2019
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Follow-up whether the recommendations
have been implemented. If not
implemented, issue remedial action to
the AO/AA that must be implement by a
specific date (e.g. within 3 months).
[Regulation 9(1)]
February 2020
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If actions were not
appropriate, include
recommendations in the
audit report on how the MI
should be addressed by a
specific date (e.g. within 6
months) [Regulation 4(3)]
31 July 2019
NB Note:
Appropriate action
is the steps the
AO/AA is legally
obligated to take
NB Note:
The recommendations
are the steps the
AO/AA is legally
obligated to take
NB Note:
The remedial action remains the steps
the AO/AA is legally obligated to
take and includes a directive to
quantify the financial loss and recover
it from the responsible person
Example - MI Process for an irregularity that caused a material financial loss (remedial route) (continued)
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Conclude based on the
written submission whether
the CoD process should
continue.
If it continues, request the
AO/AA to give oral
representation at the MI
advisory committee on
reasons not to issue the CoD.
[Regulation 15]
August 2020
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Follow-up whether the remedial actions have
been implemented. If not implemented, issue a
notice of intention to issue a certificate of debt
(CoD) to the AO/ AA.
Request a written submission on reasons not to
issue CoD within 20 working days.
[Regulation 13, 14(1)]
July 2020
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The MI advisory committee
meets to hear the oral
representation and
recommend a course of
action to the AG.
[Regulation 18]
September 2020
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AG issues a
certificate of debt to
the AO/AA.
[Regulation 19]
October 2020
Implementation of expanded mandate
The AG has a sole discretion to determine the nature, frequency and scope of audits
[section 13(1) of the PAA]
The AG may refer material irregularities to public bodies for investigation [section 5(1A)
of the PAA]
The AG may make recommendations in the audit report regarding any matter, including
material irregularities [section 20(4) of the PAA]
The AG consulted SCoAG on the notion of a phased implementation of the material
irregularity process
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Implementation of expanded mandate
To allow for establishing capacity and
processes, a phased-in approach for
implementation was agreed with
SCoAG on the basis of:
1. the type of material irregularity to
be identified and reported
2. the auditees where it will be
implemented
3. Auditees which are not part of the
phase in will be dealt with in terms
of the NOCLAR requirements
Selection of auditees
Selection criteria
Latest audit outcome not clean or unqualified with findings – except
if there was a material finding on prevention or follow-up of
irregular expenditure
High irregular expenditure over the last three years
Sufficient coverage across spheres of government and provinces.
Type of material irregularity = Material non-compliance
(which would be reported in the audit report)
that resulted in (or is likely to result in) a material financial loss
2018-19 implementation
Type of material irregularity
Commencement date 1 April 2019
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Implementation of expanded mandate
The phasing-in of the implementation of the amendments allowed us to:
Responsibly align the organisational resources with the demand placed on us by the PAA
• Develop understanding of the required additional resources to implement the powers
• Reassess the audit methodology and the audit process to accommodate the additional work
• Develop the requisite content and capacitate the audit teams via extensive training
• Develop tools and system to facilitate the remedial action and referral processes
• Build adequate support capacity
• Ensure that we are able to fund the additional effort
• Develop adequate materiality threshold to ensure value for audit fees
• Enhance the relevant internal processes to ensure adequate accountability reporting.
Ensure that our external partners are on adequately prepared
• Establish relationships with the identified public bodies
Due to the lack of accountability in the public sector it resulted in the acceleration of the PAA amendments in less than a year which
was unprecedented given the various legal steps to pass a legislation. This meant that AGSA had to assess and take cautious steps in
order to ensure that the it had adequate capacity to carry out the new mandate in a responsible manner.
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Implementation of expanded mandate
The phasing-in of the implementation of the amendments allowed us to:
Create the required level of awareness of the Act and the Regulations in the external environment
• Extensive engagement with constitutional stakeholders
• accounting officers, accounting authorities, executive authorities and audit committees
• oversight – deferred to accommodate the election and post-election processes
• Non-constitutional stakeholders
• Media
• Professional bodies
• Civil society
• Audit firms
Due to the lack of accountability in the public sector it resulted in the acceleration of the PAA amendments in less than a year which
was unprecedented given the various legal steps to pass a legislation. This meant that AGSA had to assess and take cautious steps in
order to ensure that the it had adequate capacity to carry out the new mandate in a responsible manner.
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Implementation of expanded mandate (Phase in Auditees)
1. Department of Cooperative Governance
2. Passenger Rail Agency of SA
3. Department of Defence
4. Department of Correctional Services
5. Department of Water and Sanitation
6. Water Trading Entity
7. SAA Technical
8. Department of Basic Education
9. Department of Education(EC)
10. Department of Health(NC)
11. Department of Health(KZN)
12. Department of Human Settlements(FS)
13. Gauteng Department of Health
14. Department of Health(MP)
15. Community Safety and Transport Management(NW)
16. Department of Education(LP)
1. Nelson Mandela Bay(EC) Metropolitan Municipality
2. Matjhabeng Local Municipality(FS)
3. City of Tshwane Metropolitan Municipality(GP)
4. Ethekwini Metropolitan Municipality(KZN)
5. Mogalakwena Municipality(LP)
6. Dr JS Moroka Municipality(MP)
7. Ga-Segonayana Local Municipality(NC)
8. Ngaka Modiri Molema District Municipality(NW)
9. City of Cape Town Metropolitan Municipality(WC)
PFMA LIST MFMA LIST
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Role of Scopa
In line with Scopa’s mandate, the committee may:
Consider the AG’s accountability report that provides information on the material irregularities raise during the
specific audit cycle
Request regular updates form the accounting officers / authorities on the implementation of the AG’s
recommendation
Convene oversight discussions with any organs of state
Set the tone for accountability and consequence management by investigating and dealing with any allegations
of financial misconduct and irregularities by accounting officers and authorities and monitor the progress of
investigations
Oversee and influence progress made by public bodies with investigations and executive authorities (for
recovery of debt)
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Measures of success
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Robust financial and performance management systems
• Sound financial management systems
• Successful implementation of the audit recommendations
• Reduction in irregular and fruitless and wasteful expenditure
Commitment and ethical behaviour
• Visible commitment by all players in the public service to contribute towards the financial
health of the country and an improved social reality for our people
• Demonstrated ethical behaviour and professionalism in the public sector as cementing
characteristics of a capable state.
Oversight and accountability
• Accurate and empowering financial and performance reporting
• An appreciation of the role of applying consequences for transgressions and poor performance
• Improved accountability leading to limited referrals for investigation and certificates of debt issued