Speech by KwaZulu-Natal MEC for Finance, Mrs Belinda Scott, during the fourth National Public Sector Clean Audit Indaba 2016 in Durban
KwaZulu-Natal Provincial Government Perspective on Public Sector Clean Audit Turnaround
I believe that we all understand that the name “Clean Audit Outcome” was fashioned by the Auditor General SA as a way of encouragement to all Public Service institutions to improve their financial performance, the outcome which is meant to improve the administration’s financial health, promote good governance and ethical leadership driven by the Executive Authority, through management commitment and oversight provided by Parliament/Legislature. The name simply means that an institution’s financial statements must be free from material misstatements. In this regard, an institution would have received a financially unqualified audit opinion.
KwaZulu-Natal Provincial government institutions contributed greatly to the numbers that have achieved these good results across the country over a period of time, with Provincial Treasury maintaining clean audit outcomes for seven years in succession since 2009. The rest of the departments, public entities and municipalities’ performance varied from one year to the other, some improving whilst others regressed.
Clean audits are the results of number of strategic activities put together and work in synergy for the achievement of organisational goals. It is the duty of internal auditors to conduct internal audit reviews on internal controls, including financial internal controls designed by management to assess their adequacy and effectiveness over the set strategic activities. Internal audit activities are conducted as mandated through the relevant sections of the PFMA and Treasury Regulations whilst external audit reviews are as directed by the Public Audit Act 25 of 2004.
- The AGSA’s main objective after assessing the performance, in particular, the financial statements of any institution, is to express an opinion which may be: Unqualified - which indicates that the financial statements present fairly in all material respects;
- Qualified - which the Auditor concludes that except for specially listed material misstatements, the financial statements remain a fair reflection;
- Adverse - which Auditor disagrees with the representation made by management in the financial statements; and
- Disclaimer - where there is a lack of sufficient appropriate audit evidence.
During the 13/14 financial year, the AGSA assessed 36 Provincial auditees (departments and public entities) out of which 8 public entities and Provincial Treasury alone achieved clean audits, 21 Auditees received unqualified with findings and 6 received qualified audit opinions. The risk areas that received attention during the year under review included SCM, quality of performance reports, HRM, Quality of submitted financial statements, financial health and IT governance.
From the local government perspective, 72 auditees (61 municipalities and 11 municipal entities were also subjected to the statutory review. As at the end of the audit 28% of the 72 institutions recorded clean audits, 57% received unqualified audits with findings, 11% received qualified audit opinions with findings and 4% received disclaimed opinions with findings. Similarly, the risk areas of focus during the 2013/14 financial year at local government was the same as the focus at provincial level.
These results brought up more encouragement to all the provincial and local spheres of government such that management and leadership assurance, internal independent assurance and oversight as well as external independent assurance and oversight activities were enhanced. However, it is worth mentioning that our challenges during the 2013/14 financial year centred around weak internal control environments. We then visited the drivers of key controls required to improve the audit outcomes going forward. In particular, we had to invest more time on the improvement of governance and addressing regression in leadership and financial and performance management in order to arrest the root causes identified.
The 2014/15 statutory audits, internal audit activities as well as risk management activities at the two spheres of government (including public entities) focused on improving the aforementioned risk areas.The provincial departments’ clean audits increased from 1 to 2 (departments), 9 departments unqualified with findings and 5 departments qualified. Public entities performance also improved, 8 entities received clean audits, 11 were unqualified with matters and 1 received a qualified audit opinion. Further improvement was realised at the level of public entities during the 2015/16 financial year where clean audits increased to 13, unqualified with matters opinions were at 6 and 1 public entity was qualified. On the other hand, we began to see a regression from the departments’ level during the 2015/16 financial year where only Provincial Treasury maintained a clean audit opinion whilst 11 departments were unqualified with matters and 3 departments were qualified. Health is the only department that has not been able to improve from a qualified audit opinion over the past 5 years.
Our efforts to reduce unauthorised expenditure, fruitless and wasteful expenditure as well as irregular expenditure is beginning to bear fruit. A special intervention programme directed by Provincial Treasury is ongoing. Irregular expenditure at the level of public entities decreased by 44% during the 2015/16 financial year (from 57,8 million to R31,9 million). From departments level, Health was the main contributor to the irregular expenditure (R2 billion) which increased from R1,4 billion to R3,1 billion. The department was also the main contributor to an increased unauthorised expenditure from R157 million to R217 million (38%) during the 2015/16 financial year. We are hoping to see improvement in the next statutory audit after both Provincial and National Treasuries have added more stringent measures to reduce the irregular expenditure.
We also believe that the provincial performance will continue to improve for we now know exactly the risks that may impede this administration from achieving its strategic goals or priorities. Currently, our risk mitigation strategies focus more on minimising non-compliance with SCM processes, reducing the use of implementing agents, poor management of transfer payments, providing more technical support to provincial departments receiving about 82% of the provincial budget (Health and Education, etc) in order to improve their financial performance, addressing identified weaknesses in the ICT governance controls, improving the poor management of contracts, performance management planning and reporting, reducing the risk of undisclosed fruitless and wasteful spending such as interest costs on Education and Health due to late payments, just to mention a few.
Among others, our planned strategies that are being implemented to sustain clean audit outcomes and ensure that there is an improved performance where institutions need to produce positive outcomes includes:
- Development of audit improvement strategies (including internal audit and external audit findings) through which progress on the implementation of recommended management actions to improve the control environment can be tracked. Audit improvements strategies that incorporate Auditor General, Internal Audit and Internal Audit findings serve as a route map to the audit readiness of each institution. Brainstorming about what could go wrong should form part of management meetings’ agenda to remain extra vigilant.
- Strengthened Audit and Risk Management oversight on the performance of provincial departments;
- Enforcing risk management across all the departments. Where there is any wrong doing, encourage departments to ensure that there is accountability resulting in consequence management executed;
- Discouraging transfer payments to private institutions before receiving audited financial statements or if poor quality financial statements and where adequate monitoring of funds transferred are not in place.
- Improving performance information planning and reporting, ICT governance, SCM procedure and ensuring that all departments implement their Human Resource and Development programs;
- Strong Leadership at strategic level (MEC, HOD and Accounting Officer); good decision making, good governance, laying down clear rules and procedures is also key;
- Recruitment of the right with requisite competencies, capabilities and experience is important. The main focus is on financial management and related functions as this is key to achieving clean audits;
- Appropriate educational qualifications serve as a strong basis for appointing staff with the required level of knowledge. This is a fundamental principle and basic foundation for getting things right.
- Provincial Treasury has a Strong Internal Control Unit that focus mainly on: Compliance with policies and regulations, financial compliance forms part of the organisation’s daily culture. Finance policies and procedures are applied equally across the board. The benefit of all this was sustainability of the clean audit outcomes;
- The policies should be reviewed regularly to ensure they remain relevant to business operations. Compliance audit reviews are regularly conducted by internal audit to verify the adequacy and effectiveness thereof;
- Good tone setting at the top is paramount for the rest of the staff to follow the same pattern and trend.
- Planning; Organising, leading and controlling from the beginning of the financial year cycle is critical. This strategy worked well for Provincial Treasury. All institutions are always encouraged to plan for the next statutory audits well in advance (at the beginning of the financial year).
- There are key account indicators that should be monitored monthly. Financial year end information is generated monthly and should be regularly checked to avoid surprises at year end. Interim financial statements should be prepared and subjected to financial audit review in order to give institutions the financial status of key accounts every three months.
- Each audit must be treated as the learning curve. After every audit, all lessons learnt should be recorded, analysed and implemented for future improvements. Clean audit is like a zero base budgeting approach, you start afresh every year, and it is not based on history but current and recent organisation’s performance and good or bad decisions taken.
- Clean Audit is about continuous improvements, where management should always be alert, look for improvement areas, check financial reporting update releases by National Treasury and implement appropriate solutions.
- Ongoing staff development where all staff members are sent to training to continuously refresh their knowledge. Management should render proper support to staff, be able to listen, provide guidance and take advice where necessary.
- In the area of SCM: we forever emphasise honesty, ethical conduct and promote transparency culture and not tolerate unethical conduct in processes of appointing service providers. Moreover, among the SCM reforms, the development of the eProcurement system which is designed to improve current weaknesses in the procurement process is underway;
- Motivating our teams in order to perform excellently is key.
In closing, I would like to indicate that the Province of KZN is successful with the Provincial Treasury rated to be the best performing department nationally.Commitment from the Executive Leadership and the senior management of that department is exceptional. Throughout the province, the Executive Council has provided proper political leadership and direction. Under these circumstances, we can only hope for continuous improvement and performance by all institutions at both spheres of government.
For more information contact:
Musa Cebisa
Cell: 071 687 8777
