More than one Holy Grail in the quest for a clean audit

IT is at this time of the year that annual reports of Eastern Cape departments and the entities that report to them are tabled in the legislature along with the auditor-general’s report on their financial statements.

The Eastern Cape, it needs to be stated, is making progress with regard to audit outcomes with both the office of the premier and finance and provincial planning receiving clean audits although the fact that, after 19 years, education has escaped the disclaimers and adverse opinions to collect a qualified audit must surely rank as the achievement of 2012/13.

It is also at this time of the year that political and departmental heads, along with the CEOs of the provincial entities, are summoned to appear before the various committees of the legislature and standing committee on public accounts, generally to receive their annual roasting, following which the reports are tabled in the legislature, discussed in a pretty desultory manner and then dispatched into history.

Those that receive unqualified audit reports indulge in a certain amount of self-righteous crowing, often quietly ignoring the matters of emphasis recorded by the auditor-general; those that don’t take their annual tongue-lashing with a degree of resignation knowing that they have little to fear in terms of other consequences. The sanctions provided for in the Public Finance Management Act

(PFMA) are covered in dust through lack of use and there is little to suggest that they will be invoked in the near future.

Not that the Eastern Cape is alone in this regard. Similar scenarios are being played out at a national level and no doubt in the other provincial legislatures.

If that is one of the problems with this annual ritual, another is that departments and entities that receive a qualified audit report, or worse, are simply lumped together irrespective of the

reasons why the auditor-general felt it necessary to issue a qualification.

Obviously, a clean audit should be the target if only because with the correct systems in place the possibility of irregular, unauthorised and fruitless and wasteful expenditure should be significantly reduced. That has been stressed repeatedly by Finance Minister Pravin Gordhan and outgoing Auditor-General Terence Nombembe.

There is, however, a need to balance the need for the Holy Grail of a clean audit with ensuring that the purpose for which the department or entity exists is fulfilled.

We have seen a situation in the past where an unqualified audit report was achieved in successive years but the impact of the funds allocated was minimal because achieving an unqualified audit had become far more important than ensuring the desired developmental impact was felt.

If, for example, one looks at the AG’s report for education and health, in both instances irregular expenditure is

singled out. Irregular expenditure, in terms of the PFMA, means “expenditure ... incurred in contravention of or that is not in accordance with a requirement of any applicable legislation”. This includes provincial legislation that provides for “procurement procedures”.

In the case of education, the AG found there was irregular expenditure to the tune of R1.46-billion. He notes that the department does “not have adequate systems in place to identify and disclose all irregular expenditure incurred during the year” as required by the PFMA.

The AG points out that the irregular expenditure is understated by R549.4- million which was identified during the audit process. He added that because of the “lack of systems it was impracticable to determine the full extent of the understatement of irregular expenditure”.

As far as health is concerned, the AG found that the department “did not have adequate systems in place to identify and disclose all irregular expenditure”. The irregular expenditure was disclosed at R398-million, which was significantly down on the more than R1.17-billion identified in the previous financial year.

Irregular expenditure by definition implies that there may be corruption.

Against that the East London Industrial Development Zone (ELIDZ), which also received a qualified audit report, was criticised because the financial statements were “materially misstated” in

areas such as deferred income, property, plant and equipment and accumulated loss.

The AG did not query the reliability of the annual performance report and there was no mention of irregular, unauthorised or wasteful and fruitless expenditure.

There is, therefore, a need to distinguish between the reasons why the AG qualifies his opinion as this indicates whether there are real grounds for suspicion with regard to the existence of corruption, for example, or whether the standard of financial reporting does not meet the required standards set by the AG and Treasury.

What is also important in all three cases is to look at what was achieved.

The latest figures on spending, for example, indicate that the education

department is on target to spend its

National School Nutrition Programme conditional grant, while the ELIDZ report shows that in the last financial year the entity secured R656-million in investment in the automotive sector linked to the W205 Mercedes C-Class project.

Add to that the fact that it is poised to secure a major investment, a Multi-Model OEM platform that is a “multi-billion Rand project”.

In both instances, the department and ELIDZ can state they are delivering on their mandates.

That is not to say that the issues raised by the auditor-general should not be addressed to ensure that future audits are not qualified. They must – and the need for all departments to strive for clean audits cannot be over-emphasised.

Rather it is to contend that the nature of the qualification needs to be considered and the audit outcome balanced against what the department or entity has achieved during the course of the financial year.

There is, in other words, more than one Holy Grail.

Patrick Cull is a journalist based in the Eastern Cape