(c) South Africa Institute of Chartered Accountants. Contact SAICA for permission to reproduce this article., Audit and Assurance

Understanding the amendments to the public audit act

The Auditor-General (AG) stated in the 2017/18 MFMA General Report that accountability mechanisms in local government are not working as they should, and there have been continued calls for more to be done. Accountability mechanisms in national and provincial government are also not working based on the repeat findings on consequence management and the history of unauthorised, irregular and fruitless and wasteful expenditure over the years.

The amendments to the Public Audit Act (PAA) now provide the AG with more power to ensure accountability in the public sector. The amendments to the PAA became effective from 1 April 2019.

Following the amendments to the PAA, the AG has been given the following additional powers:

  • Refer material irregularities to relevant public bodies for further investigation in accordance with their mandate
  • Take binding remedial action for failure to implement the AG’s recommendations for material irregularities
  • Issue a certificate of debt for failure to implement the remedial action if financial loss was involved

In order to facilitate the application of the amendments to the Act, the AG developed the following regulations which became effective 1 April 2019:

  • Public Audit Act (25/2004): Investigations and Special Audits Regulations
  • Public Audit Act (25/2004): Material Irregularity Regulations
  • Public Audit Act (25/2004): Regulations on Audits by Auditors in Private Practice

Material irregularity

The PAA has been amended to introduce the concept of material irregularity (MI) which has been defined as ‘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’.

Differences between a reportable irregularity and material irregularity

  Reportable irregularity Material irregularity
Identify and then Report to IRBAWithin three days notify members of management board of report Confirm factual correctnessNotify accounting officer or accounting authority (AO/AA)
Management response Within 30 days after sending report, discuss with members of management board and obtain representations from them AO/AA responds within 20 working days on actions taken and/or that will be taken to address the material irregularity
Conclude and further action Conclude and report to IRBA: (1) No RI or (2) RI is no longer taking place and steps are being taken or (3) RI continuesIRBA notifies regulator of continuing RI Conclude on appropriateness of actions: (1) MI resolved or (2) appropriate actions being taken to resolve MI or (3) appropriate actions not being taken to resolve MI.If appropriate action not being taken: Refer to appropriate public body or Perform investigation or Include recommendations in the audit report
Auditor’s response RI disclosed in financial statementsAudit report refers to disclosure or opinion is qualified if not disclosed or inadequate Includes description of MI and as applicable: Actions being taken or planned by the AO/AA Recommendations for actions to be taken by AO/AAMI has been referred or is being investigated

Source: AGSA

In line with the MI regulations, the following process will be followed when MIs are identified during the normal audit process:

Source: AGSA

Referral process

Referral is providing a public body with all the information on MI so that they can, according to their powers and mandate, investigate and issue remedial actions.

In line with the MI regulations, the following process will be followed in terms of the referral process:

Source: AGSA

Remedial action

A remedial action is triggered by the lack of implementation of the recommendation included in the audit report. The remedial action is a legal instruction to the accounting officer or authority to take specific action by a certain date.

In line with the MI regulations, the following process will be followed in terms of the remedial process:

Certificate of debt

A certificate of debt can be avoided by implementing the directive to quantify the financial loss and take steps to recover the loss.

If the remedial actions are not implemented the following process will be followed:

Source: AGSA

Implementation of the AGSA’s expanded mandate

To allow for establishing capacity and processes, a phased-in approachfor implementation was agreed by the AGSA with the Standing Committee on the Auditor-General (SCoAG) on the basis of:

  • The type of material irregularity to be identified and reported
  • The auditees where it will be implemented
  • Auditees which are not part of the phase-in will be dealt with in terms of the NOCLAR requirements

The AGSA has indicated that the success of the amendments to the PAA will be measured by:

  • Robust financial and performance management systems
  • Sound financial management systems
  • Successful implementation of the audit recommendations
  • Reduction in irregular and fruitless and wasteful expenditure
  • 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
  • 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.

Source: Auditor-General of South Africa

Natashia Soopal CA(SA)is the Project Director: Public Sector at SAICA.

This article was originally published in ASA.