Public Sector Audit is a Vital Activity within Democratic States

KHOLEKA GCALEKA Acting Public Protector Republic of South Africa

The International Federation of Accountants (IFAC) and the Chartered Institute of Public Finance and Accountability (CIPFA 2004:10–11) held that the main function of governance structures in the public sector is to ensure that the institutions that are under the control of the state carry out their responsibilities in a proper manner and achieve the intended outcomes in the best interest of the public.

Public sector audit is a vital activity within democratic states. It underpins the relationship between the government and the governed, the executive and the legislature, and different parts of the government.

However, recent audit reports of the Auditor-General show that there has been little improvement in the audit outcomes of public sector institutions and that they, in fact, continue to be non-compliant with relevant legislation, resulting in irregular, fruitless and wasteful expenditure (Auditor-General 2016–2021).

Some of these challenges and weaknesses include failure to maintain effective internal controls for good corporate and financial governance, inadequate identification and management of financial risks, the inability to ensure that the institution implements and fully complies with legislative requirements, inadequate management of conflict of interests and ethical performance, as well as the inability to ensure the integrity of financial information.

Accordingly, there is strong evidence that public case institutions, in general, fail to comply with the principle of good corporate governance and that they do not fully adhere to best practices as far as financial management is concerned. We come across these when investigating maladministration and improper conduct.

These reports make it evident that the effectiveness of the oversight mandate of financial governance structures in the South African public sector is a matter of concern, resulting in inadequate utilisation of public funds and resources thus amounting to failure of good governance and service delivery.

GOOD FINANCIAL GOVERNANCE

According to the Organization for Economic Co-operation and Development (OECD), a good financial governance framework should, among others:

• “promote the transparent, fair and efficient allocation of resources, and a frame-work that is consistent with the rule of law and that supports effective supervision and enforcement;

• “promote the transparent, fair and efficient allocation of resources, and a frame-work that is consistent with the rule of law and that supports effective supervision and enforcement;

• protect and facilitate the exercise of stakeholder rights and ensure the equitable treatment of all stakeholders;

• recognise the rights of stakeholders established by law or through mutual agreements and encourage active cooperation between the roleplayers in creating a sustainable and financially sound enterprise;

• ensure that timely and accurate disclosure is made on all material issues regarding the organisation, including the financial position, performance and ownership; and

• ensure the strategic guidance of the organisation, the effective monitoring of management by the board, and the board’s accountability to the organisation and the stakeholders.”

On a national level, in relation to the National Development Plan (NDP): Vision 2030 serves as an overarching good financial governance framework. Chapter 14, in particular, deals with the application of financial governance principles in the public sector. Whether this is effectively being implemented, is a different story.

A critical role we need to interact with is that of Parliament in holding public institutions accountable and serving as a deliberating forum for matters of public interest. Section 44 of our Constitution states that the mandate of parliament and provincial legislatures is to produce public policies and refine legislative products.

The most significant committee as far as financial oversight is concerned, is the Association of Public Accounts Committee (APAC), which consists of the Standing Committee on Public Accounts (SCOPA) and Provincial Public Accounts Committees (PAC).

These two committees oversee the utilisation of public funds by national and provincial departments.

Furthermore, the National Treasury provides guidance in terms of the Public Finance Management Act (PFMA) 1 of 1999 to all public institutions through Treasury Regulations. Section 3 of the Treasury Regulations requires public sector institutions to have an internal audit unit that operates under the supervision of the audit committee, we are, however, of the stern view that the PFMA places more responsibility for monitory and taking appropriate action on the treasury for expenditure.

Since 1994, the South African Government has developed extensive structures to regulate good financial governance in the public sector. These structures are designed in terms of a country-wide macro framework and institutionspecific micro frameworks (i.e., organisational policies and arrangements).

Some of the most prominent microfinancial controls in this regard include the following:

• budgeting processes and controls;

• controls outlined in section 3.3 of the National Treasury’s Guide for Accounting Officers in terms of the Public Finance Management Act (2000);

• control measures specified by the Institute of Internal Auditors of South Africa’s Public Internal Financial Control: A New Framework for Public Sector Management (2007);

• financial controls such as financial statements, balance sheets, income and expenditure statements, and cash-flow statements;

• performance audit reports;

• regulatory compliance checks;

• the functioning and controls of accounts committees and audit and risk committees, e.g., Municipal Public Account Committees;

• the oversight controls of internal audit units and representatives of the AGSA.

Across the world, governments are faced with growing challenges of increasing complexities that include low levels of public trust, rising economic and financial instability and social fragmentation into increasingly polarised groups.

Meanwhile, citizens are becoming more vocal, particularly given the amplifying effect of digital technologies, and their expectations for a more transparent and accountable public sector and better public services are growing.

According to the OECD, throughout the world cities face the most acute challenges of service delivery because of fast-growing populations.

Local government is regarded as the cornerstone of democracy and the first line of service delivery to the community. Our South African situation is an apt illustration of this view. The outlook placed by the Auditor General on local government, which is supported by PPSA investigations, doesn’t inspire a better future.

There is a general concern that although local authorities are the frontline local government organisation closest to the people, the scope and quality of service delivery is one of the most critical areas that have significantly tainted their credibility and institutional image.

According to local experts, some of the causes of poor service delivery in town councils include councillor interference in administration, inadequate public participation; inadequate alignment of budget with the requirements of the central government; lack of political and administrative leadership; inadequate infrastructure and shortages of skills.

AUDITING AND ACCOUNTING FOR THE CITIZENS

A risk to be considered with public sector institutions in a democracy is that power and resources, like all things, can be mismanaged or misused, leading to an erosion of trust that can undermine the essence of the democratic system.

It is therefore critical that the citizens of a country are able to hold their respective public representatives accountable. Democratically elected representatives can only be held accountable if they, in turn, can hold accountable those who implement their decisions.

Consistent with the spirit of the Lima Declaration6, an important component of the accountability cycle is independent, effective and credible Audit and Accountability

Institutions, to scrutinize the stewardship and use of public resources.

Public sector auditing, as championed by the Supreme Audit Institutions (SAIs), is an important factor in making a difference in the lives of citizens. We are still fortunate as SA as the AG holds a global record of good auditing standards and integrity.

The auditing of government and public sector entities by SAIs has a positive impact on trust in society because it focuses the minds of the custodians of public resources on how well, or not, they use those resources.

Such awareness supports desirable values and underpins accountability mechanisms, which in turn leads to improved decisions. Once audit results are made public, citizens can hold the custodians of public resources accountable. In this way, auditing and accounting promote the efficiency, accountability, effectiveness and transparency of public administration.

Independent, effective and credible Accountability Institutions such as Institutions Supporting Democracy (ISDs), are therefore essential components in a democratic system where accountability, transparency and integrity are indispensable parts of a stable democracy.

The extent to which auditing and accounting are able to make a difference in the lives of citizens depends on the ability and capacity of audit and accountability institutions in:

• Strengthening the accountability, transparency and integrity of government and public sector entities;

• Demonstrating ongoing relevance to citizens, Parliament and other stakeholders; and

• Being a model organisation through leading by example.

In this regard, its ethics and integrity are central to ensuring the authority and legitimacy of its work. To ensure that elected officials act in the best interests of the citizens they represent, governments and public sector entities need to be accountable for their stewardship over, and use of, public resources.

The institutions that are responsible for auditing and accounting responsibilities and functions serve to strengthen accountability,

transparency and integrity by independently auditing public sector operations and reporting on their findings. This enables those charged with public sector governance to discharge their responsibilities, in responding to audit findings and recommendations and taking appropriate corrective action, and thus complete the cycle of accountability.

It is thus important to recognize that government auditing is a cornerstone of good public sector governance. By providing unbiased, objective assessments of whether public resources are responsibly and effectively managed to achieve intended results, auditors help government organisations achieve accountability and integrity, improve operations, and instil confidence among citizens and stakeholders.

The government auditor’s role supports the governance responsibilities of oversight, insight, and foresight.

Oversight addresses whether government entities are doing what they are supposed to do and serves to detect and deter public corruption. Insight assists decisionmakers by providing an independent assessment of government programs, policies, operations, and results.

Auditing and Accounting practices can and ought to provide a direct link between transparency and the credibility of the government. Lawmakers and the public look to audits for assurance that government actions are ethical and legal and that financial and performance reporting accurately reflects the true measure of operations.

The principle of probity calls for public officials to act with integrity and honesty. The erosion of public trust, if public information and actions are not reliable, undermines a government’s legitimacy and ability to govern. The political, social, economic, and environmental costs to society can be extensive.

The principle of probity also applies when information is disseminated to lending authorities or other principals who have an interest other than an ownership share.

The consequences of violating the expectation for probity can be swift and shattering when the people’s trust in the government, its institutions, and its leadership is undermined.

Demonstrating ongoing relevance to citizens, parliament and other stakeholders.

Audit and accountability institutions continue to demonstrate ongoing relevance by responding appropriately to the challenges of citizens, the expectations of different stakeholders, and the emerging risks and changing environments in which audits and accounting are conducted.

Errors and irregularities are costly when large amounts of resources are misused, misappropriated, or abused and have a direct impact on numerous programs affecting citizens’ lives and health, as experienced in the state capture and subsequently the PPE saga, whilst the commission was still in progress.

Because the government’s success is measured primarily by its ability to deliver services successfully and carry out programs of relevance to and for the benefit of citizens, in an equitable and appropriate manner, government audit activities should have the authority and the competency to evaluate financial and program integrity, effectiveness, and efficiency.

ROLE OF THE PUBLIC PROTECTOR: OVERSIGHT OF FINANCIAL GOVERNANCE RESPONSIBILITIES

Jurisdiction:

The core function of the Public Protector, as determined by sections 181 and 182 of our Constitution, and the Public Protector Act, is to investigate any conduct in state affairs, or in the public administration in any sphere of government, that is alleged or suspected to be improper or to result in any impropriety or prejudice; to report on that conduct, and to take appropriate remedial action. This translates to approximately 1000 organs of state, including national and provincial departments, Metropolitan and local Municipalities, and public bodies.

The investigation of the mishandling of public funds within the Government sector is therefore within the ambit of the jurisdiction of the PPSA to the extent that if public officials are involved in the commitment of these offenses, it would undoubtedly also amount to improper conduct on the part of that official as described in the Constitution.

However, this does not mean that the PPSA assumes the investigative and prosecuting functions of law enforcement and prosecution agencies, but rather, it seeks to supplement and complement these agencies where possible.

The PPSA primarily operates as part of the national integrity framework consisting of a network of oversight and accountability bodies.

CONCLUSION

In an opinion piece published by the International Monetary Fund (IMF), the National Treasury’s Mr. Ismail Momoniat details how our country and its key decision-making structures were in recent years infiltrated and influenced by powers outside of the state machinery. This, as we witnessed during the Commission of Inquiry into the State of Capture, led to decisions of the state being taken to favour those outside the state.

Momoniat acknowledged that the financial system, on its own, cannot protect against corruption. “No public finance arrangements can by themselves prevent corruption in these circumstances, but in South Africa they did provide red flags and speedbumps, to slow down corrupt transactions. The priority is to fix the political governance and accountability system, even as we make technical improvements to our accountability system. At the same time, we need to rebuild state capability while putting in place a permanent anti-corruption mechanism.”

Auditors have a role to play in exacting accountability in state affairs and help build a strong culture of accountability.

The profession through its various bodies should take a tough stance against those who bring the name of auditing into disrepute through unscrupulous deals.

Surely, we cannot deny how unpleasant it was to witness those we have entrusted with being the eyes and the ears of our society, being named as the collaborators and enablers of the capturing of the state that our country witnessed.

When as auditors, you do not take a hard stance against wrongdoing within your midst, it creates a culture of impunity within the profession and where impunity is rife, lawlessness and chaos become the order of the day. As a layer of protection entrusted with protecting the use of our nation’s resources against any form of abuse by those entrusted with public power, we must ensure that we do our work diligently.

In that way, we give meaning to the dream the constitutional architects of our democratic dispensation had in mind when they deemed it fit to install into our constitutional, institutions such as the PPSA and the AGSA, among others.

In my humble view, if we all protect public resources through our auditing and investigating process, we will indeed advance accountability for the citizens of our country and in that way ensure that the constitutional promises of improved quality of life for all and a freed potential of every person are realized.

If auditors can raise the red flags that threaten our ability as a country to reach the goals, we have set for ourselves as a country under the NDP, then a solid foundation for a public service that is free of corruption and any form of maladministration can be laid.

By doing this, I can safely assert that most of the people of South Africa will begin to meaningfully enjoy the fruits of our democracy and most importantly we will when the time comes, hand over to the next generation, a functional state and functional public service that is free from corruption and other forms of maladministration.