Recently, much interest has been generated around a report of the Department of Science and Technology for the year ended 2010-11. I would like to state right upfront that the audit opinion on this department for the reporting period 2010-11 is and remains financially unqualified with no other matters, thus giving the department a clean audit status. The reports we produce can only be fully understandable if the basic concepts, principles and parameters of the reporting and auditing process are understood by all South Africans.

Public sector auditing in a nutshell

In the public sector, transparency, accountability and good governance are very important principles. Our laws and regulations give clear guidance to government entities on how to carry out their activities and report on them in the financial statements and the rest of the annual reports. As these activities are funded by public funds, it is the responsibility of the government and their appointed officials to be transparent about their actions and accountable to the citizens for the funds with which they are entrusted.

My office is responsible for auditing and reporting on the activities of government to ensure that such activities are adequately reported in the financial statements and in the annual report that is tabled in Parliament. This gives rise to the various audit opinions that we issue on each of the government departments and entities, which to a large extent are generally well understood by the South African citizens.

How the audit process unfolds

In arriving at these audit opinions we at the AGSA, like most auditors world-wide, apply two internationally recognised principles to our reporting:

1. Status of fair presentation (where we evaluate the extent of material omissions or errors that are likely to mislead the reader of the report)


2. Status of internal controls and governance (where we evaluate the possibility of omissions or errors occurring without being detected early enough or prevented from occurrence).

Audits invariably identify errors and/or omissions of greater or lesser amounts in the financial statements and other sections of the annual report. My office always gives government management reasonable opportunity to correct any errors noticed during the audit. This is normally done through the medium of the management report.

What is the management report?

As the name indicates, a management report is issued to those charged with governance and focuses on the status of errors or omissions and the underlying root causes of the entity's internal control failures that give rise to such errors or omissions. This report highlights potential problems and we as auditors recommend how to improve the weaknesses or deficiencies.

Before we finalise the audit report, we give management an opportunity to comment on the issues raised in the management report. Depending on the response, some or all of these issues may find their way into the final audit report. Where management has responded in a manner that reduces the materiality of an issue and also promotes transparency of reporting, such issue will not be reported in the final audit report.

This explains why, in terms of international norms, a management report is a working document, strictly for the attention of management only. Untimely communication of matters highlighted in a management report outside of the audit process tends to cause wrong perceptions and unnecessary panic, particularly when management has not as yet provided replies or explanations of such matters. Very often, the audit queries are based on differences in interpretation or administrative errors. The management report allows for such possible misunderstandings or errors to be cleared up.

How do auditors evaluate the errors or omissions that have been noticed?

All auditors follow a simple, yet thorough and trans- parent process. Before an audit opinion is finalised, the audit team prepares a list of all the errors that the audit has detected and management has not corrected. If the net result of uncorrected errors exceeds the pre-set materiality amount (i.e. the level below which errors can be tolerated as not misleading or compromising fair presentation), my office will issue a qualified audit opinion and the audit report will provide details of such material errors or omissions.

Application of these reporting and auditing principles to the Sowetan article of 4 October

In essence the article written by Alfred Moselakgomo, which appeared on the front and second pages of the Sowetan (dated 4 October 2011), suggested that my office had deliberately decided not to inform Parliament about irregular expenditure and expenditure made in vain by the Department of Science and Technology and thus misled the public and Parliament about the clean audit status that the department was granted during the reporting period 2010-11. I have the following comments to make in response to this matter:

1. Yes, I agree with the writer that the department did incur irregular and fruitless expenditure to the value of R1,3 million. In this regard it was the responsibility of management to disclose all unauthorised, irregular and fruitless expenditure. It also was the responsibility of my office to ensure that such expenditure is disclosed in the financial statements. Accordingly, such an amount was disclosed by the department in notes 23 and 24 to the financial statements on pages 140 to 142 of the annual report of the department. The Auditor-General's report in turn reflected on page 84 of the department's annual report that the financial statements fairly presented the financial position and the performance of the department, in all material respects. It also indicates that no mate- rial findings were noted on the annual performance report and that no material non-compliance with laws and regulations was found. As the materiality amount used by my office for the Department of Science and Technology was R3,4 million, the irregular and fruitless expenditure disclosed was well below this amount. I therefore believe that the story would have been more complete and balanced if the transparency with which the department disclosed this matter was given sufficient coverage by the writer. However, it unfortunately was not, in spite of the fact that the department took the trouble to disclose the amount of R1,3 million as irregular and fruitless expenditure in their annual report.


2. Further engagement with the writer provided more clarity on the direction of the story as portrayed by the writer. Yes, the manner in which the disclosure note is presented in the annual report does not provide the elaborate detail that is contained in the management report to which the writer had access, and thus raised a legitimate dilemma on the writer's side with regard to the motive of the Auditor-General in not providing such detail in his report; hence the conclusion by the writer that the intent of the AG was to mislead Parliament and the public. The fact of the matter is that the reporting and disclosure requirements for the annual report do not require the same level of elaborate detail that is contained in the management report or any of the internal records and source documents that government departments retain. A mere statement of disclosure as irregular/fruitless expenditure is sufficient for Parliament to understand the message and thus make the necessary follow-up on the matter as part of the process of regularising such matters with the department.


3. This is in fact an ideal case study of how investigative journalism could complement the audit opinions of the Auditor-General instead of contradicting them. The role of the Auditor-General is to uphold transparency of reporting in a manner prescribed by the National Treasury. This then provides investigative journalists with sufficient information and a starting point to dig deeper on some of the matters in the annual report of the department that may interest them. This is also the manner in which Parliament uses the annual report to pursue matters that are disclosed transparently in the annual reports.


4. A clean audit report therefore forms a basis of reliance for both Parliament and the public (media included) that the annual report of a government department or entity is free of any material omissions that could mislead the reader of such a report and the control environment is adequate enough to detect all material omissions or errors in a timely manner.


5. This is what the Department of Science and Technology has ascended to in 2010-11 and will no doubt sustain, given the current commitment of the leadership including the minister and accounting officer to clean governance in that department. The department has indeed done all that was necessary to demonstrate transparency in dealing with this matter and does deserve the audit opinion (clean audit) it achieved in 2010-11.

In conclusion

Citizens have the right to know that their tax money is spent appropriately and in line with the law. In this regard, auditing is a key process. I hope that this column has provided some clarity on the audit process and how it is designed to help every citizen of this country to keep government and all its institutions accountable.

I trust that the discussion above has also illustrated that what could at first glance appear to be inadequate reporting, as per some comments made in radio talk shows and electronic media, may instead, with hindsight, reflect a thorough audit process. Other comments made were supportive of the Auditor- General and as they indicated a clear grasp of the auditing process, we would encourage such citizens to continue to engage and share information with peers, colleagues and family to ultimately ensure an informed and thus empowered nation.

From our side as our institution turns 100 this year, I want to give you the assurance that my staff and I have one objective, namely to provide you, the citizens of South Africa, with audit assurance in an honest, fair and simple form, so as to enable you to engage more meaningfully in our democracy. We will also continue to work with the media in an attempt to broaden the understanding of the audit process and find better ways of complementing each other in simplifying our messages for the benefit of the citizens of South Africa. Finally, we will continue to reaffirm the image and stature of our organisation as a trusted constitutional entity that has the clear mission of auditing and reporting in a manner that builds public confidence.

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