Recently a politician commented that despite a local municipality receiving a “clean audit” it bore no relation to the effective delivery of municipal services. The implication was that the positive audit result was of little benefit to those living in that town. This set me thinking about the value of annual “routine” regularity audits which are different from “forensic audits”. The latter are important when financial irregularity and fraud are suspected.
In South Africa all government departments and entities, which includes municipalities, are audited annually by the Auditor-General of South Africa (AGSA). The AGSA is a Chapter 9 institution established in terms of the South African Constitution accountable to the National Assembly of the South African Parliament. The AGSA is required to report within the framework of the relevant legislation and policies on how public institutions are managing the funds derived from the South African taxpayer.
The results of an audit are categorised as “clean” where there are no audit findings, which is deemed the best possible audit outcome. An “unqualified” audit is where there are some findings but these are not of a significant nature. A“qualified” audit indicates that there are findings of a material and significant nature. A “disclaimer” indicates that the auditor is unable to express any opinion due to insufficient evidence on which to base an audit opinion which is the worst possible outcome. It is clear therefore that both “clean”and “unqualified” audit opinions from the AGSA provide reassurance that the entity is well managed.
It is true that in its narrowest form an audit is a verification that the financial position of the entity is “fairly and accurately represented”. However, an AGSA audit has a wider scope including the performance of the entity in terms of what are termed “predetermined objectives” many of which relate to service delivery. Service delivery objectives are set out in the Annual Performance Plan (APP), which is a public document.
Is the comment that a “clean” audit bears no relation to effective service delivery then a fair one? Using the parameters of what is required to achieve a “clean” audit, it would seem that the comment could be considered unfair. An entity that receives a “clean” AGSA audit result would in addition to effective financial management also have delivered services according to the parameters as set out in the annual performance plan. The basis of that assumption would necessarily be that the targets as set out in the performance plan are output orientated and focused on key service delivery areas.
On the other hand achieving a “clean” audit may require resources, that could be utilised to address shortfalls in service delivery, to be diverted to meet increasingly stringent audit requirements. The counter to this criticism would be that a reduction of the regulatory requirements increases the risk of fraud, corruption, irregular and wasteful expenditure. Experience over the last two decades in both the private and public service would strengthen this counter argument. Ineffective auditing were contributing factors to the catastrophic consequences both during the era of State Capture in the public sector and the collapse of the Steinhoff International in the private sector with losses of billions of rands in both cases.
Possibly a more significant consequence of an increasing focus on the achievement of “clean” audits is that an entity may become inwardly focused. Innovation and risk taking which are essential components of a successful enterprise could be limited by a rigid control orientated environment. Indeed it could be argued that by restricting new activities and setting lower service targets a public sector entity could be less likely to fall foul of more stringent audit requirements. This becomes an even greater temptation for public sector management as legislative requirements and fiscal controls become increasingly arduous. Complex and geographically widespread public sector departments, such as health and education, face the greatest challenges in this regard.
I am not minimising the value of ensuring that a department or entity achieves at the very least an “unqualified” audit nor am I minimising the importance of effective financial management. However, I would argue that chasing the “holy grail of clean audits” may in fact in itself become counter productive. Regularity must at all times be balanced with effective service delivery with due respect for each. I am sure that many may take issue with this statement but in my view in a country that cries out for effective service delivery but also faces a plague of fraud and corruption, achieving a healthy balance between a focus on audit requirements and service delivery will be to the benefit of all.
