AUDIT COMMITTEE PRACTICES THE SOUTH AFRICAN EXPERIENCE Presenter: Beerson Baboojee | National Treasury | 4 December 2014

Contents Brief introduction to the South African public sector Legislative arrangements governing audit committees Authority of the audit committee Main functions of audit committees Configuration of audit committees Value add expectations Key Challenges Building audit committee capacity Closing

South Africa LOCATIONPROVINCES

Background South Africa’s political system is a constitutional multiparty democracy Land mass is approximately square kilometers Population is roughly 52,9 million There are 3 spheres of government: –National departments and public entities reporting to these departments –Provincial departments and provincial public entities –Local government (municipalities and municipal public entities)

Legislative Arrangements The Public Finance Management Act (PFMA) regulates the financial affairs of the national and provincial spheres, as well as the Constitutional Institutions The Municipal Finance Management Act (MFMA) regulates the financial affairs of local government The Financial Management Act of Parliament regulates the financial affairs of parliament and the provincial legislatures The requirement for government institutions to have audit committees is written into all 3 of the abovementioned primary legislations and their regulations

Authority of the Audit Committee (1/2) Serves as an independent governance structure Provides an oversight role on the systems of internal control, risk management and governance Assists the Accounting Officer in the effective execution of his/her responsibilities towards achieving the institution’s objectives Has no executive status and functions in an advisory capacity to the Accounting Officer Reports and make recommendations to the Accounting Officer but the Accounting Officer retains the responsibility for implementing such recommendations

Authority of the Audit Committee (2/2) Has the right to seek legal and other professional advise Has the right to initiate special investigations Must be provided the resources it needs to secure legal and professional advise and to investigate Must have unfettered access to management, Chief Audit Executive & employees May communicate any unresolved concerns to the Executive Authority, National Treasury and the Auditor- General The relevant Executive Authority must concur with the premature termination of the services of an audit committee member

Main functions (other than internal audit) The main functions of audit committees are to review the: −effectiveness of governance, risk management and control systems −adequacy, reliability and accuracy of the financial information −any accounting and auditing concerns identified as a result of internal and external audits −the institution`s compliance with legal and regulatory provisions −the independence and objectivity of the external auditors −audit programme and audit fees tabled by the Auditor-General −collaboration between various providers of assurance (combined assurance)

Main functions (concerning internal audit) The audit committee has a special function with regard to internal audit, which includes: −approving the Internal Audit Charter −approving the annual and three year work programme of internal audit −participating in the appointment or dismissal of the Chief Audit Executive −directing the activities of the internal audit function, including, coordination with the external auditors and other providers of assurance −receiving and considering the reports of internal audits, including reports of investigations and the responses of management to specific recommendation −evaluating the effectiveness of the internal audit function

Configuration of Audit Committees (1/2) The audit committee is appointed by the Accounting Officer in consultation with the Executive Authority The audit committee must operate in terms of a charter developed in consultation with the Accounting Officer The committee must have a minimum of 3 members with at least one member being from outside the public service Members appointed from outside the public service must be appointed on contract No member may serve more than 2 consecutive terms of 3 years The complexity of the institution, diversity of skills required and the extent of responsibilities will influence the actual size of the committee Members must possess the necessary skills, qualifications, experience and qualities to serve as independent and objective thinkers

Configuration of Audit Committees (2/2) Currently serving politicians may not serve on audit committees One or more government institutions may share an audit committee if the Treasury grants approval. In such cases the head of the Treasury will appoint the members in consultation with the respective Executive Authorities Members from within the public service are not remunerated but may be reimbursed for extra expenses they may incur e.g. travel costs Members from outside the public service are remunerated in accordance with remuneration circulars issued by the National Treasury

Value add expectations Bring to bear their pool of skills and experience to guide and counsel management towards fulfilling their responsibilities Protect the independence of the internal and external audit functions Give credibility to the annual financial statements, annual reports and performance statements presented by management Strengthen governance by providing an independent assessment of risk management, governance and control Promote effectiveness, efficiency and economy of operations Promote better financial management These expectations are realised in a number of institutions in national and provincial government but to a lesser degree in local government

Key Challenges Members not having sufficient knowledge of the institution they serve thus not contributing optimally to audit committee deliberations Institutions not orientating members sufficiently upon appointment and regularly thereafter Members holding many other committee and board positions thus not devoting enough time to their duties Not applying sufficient rigour hence glossing over critical issues that require more attention Poor secretariat services inhibiting the members from receiving information and advice in good time Ultimately, the discovery of financial, governance, risk and control problems that escaped the Audit Committee

Building Audit Committee capacity The Public Sector Audit Committee Forum has been established as a joint venture by the National Treasury, Auditor-General, Institute of Directors, Institute of Internal Auditors, South African Institute of Chartered Accountants, Institute of Risk Management and the Development Bank of South Africa, to: −raise awareness of matters that relate to the function, duties and composition of public sector audit committees; −consider matters concerning public sector audit committees in the public domain; −provide thought leadership on the function, duties and composition of public sector audit committees by discussing, researching, developing and disseminating position papers and good governance guidance; −address the training and development of current and potential public sector audit committee members; −provide a database of experienced, qualified and competent individuals to serve as public sector audit committee members; −provide a forum for the mentoring of public sector audit committee members;

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