In the public eye

Three lessons to ensure a clean bill of health

By Kaya Mfono, Director: Public Sector Audit at Grant Thornton

Parliament and the nine provincial legislatures are expected to receive unfavourable audit outcomes for the financial year ending 31 March 2016 due to non-compliance against new financial management legislation which fundamentally changes the current reporting environment, analysis by Grant Thornton has revealed.

The Financial Management of Parliament Amendment Act came into effect on 1 April 2015, and seeing that the legislature’s financial year end is March 31, it means that it has reached its deadline to comply with the requirements of the new Act.

The consequences of non-compliance are far reaching as any shortcomings by the legislative sector, which are the oversight authorities over other government departments and entities, will set a negative tone for many government entities, especially when so many departments are already plagued by their failure to receive clean audits from the Auditor General. 

The crafting of a separate legislation to the Public Finance Management Act (PFMA) and Municipal Finance Management Act (MFMA) is anchored on the Constitutional doctrine of separation of powers between the three arms of government – executive, legislative and judiciary.

Based on the significant changes introduced by the new legislation, it is very likely that the legislative institutions will not be ready for the year end auditing by the Auditor General.

Prior to this recent financial reform, Parliament and provincial legislatures operated under the spirit, and not the letter, of the PFMA and its treasury regulations.

It is imperative that the custodians of Parliaments and provincial legislatures’ finances learn to master three very important aspects of the new Act if they are to comply with the legislation and ensure a clean audit.

Lesson 1: Master new accounting methodology

To date the legislative entities have used a simpler modified cash business methodology. The new legislation requires an accrual and technical accounting for income earned and paid when rendering a service. Most of the provincial legislatures run on the outdated accounting systems which can’t process the more complex accounting data.

In addition many government departments are preparing their financial statements in accordance to a modified cash basis of accounting whereas municipalities are preparing their financial statements in accordance to standards of generally recognised accounting practice (GRAP). All GRAP standards are developed by the Accounting Standards Board (ASB) and set out the recognition, measurement, presentation and disclosure requirements for financial reporting in the public sector in South Africa. The compliance on GRAP standards will add additional complexity to the accounting process.

Lesson 2: Develop new regulations

The new Act puts the powers to prescribe regulations applicable to the legislative arm of government at the executive authority of Parliament and not at the Minister of Finance or National/Provincial Treasury.

In the new dispensation Parliament, will prescribe new regulations on, among others, the funding of political parties and members represented in Parliament and Provincial Legislatures; procedures for recovery of fruitless and wasteful, unauthorised and irregular expenditure; remission of money due to Parliament and Provincial Legislatures; asset management; unsolicited offers; cash management; and investment policy.

The fact that to date only one regulation has been adopted which is a cause for concern and indicative that authorities are having difficulties in coming to terms with the new regime.

Lesson 3: Improve oversight

The new Act, abides by King 3 code on corporate governance principles, and thereby requires that an independent, multi-party oversight mechanism be established to hold the institutions financial officers to account. This mechanism will oversee all financial issues on a quarterly basis to ensure that institutions comply with the letter of the law. To date there has been no indication that an oversight mechanism has been established in any of the legislative entities.

The inefficiencies are evident and that the national and provincial legislatures are running behind schedule for putting in place a mechanism to be implemented and they have not yet tested what the Act requires.

It’s also important to remember that the new King 4 Code on Corporate Governance is expected to come into effect on 1 November 2016 and this too will affect reporting requirements towards the end of this year and well into 2017.

Time running out

As the Auditor General prepares to start with its auditing process for Parliament and Provincial Legislature post 31 March 2015, it would take some time before the institutions can develop the requisite capability.

It’s understandable that Parliament and the provincial legislature specifically will need time to build up the competencies required to comply with the new financial regime. While parliament will have a slightly better understanding having been exposed to the initial laws since 2009, the provinces will largely not have the required institutional knowledge to deal with it while at the same time having to prioritise their core business of provincial oversight.