Legislative institutions will need urgent interventions to abide by new Financial Management Act.
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.
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.
According to Kaya Mfono, Associate Director: Public Sector Advisory at Grant Thornton, “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.”
Mfono added that based on the significant changes introduced by the new legislation, it was very likely that the legislative institutions would also not be ready for the year end auditing of 2015/16 by 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. Prior to this recent financial reform, Parliament and Provincial Legislatures were operating under the spirit, and not the letter, of the PFMA and its treasury regulations.
Among the most significant changes of the new Act are:
To date the legislative entities have used a simpler modified cash basis methodology. The new legislation requires an accrual and technical accounting for income recognised when earned and expenses when incurred. Most of the provincial legislatures run on the outdated cash basis accounting systems which can’t process the more complex accrual accounting data.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).
“The compliance on GRAP standards will add additional complexity to the accounting process,” said Mfono. “This is a specialist field of expertise as all GRAP standards are developed by the Accounting Standards Board and set out the recognition, measurement, presentation and disclosure requirements for financial reporting in the public sector.”
Developing 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 as under the PFMA and MFMA.
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 – dealing with supply chain management – has been approved is a cause for concern and indicative that authorities are having difficulties in coming to terms with the new regime,” said Mfono.
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 institution’s financial officers to account.
Mfono said: “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. In our analysis we found that 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.”
Mfono also warned 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 into 2017.
As the Auditor General prepares to start with its auditing process for Parliament and Provincial Legislature post 31 March 2015, Mfono said that it would take some time before the institutions could 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,” said Mfono. “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.”
Mfono said that the challenges notwithstanding, the institutions do have to lead by example and set the tone for sound corporate governance and clean audits regime across the public sector.