THE USEFULNESS OF ANNUAL REPORTS TO OVERSIGHT IN THE ACCOUNTABILITY CYCLE

Jayce M NairNational Treasury: Republic of South Africa

5 August 2009

PORTFOLIO COMMITTEE ON PUBLIC ENTERPRISES

WORKSHOP 2009

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Overview of Presentation

The Constitution and oversight

PFMA requirements for tabling of annual reports

Roles of Portfolio Committees and SCOPA

Other role-players in evaluation process

Annual report oversight process

Interrogating & evaluating annual reports

Oversight of technical quality of annual reports

Oversight of entities performance

Interpreting audit and financial information

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The Constitution andOversight

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Introduction

• Legal framework - Constitutional

– Section 55(2) says the National Assembly: • “must provide for mechanisms to ensure that all executive organs of

state in the national sphere of government are accountable to it; and to

maintain oversight of the exercise of national executive authority,

including the implementation of legislation; and any organ of state.”

– Section 92(3)(b) requires that:

• “Members of Cabinet must provide Parliament with full and regular

reports concerning matters under their control.”

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Introduction

• Legal framework - Statutory– Section 40(1)(d) & 55(1)(d) of PFMA

• The Accounting Officer must submit within five months of the end of

the financial year to the Minister responsible for that Department an

Annual Report

– Section 65(1) of PFMA

• the Minister responsible for a department must table the annual report

in the relevant legislature within one month after the Minister received

the annual report.

– Section 65(2)(a) of PFMA

• a Minister who fails to table an annual report for an entity by 30

September (6 months after year end) must table a written explanation

in the legislature setting out the reasons why the report was not tabled

and indicating when the report will be tabled

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Introduction

• Importance of legislative oversight

– Are government’s priorities reflected in the strategic plans,

budgets and annual reports?

– Are service delivery targets aligned, measurable, related to

programmes, consistent across reporting periods and presented

in a straightforward and meaning manner?

– In terms of alignment: Auditor-General has found improvement in

the level of agreement of performance info across strategic plans,

budgets and annual reports

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Annual Reports:Closing the Accountability Loop

• Departments produce strategic plans setting out performance measures and targets Through the budget the executive indicates what funds are required to implement strategic plans

• The legislatures approve the budget, and so appropriate funds for the implementation of the strategic plans

• The annual reports indicate how the executive has used appropriated funds to implement strategic plans

• In 2005 the National Treasury issued the Guideline for Legislative Oversight through Annual Reports to assist legislatures as they develop processes for overseeing annual reports. The following slides summarize aspects of the guidance that legislatures may take into account as they finalize these processes.

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Roles of Portfolio Committees and SCOPA

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Roles: Portfolio Committees

• Close accountability loop by exercising oversight of service delivery

• Focus on the following:

– The technical quality of the annual reports

– The quality of performance info

– The economy, efficiency and effectiveness of service delivery

– Implementation of the entity’s service delivery improvement plan;

– Evaluating management’s explanations why service delivery was not in line with targets

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Roles: SCOPA

• SCOPA specialises as ‘protector of the public purse’

• Focus on the following:

– Financial probity

– General Report of the Auditor General

– Compliance with the PFMA

– Unauthorised expenditure

– Fruitless and wasteful expenditure

– Internal control and risk management systems

– Supply chain management and procurement

– Major financial losses suffered by government

– Corporate governance

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Links between Committees

Committees need to share information to improve the overall effectiveness of

oversight

Portfolio committees in the various clusters should consider holding joint hearings

The Public Accounts Committee should provide information to other committees on

key issues raised in the AG’s General Report

Portfolio committees may consider appointing rapporteurs to brief the Public

Accounts Committee on important issues it has identified in its oversight process

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Inputs by Other Role-players in the Evaluation Process

• Auditor-General

• National Treasury

• Constitutional institutions

• Committee researchers

• Stakeholders and the Public

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Input by other role-players (1)

Auditor-General

– Auditing of annual financial statements

– Auditing of performance information

– Performance audits of selected entities

National Treasury

– Annually prepares a Guide to the technical requirements for annual reports’

– Framework for non financial information

– Treasury do prepare a consolidated report for Cabinet on audit outcomes

Constitutional institutions

– Provide inputs to the oversight hearings dealing with issues within their mandate

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Input by other role-players (2)

Committee researchers

– Be familiar with the challenges, policies and other developments

– Review strategic plans, budgets, in-year reports and previous annual

reports

– Monitor developments in their area of focus on an ongoing basis

– Talk to the relevant treasury, auditors and other stakeholders

Stakeholders and the public

– Request subject experts to evaluate the performance of entities

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Proposed Oversight Process

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Overview of Oversight Process

Review of AG’s General Report

Timely tabling process

Late tabling process

Preparation PhaseJoint

Workshops(provincial concurrent

functions)

Report Writing PhaseAnnouncement of

completion of tabling process

Annual Report Tabling Processes

Referral to Portfolio Committees

Tabling of Oversight Reports

Ongoing Oversight Processes

Timeline

30 September

First two weeks in October

Third week in October

First week in November

Second week of November

Follow-upPhase

Preparation Phase

Referral to Public Accounts Committee

Annual Report Oversight ProcessPortfolio Committee

process

Public Accounts Committee

process

Day of Delivery

Tabling of a weekly

update of outstanding

Annual Reports

Recommendations for the

preparation of the Finance Bill

Before 31 March

Hearings Phase

Last week in October

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Oversight preparation phase

Start preparations well before 30 September

Committee staff ensure:

– members have access to all relevant documents

– identify and contact subject experts for hearings

Members’ preparations:

– read all relevant documents

– review current year’s performance compared to outcome of previous oversight

process

– consult with subject experts and other stakeholders

– prioritise issues and questions

Committee should meet prior to hearing to:

– identify key issues

– identify what they want to get out of the hearing

– prioritise certain key questions

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Oversight hearings phase

Hold hearings in period 15 to 31 October

Request Minister to give an overview of the performance of the department

Options for structuring the oversight hearings:

– A presentation by the Minister and/or the accounting officer and then a page-by-

page review of the annual report

– A presentation by the Minister and/or the accounting officer followed by a

presentation by a designated member of the Committee dealing with key issues

as identified by the Committee, followed by a question and answer session

– A presentation by the Minister and/or the accounting officer followed by inputs by

invited experts or stakeholder organisations, followed by a question and answer

session.

– A presentation by the Minister and/or the accounting officer followed by a full-

scale public hearing, followed by a question and answer session

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Oversight report-writing phase

Each portfolio committee should prepare an Oversight Report for each entity they

oversee

Oversight Reports should deal with:

– Compliance with the tabling deadlines

– Compliance with the technical requirements for annual reports

– The usefulness of the General Information section

– Comments on the entity’s reported performance

– Comments on the entity’s human resource situation and policies

– Key issues that the committee would like to draw to the entity’s attention as

regards its performance

– Recommendations in relation to any of the issues noted above

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Tabling of Oversight Reports

Oversight Reports should be tabled in the House not later than 14 November or, at

latest, before the December recess

In certain circumstances the House may consider debating certain issues contained

in the Reports

Once accepted, Reports should be sent to the relevant Minister for response to

resolutions

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Follow-up phase

Legislatures need to put in place systems to manage and track resolutions

Aim of such systems

– to bring resolutions regularly to the attention of Ministers

– to ensure Ministers respond to resolutions

– to ensure issues raised in resolutions get resolved

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Interrogating & Evaluating Annual Reports

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Aim of Portfolio Committees’ Oversight

Clear understanding of purpose of oversight helps to achieve objectives

Fulfil constitutional obligation to hold executive accountable

Ensure departments and public entities are:

– producing high quality services, economically, efficiently and effectively

– complying with constitutional and/or legislative mandates, strategic plans and

budgets

– contributing to the realisation of government’s objectives

Gather information on the views of customers and clients

Make recommendations on improving the quality and responsiveness of services

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Preparing to exerciseoversight

The oversight process is about the legislature exercising oversight of the executive in accordance with the Constitution

It is NOT about opposition parties exercising oversight of government

The committee needs to work as a team in exercising oversight

Oversight Preparation Checklist

Be ready - think about the issues and information needs well in advance of the start of the oversight process.

Be disciplined - set clear start, interim milestones and completion targets.

Be aware - know about other oversight processes that may be relevant, e.g. of other departments of entities, or of provincial departments.

Be focused - tailor the oversight process to where it can have the most impact, i.e. set clear priorities.

Be intelligent - be flexible enough to take on board new issues and options should they arise in the course of the oversight process.

Be open - consult with outside experts, organisations and clients throughout.

Be forward looking - remember that the purpose of oversight is to improve service delivery in future.

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Oversight of technical quality of Annual Reports

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Aim of overseeing technical quality

To ensure that entities’ annual reports comply with the legal and policy frameworks

for:

– the structuring of the annual reports

– the compilation of information

– tabling of annual reports

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Necessary background information

Guide for the Preparation of Annual Reports issued by National Treasury

Familiarity with the technical terms and methods used to

– describe service delivery performance

esp. economy, efficiency and effectiveness

– describe human resource issues

Strategic plans and budgets for the entity

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Typical technical focusquestions

Was the report delivered on time?

Is the report in line with the prescribed formats?

Does the layout of the report facilitate understanding?

Is the information communicated simply and clearly?

Is the report original, or are key portions copied from previous reports?

Does the report deal faithfully with each aspect of the strategic plan?

Is each measurable objective specified in the strategic plan reported on in the

report?

Is the service delivery information presented in the report reliable?

– Are the performance measures robust?

– Can the performance information be verified?

– Can the human resource information be verified?

Was an excessive amount spent on the production of the annual report?

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Oversight of Entities’ Performance

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Performance Focus in Annual Report Review

• When reviewing annual reports with a performance focus the following areas can

be examined:

– Background information

– Organisational concerns and options

– Evaluating past performance

– Evaluating future performance

– Evaluating efficiency of performance

– Evaluating human resource development

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Necessary backgroundinformation

Information on the entity

– its mandate, structure, way of operating, strengths and weaknesses

The entity’s strategic plan and budget

Information on external and internal challenges faced by the entity

Information from clients

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Organisational concerns and options

How effectively does the entity contribute to the delivery of government objectives,

as reflected in its mandate?

Should the mandate be changed to better reflect the priorities of government, and

the needs of clients?

Is there a continuing need for the functions being delivered by the entity as a

whole, and by each of its programmes?

– If not, can the entity be closed down, or certain of its programmes be

terminated?

Is there a need for new programmes?

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Evaluating Past Performance

Is the annual report transparent about the entity’s performance?

- Or is it simply a public relations document?

Has the entity met its aims, objectives and performance targets and quality

standards?

- What were the reasons for any failures?

Have the entities performance targets changed over time?

- Are targets increasing with increases in funding?

Are there examples of good practice in how the entity has delivered its services?

What changes have been made in the services provided to clients?

- How can greater client choice be provided in future?

What are clients’ views on the nature and quality of services?

- Have these views altered over time?

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Evaluating Future Performance

Are the entity’s objectives and performance targets linked to government’s overall

aims?

Are the objectives and targets sufficiently comprehensive?

Do the performance targets drive continuous improvement?

Is there continuity in the performance targets between years?

Does the entity have too many performance targets?

Are any additional/alternative performance measures and targets needed?

How well do the performance targets measure the delivery of outputs and the

achievement of outcomes?

Does the entity have the right balance between output and outcome performance

targets?

Are effective information systems in place to measure performance?

- How could these be improved?

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Evaluating Efficiency of Performance

Are there systems to identify clients’ needs and monitor the extent to which they are

met?

Has the entity delivered value for money?

� Over time, is it delivering its outputs at reduced cost?

Has the entity been innovative in managing costs and improving performance?

� What steps has it taken in this regard?

� Is there any scope for increased efficiency savings?

Are staff hampered by internal bureaucracy?

� What has been done to encourage greater flexibility and creativity in delivering

services? What can still be done?

How effective have the relationships with other entities operating in the same or

related areas been?

Have service delivery risks been managed adequately?

Does the entity comply with the Access to Information Act?

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Human resource development

Has progress been made with the implementation of the Service Delivery Improvement Plan? – Is there evidence that services are improving as a result?

What has been done to fill key vacancies?– What more can be done?

What progress has been made with employment equity? – What strategies have been adopted to promote greater equity?

What is the status of the skills development programme?– Is the programme making a difference to staff’s ability to deliver services?

How much was paid out in performance bonuses?– How much did the accounting officer and other senior managers receive as

performance bonuses? – Are these rewards in line with the entity’s delivery performance?

How many disciplinary matters are outstanding?– What is the age profile of these complaints?– What is the entity doing to ensure the speedy conclusion of matters?

How many senior management posts do consultants fill?– How will the entity reduce its reliance on consultants for routine functions?

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Interpreting Financial and Audit Info in the Annual Report

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The Annual Report

• Accounting Officer’s Review

• Audit Committee Report

• Accounting Officer’s Report

• Auditor-General Report

• Appropriation statement

• Annual Financial statements

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Annual Financial Statements

• Statement of financial performance

• Statement of financial position

• Statement of changes in Net Assets

• Cash flow statement

• Notes to the annual financial statements

• Disclosure notes and annexures

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Audit Committee Report

• An audit committee report should cover:

– Membership and attendance to committee meetings;

– the effectiveness of the internal control systems;

– the effectiveness of the internal audit function;

– the risk areas of the entity’s operations to be covered in the

scope of internal and external audits;

– Significant accounting & auditing concerns, and follow up

recommendations made by internal & external; and

– the entity’s compliance with legal & regulatory provisions.

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The Accounting Officer’s Report

• Management’s opportunity to deal with the state of financial affairs, the activities and the results of the entity

• Capacity constraints

• Entity’s business strategy going forward

• Managements response & plans to address any significant audit findings & SCOPA resolutions

• Corporate Governance Arrangements

• Entities reporting to the departments incl their compliance with PFMA

• Organisations receiving transfer payments

• Events after reporting date

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The Audit Report

• Responsibilities of various stakeholders

• Framework used to prepare the audited AFS

• Audit opinion paragraph and emphasis of matter

• Other matters:– Root causes (control environment, control activities, risk

assessment, information and communication, monitoring &

evaluation of controls)

– Governance matters

– Other reports issued during the year

– Value for money matters

– Any unaudited schedules

• Other reporting responsibilities

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Appropriation Statement

• Content:

– Includes a summary of the Appropriation Act according to the

various programme and sub-programme allocations

– Shifting and virement of funds

– The actual expenditure split as above

• Use of content for reader:

– Variances between actual performance and compliance with

adjusted budget with explanations for material variances in the

notes

– Links to the service delivery table in the AO’s review

– Efficiency of the planning processes

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Statement of Financial Performance

• Content:

– Overview of the entity’s total actual performance over the

specified period with a surplus/deficit being the difference

between amounts received and paid during the financial year

• Use of content for reader:

– Information in the appropriation statement analysed at an entity

level in the economic classification

– Understanding of the surplus/deficit: split into surplus/deficit on

Appropriated funds, Departmental receipts and Local and

foreign aid assistance.

– Extent of unauthorised expenditure for the current year

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PERFORMANCE ASSESSMENTOF STAFF

Policies & Priorities

Medium TermBudget Process

Statement of ServiceDelivery

LEGISLATURE/COMMUNITY

EXECUTIVE AUTHORITY(Outcomes)

Performance Agreement

ACCOUNTING OFFICER(Outputs)

SENIOR MANAGERS

Performance Agreement

STRATEGIC PLANSOutcomes/Outputs

SERVICE DELIVERYIMPROVEMENTPROGRAMME

(Outputs)

BUDGET (Outputs)

PERFORMANCEREQUIREMENTS

DELEGATIONS

FINANCIAL STATEMENTS/

ANNUAL REPORT

REVIEW ANDASSESSMENT

INTEGRATED FINANCIAL MANAGEMENT SYSTEM- Compilation of medium term budgets and costing of outputs- Accounting system (accrual)- Creditor, Debtor, Stock and Asset Systems - Human Resource Management System- Management information system (Financial and non-financial)

IN-YEAR MANAGEMENT

AND REPORTING(Financial & non-

financial)

INTERNALCONTROL

ASB- GRAP- GAAP

PFMA: FINANCIAL MANAGEMENT MODELPFMA: FINANCIAL MANAGEMENT MODEL

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Thank you