Financial Management – a brief overview Portfolio Committee on DoD Briefing 19 October 2005 RP Mosaka/ C Botes Parliamentary Service Unit Office of the Auditor-General

INDEX 1.Definition 2.Tools for Financial Management in the public sector 2.1 Controlling the business 2.2 Internal control systems 2.3 Control environment 2.4 Specific control measures 3.Financial Management Performance vs Service Delivery 4.Financial Management Capability Model

1.DEFINITION Section 188 of the Constitution requires an audit and a report on the accounts, financial statements and financial management of all national state departments and administrations …… Why is Financial Management important? FM = Good Governance = Good Process + Good Outcomes Some key definitions of financial management in the public sector context:

a)Process by which management exercise control of its resources in order to fulfil its objectives and report accurately b)Essentially the manner in which “management” initially controls and then manages it’s business, and therefore it can be said to be the assessment of the performance of management, and in turn holding management accountable. DEFINITION (Continued)

2. Tools for Financial Management 2.1Controlling the business Key questions: a)To what extent is management controlling its business effectively? b)To what extent is management providing efficient, economic and effective delivery on its mandate?

Controlling the Business is therefore a management obligation – inter-alia by means of the following steps: a)Identifying the legal requirements of the organisation (public sector organisations can only act according to/in terms of their legal mandate) b)Identifying the key risks, both internal and external Controlling the business (Continued)

c)Management then needs to translate the laws and incorporate risks control into its organisation operations through the establishment of strategies and setting of objectives d)These strategies and objectives are translated into policies, procedures and processes that can be put into operation by the organisation e)The organisation’s personnel and systems then perform functions that are directed and guided by the policies and procedures. This is often referred to as the internal control structure Controlling the business (Continued)

2.2Therefore internal control systems are: All policies, procedures and processes adopted to assist in achieving management’s objectives All legislatives and directives pertinent to the organisations All frameworks that ensures conduct of business in an orderly and efficient manner Internal control systems

Internal control systems (continued..) Internal control include: a)Implementation, maintenance and adherence to management policies b)safeguarding assets c)fraud detection and prevention d)accuracy of accounting records and reliable reports

Control Environment 2.3Elements and characteristics of control environment Includes overall attitude and actions of management regarding controls (VIP) Guided by laws and regulations e.g. founding legislation, the PFMA, Treasury regulations adherence… etc. Ministerial and other directives

Control Environment (Continued) Organisational structure should be established and provide for skilled/trained personnel Training courses and ongoing assessments to be done as it affects capacity and competence of personnel affects specific control measures Individual job descriptions should be in place for effective role clarification

Control Environment (Continued) Performance contracts for employees to facilitate periodic performance appraisals Budgeting and planning for use of resources Accurate, reports, e.g. from accounting processes and systems such as BAS, Logis Internal audit and an audit committee – key to well- structured and working control environment

Control Environment (Continued) Segregation of duties to be established by management Key duties: a)Authorising/approving of transactions b)Recording of transactions c)Custody over the related assets d)Reviewing of transactions

2.4Specific management control measures Internal control mechanisms such as: a)Proper authorisation b)Restricted access to resources c)Independent checks/reviews d)Enforcing/monitoring of controls by management

3.Financial Management and Service Delivery Ultimate test is to determine whether policies, procedures and processes produce the desired results Financial management objective should relate to performance of management (VIP) One may use financial management processes to question the effectiveness and efficiency of organisational performance – and service delivery

4.Financial Management Capability Model Maturity levels based on Canadian model, and Auditees will be evaluated on maturity levels 1 to 6 Level 1: START UP No proper control framework Level 2: DEVELOPMENT Develop a proper internal control framework and financial accounting processes

Financial Management Capability Model (continued) Level 3: CONTROL Focus on compliance and control Level 4: INFORMATION Focus on measuring how resources are used. Have reliable and sufficient financial information

Financial Management Capability Model (continued) Level 5: MANAGED Focus on balancing efficient and economical use of resources with quality/effectiveness of results achieved Level 6: OPTIMISING LEVEL Focus on continuous improvement and learning These levels will primarily be audited and reported via performance audits

Initially on levels 1-3 – about financial management control Levels 4-6 – about financial management performance Financial Management Capability Model (continued)

How to engage with relevant audit reports and what the audit opinions mean? Portfolio Committee on DoD Briefing 19 October 2005 RP Mosaka/ C Botes Parliamentary Service Unit Office of the Auditor-General THE PUBLIC SECTOR AUDIT PROCESS

INDEX Definition Types of audits The audit process Reporting

AUDIT PROCESS An audit can be defined as an official examination of accounts or as a searching examination

AUDIT PROCESS continued… Objective of audit of financial statements is to express an opinion as to whether statements are a fair presentation Process is underpinned by attesting whether the controls are in place or not, and if in place, whether they are: Being implemented (compliance), or Effective, i.e. whether they are working or not

TYPES OF AUDITS Comprehensive (Regularity/Financial) auditing Performance auditing Forensic auditing Sustainable development auditing Integrated auditing

TYPES OF AUDITS continued… Comprehensive Audit Comprises both financial auditing and the consideration and testing of compliance with laws and regulations Output of an comprehensive audit is the expression of an opinion of the financial statements of an entity

TYPES OF AUDITS continued… Performance Audit Focuses on evaluating measures implemented by management to ensure economic procurement of goods and services and efficient and effective application of the same – VFM audits Forensic Audit An independent process to prevent or detect economic crime in the public sector

TYPES OF AUDITS continued… Sustainable Development Audit Uses existing auditing disciplines but focuses on the social and environmental aspects of business processes Integrated Audit Independent process whereby the principles of preceding audit disciplines are co-ordinated and incorporated into one process

AUDIT PROCESS Pre- Engagement Activities Audit PlanningExecutionReporting

PRE-ENGAGEMENT ACTIVITIES –Consider changes in circumstances of previously audited entities –Consider circumstances of new engagements (identify risks) –Determine skills and competency requirements –Establish terms of engagement and communicate to management AUDIT PROCESS Pre-Engagement Activities Audit PlanningExecutionReporting

AUDIT PROCESS AUDIT PLANNING –Obtain knowledge of the business –Obtain understanding of systems and processes –Assess financial risks facing the entity –Evaluate work of internal audit –Evaluate financial management –Formulate audit approach –Communicate audit plan to management Pre-Engagement Activities Audit PlanningExecutionReporting

EXECUTION OF THE AUDIT –Testing of controls –Detailed test of transactions and balances –Continual communication –Letter to management to highlight key audit findings –Final audit steering committee meeting to clarify findings AUDIT PROCESS Pre-Engagement Activities Audit PlanningExecutionReporting

AUDIT REPORT AS OVERSIGHT TOOL Audit assignment, nature and scope paragraph –common in all reports Qualification paragraph –findings on which qualified opinion is based –Two types of reports unqualified modified AUDIT PROCESS Pre-Engagement Activities Audit PlanningExecutionReporting

AUDIT REPORT AS OVERSIGHT TOOL continued… Unmodified “clean” report No further audit comment

AUDIT REPORT AS OVERSIGHT TOOL continued… Modified reports Matters that do not affect the auditor’s opinion Additional reporting requirements To highlight a matter

AUDIT REPORT AS OVERSIGHT TOOL continued… Modified reports Matters that do affect the auditor’s opinion Effect is so material and pervasive and/or fundamental that auditor is unable to express an opinion Effect is not so material and pervasive and/or fundamental as to require disclaimer of opinion Effect is not so material and pervasive and/or fundamental as to require adverse opinion Effect is so material and pervasive and/or fundamental that auditor concludes that a qualified opinion is inadequate Qualified opinion Adverse opinion Disagreement with management Disclaimer of opinion Qualified opinion Limitation of scope

AUDIT REPORT AS OVERSIGHT TOOL continued… Emphasis of matter paragraph –Matters affecting financial statements Going concern Fraud or suspected fraud –Matters not affecting financials Unauthorised expenditure Irregularities and losses Weaknesses in internal control Financial management DORA

AUDIT REPORT AS OVERSIGHT TOOL continued… Qualification and emphasis of matter paragraphs important to both PACs and PCs – to ensure that the accountability and oversight loop is complete For Example - Questions on: – Reasons for shortcomings – Whether poor controls gave rise to losses/irregularities – Steps taken to regularise – Financial misconduct – Departmental investigations –Whether subsequent budgets (and therefore strategic plans) address shortcomings raised/observed before