Public sector Flashcards
Public Finance Management Act
- Public sector organizations, including the various arms of government at national and provincial level, are subject to the provisions of the PFM Act
- The Act is also applicable to a large number of state-owned enterprises
- The object of the PFMA is to secure transparency, accountability, sound management of the revenue, expenditure, assets and liabilities of the institutions to which the Act applies
- While the act does not deal specifically with issues of corporate governance, it does deal at some length with accounting and reporting issues, and also provides specifically for the establishment of an Accounting Standards Board (ASB) which has the responsibility of setting standards of generally recognised accounting practices for the financial statements of state departments, public entities, parliament and provincial legislatures, etc. (s 89)
- The ASB has done so by issuing standards of Generally Recognised Accounting Practices (GRAP), which are based on International Public Sector Accounting Standards (IPSAS) which are used as guidance where the relative GRAP standard has not yet been issued
State departments
• An important aspect of the PFMA is the appointment of an accounting officer for every state department (and constitutional institution)
• Among others, the responsibilities of the accounting officer include
(i) Efficient and effective systems of financial and risk management and internal control;
(ii) A system of internal audit under the direction of an audit committee
(iii) Appropriate systems for procuring and provision of services and evaluation of major capital projects;
(iv) effective, efficient, economical and transparent use of the organisation’s resources as well as numerous specific contractual responsibilities
• According to s 40 of the PFMA, an accounting officer must prepare annual financial statements in accordance with GRAP and must submit those financial statements within two months after the financial year end to (1) the Auditor-General for auditing and (2) the relevant Treasury to enable that treasury to prepare consolidated financial statements
• The accounting officer must also submit, within five months of the end of a financial year, an annual report, audited financial statements for that financial year and the Auditor-General’s report on those financial statements. These are also submitted to the relevant Treasury and in the case of state department or trading entity, also to the executive authority responsible for that department or trading entity
• In terms of s 40(2), the Auditor-General must audit the financial statements and submit an audit report on those statements to the accounting officer within two months of the receipt of the financial statements
• The annual report and the audited financial statements must fairly present
a) the financial position at a specific date and results of its operations and cash flow for the period in accordance with applicable financial framework and legislation
b) the auditee’s compliance with any applicable legislation relating to financial matters, financial managements and other related matters
c) the performance of the auditee against predetermined objectives
Public entities
• Public entities must have an accounting authority rather than an accounting officer. Normally this will be the entity’s board or other controlling body
• Unlike state departments, public entities are incorporated companies and therefore also subject to the Companies Act (alongside the PFMA, and in cases of conflict, the PFMA prevails)
• According to s 50 of the PFMA, the fiduciary duties of accounting authorities are to
a) exercise a duty of utmost care to ensure reasonable protection of the assets and records of the public entity
b) act with fidelity, honesty, integrity and in the best interests of the public entity in managing its financial affairs
c) on request, disclose to the executive authority responsible for that public entity or the legislature to which the public entity is accountable, all material facts, including those reasonably discoverable, which in any way may influence the decisions or actions of the executive authority or that legislature; and
d) seek, within the sphere of influence of that accounting authority, to prevent any prejudice to the financial interests of the state
Treasury obligations
• Both state departments and public entities are subject to the Treasury Regulations, which are to be read together with the PFMA
• The regulations contain some noteworthy requirements for public entities namely:
a) Disclosure of remuneration of senior management, individually (including that of the CEO and the CFO)
b) Details of what must be included in the corporate plan required by s 52 of the PFMA
c) The need of a shareholders’ compact (applicable only to public entities running businesses) which must document the mandated key performance measures and indicators to be attained by the public entity as agreed between the accounting authority and the executive authority (i.e. the board and the relevant state department)
Section 77 of the PFMA
• In terms of s 77 of the PFMA, an audit committee
(a) must consist of at least three persons of whom, in the case of a department—
(i) one must be from outside the public service;
(ii) the majority may not be persons in the employ of the department, except with the approval of the relevant treasury; and
(iii) the chairperson may not be in the employ of the department;
(b) must meet at least twice a year; and
(c) may be established for two or more departments or institutions if the relevant treasury considers it to be more economical.
• The regulations issued by the Treasury require that the audit committee must
a. report and make recommendations to the accounting authority
b. report on the effectiveness of internal controls in the annual report, and
c. comment on its evaluation of the financial statements in the annual report
• Audit committees established under the PFMA differ in some respects from those of private companies. They are established in terms of statute by the accounting authority of the entity, are regulated in terms of Treasury Regulations and have a responsibility to report in the normal course of events to the accounting authority
• With respect to the membership of the audit committee, Treasury Regulations provide that:
a. The chairperson of the audit committee must be independent, be knowledgeable of the status of the position, have the requisite business, financial and leadership skills, and may not be the chairperson of the accounting authority or a person who fulfills an executive function in the public entity
b. The majority of the members of an audit committee shall consist of non-executive members appointed by the accounting authority
c. Committee members need not all be members of the accounting authority
d. The majority of persons serving on an audit committee must be financially literate
Audit of public entities
- The external audit of many of the institutions affected by the Act is carried out by the Auditor-General, notably the departments of state, constitutional institutions, parliament and the provincial legislature
- Public entities may be audited either by the Auditor-General or by a private sector auditor
- The Public Audit Act gives a number of powers and duties to auditors of public entities over and above those in the Companies Act and these include:
- Unrestricted access to
- Any document, book or written or electronic record or information of the auditee or which reflects or may elucidate the business, financial results, financial position or performance of the auditee
- Any of the assets of or under the control of the auditee
- Any staff member or representative of the auditee, and
- Wide-ranging powers to interrogate information provided and to obtain further information from relevant individuals, including instructing a person to disclose confidential or classified information
- When the Auditor-General receives a complaint, or considers it to be in the public interest, he may investigate or audit the financial statements of a public entity, even though it has other auditors
