Audit

Background 

Deconcentration and the implementation of the new Financial Regulations placed an increased burden on the Delegation to enhance the level of financial transparency and accountability for European Commission funds in South Africa. This led the Delegation to develop an innovative system for financial monitoring which not only ensures that European Commission funds are accounted for but also enables beneficiaries to develop systems and procedures to meet the stringent financial control standards.

In consultation with the South African Government, through National Treasury, agreement was reached on the implementation of annual financial and compliance audits for all European Commission funded programmes in South Africa. Through the experience gained in the early days of deconcentration, it became clear that auditing projects as old as 6 or even 7 years was going to be problematic for a number of reasons such as:

• Issues of non-compliance relate to the whole life of the project;

• Supporting documents from several years ago are often missing, lost or destroyed;

• Staff with institutional knowledge are no longer available

For the recent past and future, the adoption of annual financial and compliance audits will ensure that instances of non-compliance are identified early in a project’s life thus enabling corrective measures to be put in place to negate weaknesses. The likelihood of documentation not being available is greatly reduced and there will always be staff available who have institutional knowledge.
 
In support of the above objectives, the Delegation has also started to commission systems appraisals for all new projects. This means that within the first 6 months of a project going live, a team of auditors will visit the project and assess the systems and procedures which have been put in place to determine if they are sufficiently robust enough to assure accountability and compliance with the Financing Agreement and EC Regulations. This pro-active measure gives project managers every opportunity to ensure that their systems and procedures meet the challenges of transparency, accountability and compliance.

Frequently Asked Audit Questions

What is a compliance audit?

A compliance audit is a detailed review of the legal and contractual obligations contained in the Financing Agreement. The auditors will select a sample of transactions and test them to ensure that they are in compliance with those obligations.

What is a systems audit?

The auditor will evaluate the internal control system set up for the programme management, in order to determine whether it:

• Is in accordance with the contractual basis of the programme;

• Allows the programme to be conducted in an orderly and effective way;

• Provides for safeguarding assets;

• Makes provision for a reasonable degree of prevention and detection of irregularities and fraud;

• Makes provision for the necessary reliability in entering the programme activities in the accounts and preparing the accounts and financial reports.

The auditor will examine whether the system:

• Includes appropriate measures to segregate duties;

• Includes appropriate measures to prevent management from overriding control mechanisms;

• Has operated throughout the whole reference period and guarantees observance of the contractual procedures laid down in the programme and observance of the legal framework in the country concerned;

• Provides for appropriate procedures for avoiding conflicts of interest;

• Provides for the existence of an appropriate system for authorising operations.

How are audits contracted and conducted? 

Each project funded by the European Commission in South Africa will have an annual financial and compliance audit. The Delegation is in the process of contracting all audits on behalf of the projects.

The following outlines how the audits are conducted:

• Once the contract is awarded the Lead Auditor/Partner, will make contact with the project and arrange for an opening meeting;

• At the opening meeting (the Delegation will attend whenever possible), the auditors will explain their methodology and what they require from the project in order to progress the work;

• At the conclusion of the field work, the auditors are given 5 days to produce a draft report, which is sent to the Project for Management comments and to the Delegation to verify that the findings are correct in terms of the EC rules;

• Once Management and the Delegation have given comments the report is finalized;

• On receipt of the final report by the Delegation, it is reviewed, by the Finance, Procurement and Development sections and recommendations on follow up action are presented to the Head of Delegation;

• Once the Head of Delegation has made a conclusion on the recommendations, these are formally communicated to the project;

If the project accepts the findings and conclusions, the matters are followed up and the audit closed. If there is any dispute the project is given the opportunity to make representations to the Head of Delegation.

What can invalidate expenditure:

The Auditor should report on any expenditure which he considers invalid or questioned.

Reasons to invalidate expenditure include but are not limited to:

• Absence of original documentation;

• Non-compliance with the procurement procedures;

• Incomplete documentation

• Any deviations from the specific requirements of the Financing  Agreement;

• Any expenditure in excess of budget (without prior approval of the EC);

• Any expenditure which does not relate to the financing agreement/work plans;

• Any unapproved expenditure;

• Any expenditure for which there is insufficient evidence to prove the services/goods were received/delivered;

• Expenditure for activities which commenced before the signature of the agreement or were completed after the implementation end date;

• Missing assets;

• Absence of required counterpart contributions or lower level than foreseen;

• Ineligibility of beneficiaries. (If applicable);

• Absence of Community Contribution (If applicable);

• Expenditure where value for money is in question;

• Fruitless or wasteful expenditure;

• Any accruals.

Forensic Audits

1. What is a forensic audit?

A forensic audit is the targeted application of detailed audit procedures to identify if there has been any illegal, unauthorised or unprocedural use of EPRD funds and assets and to establish the identity of those responsible. A forensic audit differs greatly from a “normal audit” in that trained forensic auditors will examine in detail each and every transaction. Background checks on individuals are carried out to determine if they are living beyond their means or have interests in companies/entities who received EC funds. The auditors will gather evidence (affidavits) capable of being presented in court should a prosecution follow from the audit.

2. When would a forensic audit be considered necessary?

There are a number of reasons why a forensic audit would be commissioned such as:

1. adverse findings during a normal annual/final audit;

2. where there are questions raised about the validity of a procurement procedure/award of contracts;

3. under-performance/non-delivery of goods/services;

4. where information is received from a “whistle blower”;

5. when management request that a forensic audit be carried out.

3. Who commissions a forensic audit and who is informed about it?

Who commissions a forensic audit will depend on the reason for the audit but in general:

1. where irregularities involve solely EC funds and it is intended that EC funds will be used to fund the audit, the Delegation of the European Commission will normally act as the contracting authority for the forensic audit;

2. where irregularities involve both EC and the implementing agency and/or other donor funds, a consensus will be sought from all interested parties as to who should act as contracting authority;

3. where there is a statutory requirement the Auditor General may instigate the forensic audit;

4. in all other instances agreement will be reached between the parties concerned.

4. Who is informed about a forensic audit?

Again this is largely dependent on the nature of the irregularity and the individuals involved. Where information is received from a “Whistleblower”, the primary concern is to protect that individual as far as is reasonably possible. In this type of case, the information will be restricted to those persons who need to know it to carry out their duties efficiently. No person is entitled solely by virtue of their position or seniority to have knowledge or possession of such information. The Delegation will inform National Treasury where a forensic investigation is called for. In certain instances, the Delegation is also compelled to inform the European Anti Fraud Office (OLAF).

5. What is the process of a forensic audit?

The primary action in any forensic audit is to review the information available to determine if the allegation/information is credible and not merely malicious. Should the credibility of the information be such that an investigation is considered necessary a preliminary fact finding/evidence gathering phase is initiated. The information gathered is then analysed and a detailed audit plan is produced. Only at this stage will the formal taking of affidavits take place.

6. What happens after a forensic audit?

Once a forensic audit is completed the findings are considered by the Delegation in conjunction with National Treasury and the relevant line Department. If it is considered that there is sufficient evidence to warrant a criminal investigation, the file is handed over to the appropriate South African investigative authority.

7. What information can interested parties expect to receive during and after a forensic audit?

Unfortunately very little, if any, information can be released during a forensic audit. This is due to the nature of the audit and the fact that evidence obtained may be considered sub-judice and as such premature disclosure could hamper any subsequent prosecution but may also frustrate the investigation.

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What should we do if we have a problem or are not sure about a finance issue?

Staff of the Delegation’s Finance and Contracts Section are always available to provide help and advise. You should contact them via 012 4525278.