An internal investigation by the Independent Regulatory Board for Auditors (Irba) uncovered irregular expenditure of almost R11 million, which arose from the regulator’s difficulty in complying with the procurement process when sourcing investigative auditors for “high-profile” cases.
Irba acting chief executive Imre Nagy explained to Parliament’s Standing Committee on Finance last week how the irregular expenditure had come about.
He said the Auditor-General flagged irregular expenditure of R335 570 disclosed in Irba’s 2019/20 annual report. This amount was below Irba’s materiality threshold and so did not prevent Irba from receiving an unqualified audit report.
However, Irba had reviewed its financial statements from 2014, Nagy said.
Irba uncovered irregular expenditure of R1 962 869 in 2020/21 and R8 468 502 since 2014. These amounts, plus the R335 570 that was carried over, were disclosed in Irba’s 2020/21 financial statements. As the total irregular spending of almost R11m was material, the AG made a finding of non-compliance.
He said Irba had received clean audits for 11 consecutive years.
The irregular expenditure related mostly to the procurement of specialist investigators for high-profile audits. Historically, Irba has found it difficult to obtain three quotations, because independent experts are scarce, and their skills set is highly specialised, Nagy said.
Irba procured specialist investigators through “single-source motivation for years” without adverse findings by the AG, until 2019/20. Nagy said this was directly related to the interpretation and implementation of National Treasury Instruction Note 3 of 2016/17, which prescribes the process that must be followed for a single-source procurement above a certain amount, or prior approval for deviation from the process needs to be obtained from Treasury.
Irba’s board investigated the expenditure and found no evidence of fraud, corruption or criminal conduct, and Irba had not suffered material loss, Nagy told the committee.
The board has approved the removal of the irregular expenditure from the financial statements, and this will be disclosed in Irba’s 2021/22 statements.
Moves to comply
In future, Irba will not use single-source procurement but will appoint a panel of experts on which to draw for specialised investigations. This approach was allowed in terms of Treasury’s procurement process, Nagy said.
Where a high-profile investigation requires a specific investigative skill set, Irba will apply to National Treasury in advance for deviation from the procurement process, he said.
“Irba has been prudent in declaring and disclosing possible irregular expenditure and has implemented the necessary controls to mitigate possible future irregular expenditure.”
He said the former chief executives and the former director of operations (who fulfils the role of chief financial officer) have left Irba and new and additional staff have been employed to strengthen the supply chain management unit.
Irba currently has only two external specialist investigators on high-profile interest matters. One of these involved African Bank, which was successfully prosecuted last year using Irba’s specialist auditor on banks.
Irba has applied to Treasury for approval for deviation from the procurement process for one of these two investigators, and he said Treasury approval has been granted.
Limited pool of external investigators
Nagy said external investigators were scare, because only one appropriately qualified and experienced person can conduct an investigation into a high-profile matter. The investigator requires direct knowledge of the issues and will be the expert witness if the matter proceeds to a disciplinary hearing.
Furthermore, he said Irba can only draw on a limited pool of auditors and chartered accountants because it cannot use investigators who are currently practising as auditors, because the investigating auditor need to be independent.
Nagy said it was difficult for Irba to know when it started to investigate a matter whether it should tender for an investigator, because the matter could be dismissed after a month or three, or new information could come to light which results in the investigation continuing for longer than a year.