“Every few months there’s a stir in the media when the Auditor General releases yet another government entity’s audit report,” says Kevin Phillips, MD of idu Software. The reports are variously damning, with the provinces and municipalities often being the worst culprits when it comes to things like ‘fruitless and wasteful expenditure’.
But what do these scary-sounding terms actually mean? What is really happening to our tax money in these cases – and how much of a big deal is it? Phillips shares his views on the subject.
The purpose of audits
To answer those questions, let’s first recap the purpose of an audit. The auditor’s job, whether in the private or the public sector, is to make sure that an organisation’s financial statements are a fair reflection of what actually went on during a financial year. It’s about accuracy, transparency and completeness of information.
If corrupt individuals are organised enough, they can fool the audit process for a while – but it won’t be easy. Corruption doesn’t flourish where financial information is transparent and widely available, so that many people understand the broader financial picture. On the other hand, if there’s only one person in the organisation who knows what’s going on, the risk of fraud and corruption is massively higher.
So, a regular audit serves both to uncover problems and as a useful precaution: When people know they have to satisfy an auditor at the end of the year, they are more likely to follow good practice.
With that in mind, it’s easier to understand what all those audit terms really mean. A clean audit report is what everyone wants: A confirmation that there are no material errors or omissions in the organisation’s financial statements.
That little word ‘material’ is important, however. It doesn’t mean there are no errors or omissions at all – it just means they aren’t significant enough to be a serious concern. The ‘threshold of materiality’ is the point at which errors or omissions become large enough to influence economic decisions in the organisation.
Exactly where this threshold lies will depend on the size of the organisation’s budget: A R1 million discrepancy could be a sign of major trouble in a small municipality, or a mere rounding error in a large government department. This materiality issue goes some way to explaining why there is sometimes confusion about whether an organisation’s statements really are clean or not.
The next step down from a clean audit is a ‘qualified audit’ – the accounts contain some ‘material misstatements’, or there isn’t enough evidence to decide whether some amounts are accurate enough.
The words ‘qualified’ and ‘unqualified’ also sometimes lead to confusion, because the way they are used in audit reports is different to the way we use them in everyday speech. We want our doctors and our accountants to be qualified, ie. we want them to have all the right training and certifications and to meet certain standards. But we don’t want audit reports to be qualified; because that means the auditor has some reservations about the figures. Hence a clean or unqualified audit is better than a qualified one.
A further step down the list is the adverse audit: The auditor finds the organisation’s financials have substantial misstatements. In other words, the amount of information that is wrong or left out is significant.
Even that is not as bad, however, as a disclaimed audit: This happens when the auditors throw up their hands and say “these statements are such a mess I can’t tell what’s going on!” or the accounts are fundamentally incorrect or false. This is a red flag precisely because of the point we made about transparency above: If nobody knows what’s going on, what could be hiding in the mess?
Within each category of audit opinion, there are three kinds of problem spending that the auditor might flag. The first is unauthorised spending: That is, spending that goes over budget or wasn’t used for the purpose intended.
Irregular expenditure is something different: Spending that was incurred “without complying with applicable laws and regulations,” according to the Auditor General’s definitions. Unauthorised spending can be down to admin errors or accidents – irregular spending might raise more concerns because it suggests that procedures aren’t being followed and there is potentially more chaos to follow.
Finally, ‘fruitless and wasteful expenditure’ is the facepalm category: Pointless spending that could have been avoided “if reasonable care had been exercised.” Penalties and interest for late payments fall into this category.
Next time you read a sensational news story about an Auditor-General’s report on a particular department or municipality, take some time to consider the details. Is the report misunderstanding, or making a mountain out of a molehill – or are things even worse?
Top Sectors For SMEs In 2019
“As such, SMEs in the construction, communications and electrical fields are all likely to benefit from supply and sub-contracting agreements over the coming years.”
While the South African economy has been underperforming for a number of years, the first positive signs of turnaround started to become visible by the second quarter of 2018, and by the end of the third quarter, data supplied by Statistics South Africa showed that the economy had indeed grown by 2.2 percent, compared to the previous quarter. This uptick is expected to have a positive effect on business confidence in 2019.
This is according to Jeremy Lang, regional general manager at Business Partners Limited (BUSINESS/PARTNERS), who says that certain business sectors have already seen an increase in opportunities for small businesses and start-ups.
“While these sectors will not be without challenges, the following four industries are likely to offer the best opportunities for small and medium enterprise (SME) owners to grow their enterprises in the coming year.”
The World Travel and Tourism report 2018, revealed that the direct contribution of the travel and tourism sector to South Africa’s GDP has been projected to rise from R136bn in 2016 to R197.9bn by 2028 – set to make up a total of 3.3 percent of the country’s total GDP, says Lang.
“Although this sector experienced some setbacks in 2018, such as the drought in the Western Cape and stricter visa regulations for children entering the country, both the water restrictions and visa regulations have been relaxed and the sector is once again poised for growth,” he says.
Statistics South Africa has credited this industry with being the biggest driver of growth in the country’s GDP, having expanded by 7.5 percent in September 2018, says Lang. “To bolster this, Government has made a concerted effort to stimulate small business growth in this area with initiatives such as the Black Industrialist Programme and the SA Automotive Masterplan.”
He adds that businesses in the manufacturing sphere could therefore likely see significant opportunities in the form of outsourcing contracts and new partnerships with large corporates.
“The debate around land expropriation has occupied most of the discussions surrounding the agricultural sector in 2018, with some questioning growth prospects of this sector. However, this industry has a lot of growth ahead of it, as demonstrated by its 6.5 percent growth over the last three months of 2018,” explains Lang.
“Further to this, the industry is also already taking significant advantage of seven climatic regions in South Africa, with the export of a wide variety of high quality fruit and vegetables increasing substantially,” he points out. The recent outbreak of foot and mouth disease that has resulted in the suspension of the country’s FMD-free status will however significantly impact meat exporters.
In terms of opportunities for SMEs, he says that these may most likely be found in the rural and underdeveloped regions, where the need for resources like efficient transport, state-of-the-art cold storage, better irrigation and private power generation will be key to making agriculture projects more productive and competitive in the export market.
Data and information technology
Connectivity and information technology infrastructure are both crucial to business and employment growth in South Africa, says Lang.
“With many municipalities and the Western Cape government committing to providing all of its residents with free data as part of a plan to expand public Wi-Fi network access, it is clear that this is also becoming a high priority on a state level.”
It has also been reported that South Africa is awaiting the arrival of three international data centres, and large players in the communications sphere, including Vodacom, Telkom and Vumatel, are making huge strides in drastically growing the country’s fibre optic backbone, he adds. “As such, SMEs in the construction, communications and electrical fields are all likely to benefit from supply and sub-contracting agreements over the coming years.”
In conclusion, Lang says that as South Africa’s economic growth has started to turn around, business owners should keep their ears to the ground as 2019 is highly likely to be a year of opportunity.
Herman Mashaba To Talk On City Of Jo’burg Job Creation Initiative
Herman Mashaba to talk on City of Jo’burg job creation initiative at 2019 Business Day TV SME Summit.
Leading organisations at the SME Summit
SME Insurance Checklist For New Year
Malesela Maupa, Head of Product and Insurer Relationships at FNB Insurance Brokers, advises SMEs to consider the following factors when reviewing their policies.
Business owners who are planning for the year ahead should not overlook the importance of reviewing their insurance policies to ensure they are adequately covered against insurable risks.
Malesela Maupa, Head of Product and Insurer Relationships at FNB Insurance Brokers says, every year businesses face unique challenges ranging from credit and market risks, technological disruptions, compliance, operational and regulatory risks, amongst others. As a matter of precaution, insurance policies should at least be reviewed or updated once a year.
He advises SMEs to consider the following factors when reviewing their policies:
- Employee movements – if there are any employees who have left or joined the company, ensure that your policy is updated accordingly.
This type of cover normally depends on the role and contribution of the employee to the business. For instance, directors may be covered for Key Person Insurance and Directors & Officers Liability insurance.
- Protest Actions – this year is the national election year and leading up to elections we can expect to see an increase in the frequency and severity of protest actions, riots and strikes. Thus, it is essential to ensure that adequate special risks cover is in place from the South African Special Risks Insurance Association (SASRIA).
SASRIA provides cover to both individuals and businesses against special risks like civil commotion, public disorder, strikes, riots and terrorism at affordable premiums.
- Cyber risks – it is essential to communicate with your insurer or broker and find out if there are any new risks that your business should be protected against. Cyber incidents continue to be a major risk for businesses especially in the SME sector. Over the last couple of years there has been a major increase in the number of reported cyber incidences.
More businesses are now facing increased cyber threats due to their increased dependency on technology, relating to their internal and customer data being compromised by fraudsters. It is therefore essential to have some form of cyber risk insurance cover and/or enhancement of data security protocols.
- Regulatory changes – every year there are a number of regulatory changes that impact businesses directly or indirectly, which may result in fines and penalties for non-compliance.
- Natural catastrophes – the increase in the frequency and severity of extreme weather conditions, coupled with intensifying natural catastrophes will continue to have a significant impact on businesses.
Businesses should ensure they are adequately protected against these risks to avoid incurring sever financial losses.
- Business changes – should a business consider moving to a new location, purchasing new premises or venture into new business activities, these types of changes could have a major impact on its risks profile. As a result, the policy needs to be updated accordingly.
- New and Enhanced products – An innovative culture has taken over the insurance industry and ever so often we see the introduction of new products or the enhancement of existing products. Get in touch with you broker to advise you on any new products that might add value to your existing insurance portfolio.
“Reviewing your policy regularly gives you peace of mind knowing that you can focus on running your business effectively, without worrying about unforeseen risks,” concludes Maupa.
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