In the public eye

March 2008

Are there effective controls in the public sector?

Governance in the public sector deserves the same attention as governance in the private sector. While unethical behaviour in the private sector impacts the shareholders of a company, unethical behaviour in the public sector impacts all taxpayers and citizens.
All too often news of corporate scandals has spurred the public to focus on the importance of governance. However, effective governance is not limited to business entities only, it is important to public sector entities as well. Public sector entities include amongst others national and local governments, public utilities, hospitals, colleges and universities, city councils, boards of trustees and legislatures. Governance in the public sector deserves the same attention as governance in the private sector. While unethical behaviour in the private sector impacts the shareholders of a company, unethical behaviour in the public sector impacts all taxpayers and citizens. Recent government scandals published in the news illustrate all too well that governance in the public sector can fail. But what is the real situation and more importantly what can be done about it?
What is internal control?

fundamental feature of financial management. It is critical to the overall control of the organisation and, ultimately, the quality of delivery of services and performance of functions. Moreover, it ensures compliance with applicable laws and regulations and safeguards against loss, misuse and damage.
Internal control is:

a process affected by people expected to provide reasonable assurance, not absolute assurance geared to the achievement of objectives
Legislation governing controls in government

If we are to evaluate the level of internal control in government, it is essential to first understand what it is. Internal control is a

Surprisingly, government is more regulated than the private sector. In the private sector, adherence to good corporate governance is extremely important for shareholders confidence and therefore a statement on the organisations level of compliance is included in the financial statements. However, the recommendations of the King Committee on corporate governance is only required for listed companies.

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Are there effective controls in the public sector?

In government, the most important legislation is the Public Finance Management Act (PFMA) and its twin the Municipal Finance Management Act (MFMA). These acts place specific responsibilities squarely on the shoulders of accounting officers to ensure effective, efficient and transparent systems of financial and risk management and internal controls.
History and management of controls in government Status of internal controls in government

If we agree that government is regulated as far as controls are concerned and that controls have been around for a long time, why are there so many reports in the media of fraud, favouritism and other general instances of ineffective controls? Some of the more obvious reasons for these deficiencies are:
Skilled workers

It is important to note that controls remain just that, irrespective of the organisation. Principles that apply to private companies apply equally to public sector entities and although objectives are often different (pursuit of profits and wealth creation for shareholders vs. service delivery), general management and business principles remain the same. For most parts, government is slow to change. Some of the existing systems have been in operation for many years, dating back to pre-democracy. These systems are often transversally applied throughout government for example payroll, finance and procurement. In addition, government has a number of agencies charged with the responsibility of ensuring controls not only exist, but are also adhered to. The most famous of these are probably the Auditor General who is not only charged with auditing the financial statements of all public sector entities but has a much wider role to examine controls and report on the adherence thereto to statutory bodies such as the Standard Committee on Public Accounts (Scopa). In light of the above, it would be very hard to argue that controls are not in place in government.

Government has acknowledged that the single biggest threat to service delivery is the shortage of skilled workers. Although controls are in place, proper application thereof is not always possible, for example segregation of duties becomes near impossible when posts are constantly vacant. The political imperatives of affirmative action further strain this situation. Human error increases where staff is not properly trained.

Why are there so many reports in the media of fraud, favouritism and other general instances of ineffective controls?

New systems

Fraud

In recent years technological advances have necessitated the development and implementation of new systems. Appropriate controls still need to be developed or customised for the government environment; for example, the National Treasury does not yet prescribe a standard procurement system or asset management system. Departments and entities are therefore allowed to implement any system that can fulfill their requirements. Often off-the-shelf solutions are used where built in controls are either not suitable to the environment or have not been sufficiently customised.

Any control can be circumvented if a criminal mind is intent on doing so. Controls must therefore be regularly tested and upgraded to prevent this. In addition, some forms of fraud are often hard to detect, such as bribery, kickbacks and nepotism. Despite current perceptions, fraud in government in South Africa is no higher than that in other countries. A recent survey from Transparency International listed South Africa 51 out of 163 countries surveyed. With countries such as Finland, Iceland and New Zealand topping the list as least corrupt, South Africa was placed much higher than most of the eastern pacific, African and eastern European countries.

In South Africa, government has, since the 1994 elections, promoted open access to information. Government organisations are even required to publish instances of fruitless and wasteful expenditure in their financial statements and must account for it to Scopa.
Possible improvements

In the end we ask then what can or must be done to improve the situation. A simple answer is more of the same. Government is on the right track and has implemented a number of initiatives and legislation that are assisting in achieving marked improvements. Further improvements can be made by inculcating a culture of personal and professional integrity and values in management and staff, setting the tone at the top and taking strong action against perpetrators, implementing sound organisational structures, improving human resource policies and practices and performing constant risk assessments to ensure that all risks are identified and addressed appropriately.

Further improvements can be made by inculcating a culture of personal and professional integrity and values in management and staff.
Michael Sass
Director, Public Sector Advisory Services Division, Grant Thornton Business Risk Services

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