Corporate governance embodies processes and systems by which organisations are directed, controlled and held to account. Corporate governance in South Africa was institutionalised by the publication of the King Report on Corporate Governance in November 1994, which has subsequently been superseded by the King II & III Report on Corporate Governance. The purpose of the King Report is to promote the highest standards of corporate governance in South Africa.
Corporate Governance in the Public Sector
All organisations have systems of internal control, and government is no exception. There is various legislation that governs the public sector that should be complied with which does enhance corporate governance. It is therefore incumbent on the accounting officers to ensure adherence to the legislation and principles and the relevant executive and accounting authorities to exercise oversight. There is always a link between good governance and compliance with law. Good governance is not something that exists separately from the law and it is entirely inappropriate to unhinge governance from the law.
In 1997 the Protocol on Corporate Governance was published with a view to inculcate the principles of good governance in the State Owned Entities’ (SOE’s). The Protocol constituted a substantial revision in light of the King I Code and international developments. The principles articulated therein are specifically intended to apply only to the entities listed in Schedules 2 and 3 (B) and (D) to the PFMA; and any unlisted public entities that are subsidiaries of a public entity, whether listed or not.
In 1999 the Public Finance Management Act (PFMA) was promulgated by the Government as the principal act to stipulate in detail the rules and regulations related to financial management and reporting to be followed and observed by the governing bodies (executive authority, accounting authority (board) and council) and management. As far as the group of legislation that applies to the public sector is concerned, corporate governance mainly involves the establishment of structures and processes, with appropriate checks and balances that enables accounting officers, chief executives and other officials to discharge their legal responsibilities, and oversee compliance with legislation. As the principal legislation governing financial matters of the public sector, all other legislation is subordinated to the PFMA. Although the PFMA should be considered in its entirety, Sections 46 through 86 are of particular importance for financial governance issues.
Governance Role Players in the Public Sector
Effective governance begins with an understanding of the roles and responsibilities between the various participants; executive and accounting authority, senior management, employees, suppliers, etc.
Executive & Accounting Authority and Council
Executive and Accounting Authorities/Board and Council are accountable to parliament for the relevant institutions and this constitutes the fundamental base for corporate governance in the public sector.
Accordingly, each department, entity and municipality should be headed and controlled by an effective and efficient executive authority, accounting authority/board and council.
The executive leadership and management are responsible for the organisation’s internal governance processes, practices, and procedures. These managers should consider how their governance responsibilities are executed in light of the required and optional governance criteria they want to adopt. These managers should conduct a review of their own practices. The review should encompass the design of the governance processes and their operating effectiveness. Executive leadership and management should also ensure that there is on-going monitoring in place.
In the public sector the fiduciary duties imposed on the accounting officers, senior managers, other officials, regarding sound financial management are set out in sections 38, 45, 51 & 57 of the PFMA and 61 & 78 of the MFMA.
The PFMA & MFMA requires the executive authority, accounting authority (board) and council to establish a system of internal audit under the control and direction of an audit committee. Internal audit uses systematic processes which determine whether established procedures are being followed and whether internal controls are operating properly. Internal controls are procedures and rules established by management to assure that the organisation’s assets are protected from loss as a result of carelessness, dishonesty or poor judgement, and that data is recorded accurately and timeously.
Internal Audit is integral to the governance framework of the organisation. If positioned properly within the organisation and staffed with capable professionals, internal audit can observe and formally assess governance risk and control structural design and operational effectiveness while not being directly responsible for operations.
Consultation between external and internal auditors should be encouraged to the extent that periodic meetings should be held to discuss matters of mutual interest and to understand respective methods and procedures.
The audit committee is responsible for overseeing internal audit functions, internal controls and the financial reporting process. The majority of the members of the audit committee should be financially literate. An effective audit committee can assist management in discharging its accountability to safeguard assets, operate adequate systems and controls, ensure service delivery and prepare annual financial statements. In principle, an audit committee should be advisory and not executive, and will probably only meet quarterly. The committee should not perform any management functions or assume any managerial responsibilities, as this would prejudice objectivity.
Risk refers to either uncertainty within the operational environment or the possibility that a specific event or events may derail a plan or service delivery outputs negatively. The Public Sector Risk Management Framework (Framework) has been developed in response to the requirements of the Public Finance Management Act and Municipal Finance Management Act for Institutions to implement and maintain effective, efficient and transparent systems of risk management and control. A number of supplementary guidelines, templates and implementation tools have been developed to enhance the user’s understanding of the Framework and to facilitate its implementation. The Framework is “principles” rather than “prescriptive” based and adopts the approach of elucidating the principles, standards, models and practices proven to support and sustain effective risk management.
Other Assurance Providers
This group includes assurance providers like those that provide service organisation reports and legislative and regulatory functions that review an organisation’s compliance to laws and regulations. Internal Audit must manage relationships with various stakeholders, i.e. external auditors, internal and external assurance providers, and management to minimize duplication of audit efforts and ensure adequate coverage of the audit plan. The effective management of these relationships will assist in compilation of the combined assurance report/model to provide a coordinated approach to all assurance activities as required by King III Report on Corporate
Governance processes should be defined and understood by the role players to ensure adequate implementation and continuous improvement. All public sector institutions should comply with legislation governing the public sector and also apply the principles and consider the best practice recommendations in the King III Report. Institutions should by way of explanation make a positive statement about how the principles have been applied or have not been applied. The manner of application will differ for each entity and is likely to change as the aspirational nature of the Code should drive institutions to continually improve governance practices.