Report: How public audit institutions can promote accountability in Africa’s extractive sector
Sponsored by Oxfam
A mining site at Kenya's coast.
By James Kahongeh
Africa’s extractive industry suffers deep auditing shortfalls, a new report by Oxfam shows.
Titled “Auditing the Auditor: Examining the Role of Supreme Audit Institutions in Auditing the Extractive Industry in Africa”, the report assesses the role and capacity of public auditing entities, and the challenges they face in executing their mandate.
The audit surveyed 10 countries in Africa, these being Nigeria, Uganda, Ghana, Tanzania, Zimbabwe, Kenya, Cameroon, Zambia, Mozambique and Sierra Leone.
According to the Oxfam report, a majority of the African countries surveyed have witnessed a steady growth of their extractive industries in the recent past, thanks to mineral reserves that have been discovered there, or after extraction began.
Elsewhere on the continent, in countries such as Nigeria (oil) and Mozambique (natural gas), the extractive industry is active and fairly well-established.
But even as the continental extractive industry starts to flourish, a number of factors, notably poor governance, corruption and misappropriation of revenues, hinder growth.
There are also “complex tax minimisation strategies”, where companies deliberately organise their tax declarations in a manner that reduces the amount of tax they pay through legitimate means, such as moving funds through trusts. The report indicates that these strategies are often used by multinational corporations, and they “deny countries a fair share of revenues that would be invested in providing social services such as health and education.”
These factors, consequently, affect the livelihoods of citizens of these countries.
All isn’t lost though. Oxfam notes that the ills hurting the industry’s prospects could be mitigated by conducting comprehensive audits. Such audits are performed by what are called supreme audit institutions.
A supreme audit institution is the lead public sector audit organisation or national agency responsible for auditing government revenue and expenditure.
Supreme audit institutions oversee the management of public funds and the quality and credibility of the government’s reported audits and compliance with existing laws and regulations.
Where they exist, supreme audit institutions are constitutionally empowered to play a critical role in promoting transparency and accountability. The practice of openness is especially critical in the extractive sector, by facilitating timely performance and publication of the relevant audits.
Supreme audit institutions often conduct financial, compliance and performance audits to ensure that companies in a country’s extractive industry adhere to the laws and regulations.
Even so, supreme audit institutions across the continent grapple with different challenges that hamper their mandate: From lack of efficiency to failure by other relevant entities to implement their recommendations. There are also capacity issues and inconsistencies in law that impede the work of supreme audit institutions.
In countries in East Africa such as Uganda and Tanzania, there’s scanty historical information on mining audits by their supreme audit institutions, OXFAM observes. However, the supreme audit institutions in the region argue that regular monitoring of the mining sector has been ongoing for several years now, mainly to ensure compliance to contractual obligations by the mining companies.
Meanwhile in Kenya, audit of oil operations has been “minimal and slow to start”, according to Oxfam. This is despite the country’s revenue agency (Kenya Revenue Authority) completing yearly desk-based tax audits of production sharing contracts since 2014.
Oil accounts for 90 percent of foreign exchange for Nigeria, and over 50 percent of revenue for the country’s federal government. Owing to the West African country’s position as a major oil producer in the world, its revenue pipeline is complex.
Players, for instance, lament that the government makes “irregular” deductions in the oil value chain, thus contravening stipulations contained in Section 162 of Nigeria’s constitution.
Rubies, coal and potential oil reserves constitute Mozambique’s fairly extensive mineral wealth. In recent years, the country has become a major player on the global front of natural gas.
Lack of regular audits of the extractive industry in Mozambique has resulted in a knowledge gap regarding the actual costs of mining companies’ activities in the country.
Industry observers in the South African country argue that Mozambique’s taxman – Autoridade Tributaria – lack the capacity and expertise to administer fiscal arrangements on petroleum cost revenues.
Meanwhile, the World Bank estimates show that between 50 and 90 percent of total production of diamonds in Sierra Leone is smuggled out of the country. Lamentably, mining companies in the West African country sometimes pay as little as three percent in royalties, in contravention of the Mines and Minerals Act (2009).
Oxfam says the role of supreme audit institutions in preventing such malpractices and inconsistencies is key to ensure that citizens of mineral-endowed countries get a fair deal.
Interestingly, the report shows, there is “a general awareness” of the audits conducted and published by supreme audit institutions. Even then, there is poor communication between the supreme audit institutions and key stakeholders in the extractive industry.
Oxfam notes that both auditors and the extractive industry sector stakeholders concur that audit reports have fallen short of promoting transparency and accountability within the sector.
Even crucially, the report shows that the number of audits being performed per audit cycle by supreme audit institutions are often too few to realise any meaningful impact. As a result, the majority of such audits are also unlikely to be tabled before parliament. They, therefore, end up being unavailable to the public, thus avoiding the requisite scrutiny.
According to the report, the relevance of these audits has been a contentious subject. Experts argue that their inadequacy to address issues in the extractive sector is attributable to lack of expertise in the industry by supreme audit institutions.
Even more concerning about the supreme audit institutions is their inability to carry out consultative sessions while assessing risks of the extractive industry.
Essentially, the extractive industry value chain has seven interdependent steps that must be followed for a comprehensive process. The seven-part value chain constitutes the following:
- The legal framework
- Government decisions on natural resources
- Award of contracts and licenses a
- Monitoring and operations
- Assessment and collection of revenue
- Revenue management and allocation
- Implementation of sustainable policies.
Findings of the Oxfam report, however, show that audits by supreme audit institutions usually focus on only the first two steps, thus exposing the rest of the chain.
Oxfam recommends a number of areas where capacity building is needed to address the shortfall of supreme audit institutions in conducting audits of the extractive industry. These include:
- Human resources
- Organisation and management
- Independence and legal framework
- Evaluation of audit standards
- Methodology
- Communication
- Stakeholder management.
Further, the report recommends enhanced coordination between supreme audit institutions and extractive industry stakeholders through sharing of knowledge, for instance.
OXFAM also recommends collective efforts to petition state institutions to implement audit recommendations by supreme audit institutions as well as safeguard their independence.
Bolstering these areas will empower supreme audit institutions to “contribute meaningfully to transparency and accountability” in the sector.
Oxfam acknowledges that when harnessed well, extractive industries in Africa have the potential to significantly contribute to nations’ socio-economic development.
