Auditor-General's General Reports and Special Report, PFMA Implementation Report: briefing by Treasury

Public Accounts (SCOPA)

25 August 2004
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Meeting Summary

A summary of this committee meeting is not yet available.

Meeting report

25 August 2004

Mr F Beukman (NNP)

Documents handed out
Auditor-General's presentation
Auditor-General's General Report: Activity Report 2003
Auditor-General's General Report: Audit Outcomes Report 2003
Auditor-General's Special Report on Delays in Tabling of Annual Reports in 2002-03
The above 3 reports are under Special and General Reports at

The Auditor-General briefed Members on the three reports from the Office of the Auditor General: Activity Report, Audit Outcomes and the S65 Report for 2002-2003, a Special Report on Delays in Tabling of Annual Reports in 2002-03. In the discussion that followed, concern was raised at the performance of departments. It was felt that after ten years departments still did not have the basics right. He said that civil servants not committed to reform should do the honourable thing and resign.

The National Treasury briefed Members on the implementation of the Public Finance Management Act (PFMA). In the discussion that followed, Treasury admitted that the departments faced a huge challenge in meeting the standards of the PFMA and measuring performance in delivery of services. Also stated was that National Treasury would not condone departments' unauthorised over-expenditure.

Throughout both presentations, a common theme was the difficulty of attracting and keeping skilled chartered accountants. It was agreed that the Committee would reconvene at a future date to deal with unauthorised expenditure in more detail.

Office of the Auditor General Activity Report, Audit Outcomes and S65 Report for 2002-03

Mr S Fakie (AG) presented the highlights of the audit outcomes for 2002-03. He focused on what was coming in the 2003-04 Outcomes Report. The AG had for the last two years submitted two general reports to Parliament; the Audit Outcomes Report and the Activity Report. The Activity Report indicated to the Committee and Parliament where the AG wants to focus his auditing activities in the future. For the Activity Report, the AG asked if the Committee had any specific views on where the focus should be in the future. In the current year; ten departments out of thirty-three received qualified audit opinions. This was an increase from the previous year. There were five departments that had received qualified opinions for at least the last three consecutive years. The major issue leading to qualified opinion was a lack of audit information provided. They were unable to verify the information regarding donor funding.

For the last two years the audit office had placed considerable emphasis on the Division of Revenue Act. The transversal emphasis on the audit reports was on transfer payments, internal control problems, internal auditing problems, auditing effectiveness, non-compliance with legislation, information system shortcomings and the extent of compliance to the Committee. The Activity Reports showed the emphasis that the AG wished to place in the future. There was a need to link findings with root causes in order to improve financial management. There needed to be a framework for department policies and procedures. Common understanding would enable the testing of departmental compliance. SCOPA Resolutions should be rolled out. In the near future the AG wanted to start focusing on two new areas. Human resource management needed to be paid more attention. This would increase accountability. A range of irregularities crept into the procurement area. It was a high-risk area from both an auditing and an accountability point of view. The supply chain initiative posed a new challenge on the procurement business. There were additional focus areas that they were considering but those were the two areas that they thought of early. They believed far more auditing focus was needed on these areas. Specialised audits were being done or had been done into the management of sick leave and a nation-wide audit was being carried out into the housing side. For the current year all departments were required in terms of the PFMA to prepare consolidated financial statements. This was the first time that this had been implemented. The deadline was 30 June, but not many of the financial statements had been received. The implementation of SCOPA resolutions should be forthcoming.

Internal Audit and Audit Committee
Ms L Mabe (ANC) wanted to know why there was limited reliance on the internal audit reports. She asked the reasons for the Audit Committee not functioning. How can their operations be improved so that in the future there can be reliable internal audit reports?

Mr Fakie said that there were many reasons why there was limited reliance being placed on the internal audit reports. Quite often the internal audit focus was different. For example there may be a huge risk on the staff recruitment, but this was of little interest to the AG. Many departments' internal audits were ineffective. They needed to make sure that they delivered for the reasons of their establishment. There were major problems with the internal audit committee submitting a plan saying their focus would be on ten areas as the AG would place reliance on these ten areas. However when the AG came to auditing at the end of the year, management had refocused the audit because of crisis management within the department. There was a problem with the skills and the capacity of internal auditors to cover the full plan. Often the quality of the work would be lacking. In the 2003/04 report they were trying to spell out in more detail the reason why they could not rely on the internal audits.

The audit committees were not functioning for a couple of reasons. Departments were having problems appointing appropriately independent members onto the auditing committee. In terms of the PFMA requirement the audit committee was supposed to convene 3or4 times a year but would in fact only meet once a year. There were other cases where the audit committees in their deliberations did not interrogate the internal audit plans to the required extent.

Mr E Trent (DA) wanted to know how the AG proposed to solve the problem of the private sector poaching public sector staff.

Mr B Kannemeyer (ANC) said that there was inconsistency regarding the extent to which different audit committees focused on certain key areas. If there could be a framework worked out that would be helpful.

Mr Fakie said that the lack of skills was unfortunately a reality. There were only longer-term solutions that needed to be looked at. However, there were sufficient skills for effective internal audits and audit committees. Co-sourcing initiatives with audit firms was a short-term solution that was being used by some departments. The treasury had provided a framework for what should be reported on in the audit committee.

Division of Revenue Act (DORA)
Mr Trent said that the Committee was deeply concerned with the comments regarding DORA. Provisional transfers to the provinces amounted to R26bn.With national and provincial auditors involved it was unclear who was responsible for this problem. He wanted to know if there was a risk of fraudulent activity creeping into this area.

Mr Fakie said that the answer was in DORA but the implementation of the Act was lacking. Enforcement of the implementation would go a long way towards solving this problem. The transferring department had a huge responsibility in assuring the money was used for the correct purpose. This was not being enforced. The extent of compliance with DORA varied. Some departments transferred the money and then thought their responsibility was finished once the transfer was complete. The risk of fraud was a difficult one to assess. However, when there was no accountability with the receiving department the risk of fraud was always high. The bigger risk was on accountability but one could not rule out that other irregularities could creep in because of this lack of accountability.

Mr Trent asked whether any of the departments took punitive action against the receiving departments and whether they withheld money pending compliance. This was an option that should be followed quite rigorously.

Mr Fakie said that they did not have an example where money had been withheld. However, this was one of the options that they had, as the money was transferred in quarterly amounts.

Internal Control
Mr Kannemeyer said last year's report had mooted the idea of a financial capability model. It would be interesting to know how far this model had progressed. This would be one of the key components for benchmarking departments on their own development in terms of financial management and capability of financial management control.

Mr Fakie said that they were making progress on the model but it would take time to bring in. There had been extensive debate on making sure there was a common understanding of the criteria upon which individual departments would be evaluated under the terms of the capability model. In the next cycle of audits it was hoped that some of these things would start to emerge. One of the fundamentals underpinning this whole capability model was the mechanism and the internal control systems in the organisations. There were six models of maturity in the capability model. The first level was where there was nothing in place; a start-up phase. The second level was where they had the policies in place but there was not the required implementation and understanding of those policies throughout the organisation. The third level was where there were policies and procedures in place and there was a reasonable level of institutionalisation. The departments needed to reach levels two and three before the higher levels could be looked at.

Mr K Hamid (Senior Manager) said they were focusing on the first three levels. It was a long process. As issues were identified in terms of the order, the level this issue related to needs to be identified. They were trying to add value and group them under a group cause relating to that information and tried to stop other issues arising.

Mr Kannemeyer said that on page 14 of the report, there was a graph indicating that with regards to the internal control environment and the number of reasons why there was emphasis of matter, from about 45% in 2000-01 by 2002-03 it had risen to 73%. As a percentage of matters raised 73% related to internal control issues. The weakness in internal control was the result of one of two things, either there were systems in place and those supposed to implement those did not adhere to them. Hence there were irregularities or non-compliance with a given framework. The second reason was more worrying. That was that there were no proper systems in place. This meant that even if people followed due process, fraudulent or irregular practices were more likely to occur. Under paragraph 1.4 the point that 'the findings are summarized in the figures below and show the trend of findings is moving away from non-compliance and irregularities towards weaknesses in internal control' was worrying. He wanted to know how much value should be lent to that and to what extent it meant that systems put in place were becoming weaker or were not responding to the challenges. He asked how the weaknesses in the internal control environment manifested itself.

Mr Fakie said that on page 13/14 they had expressed the view that to a large extent many of the departments had reasonably appropriate procedures and policies in place. However the bulk of the problem was that management was not implementing the policies and procedures to ensure controls were in place. Controls were not being complied with as proscribed by management.

Vacancies, human resources and liability
Mr C Wang (ID) said that the report stated that all the departments apart from the Department of Health had increased vacancy rates. National Treasury's had risen from 12% to 41%. He wanted to know if the AG had mentioned alternative means of tackling this problem to the relevant departments. In several departments there was a large percentage of the budget paid out on salaries and performance bonuses. Did the AG investigate the policies that were allowing these public officials to receive substantial bonuses?

Mr Fakie said that the table and comments on page 49 were a broad observation that was found in terms of the vacancies at senior management level. It was not conclusive evidence. They had not tested it. All they were trying to highlight was the extent of vacancies that existed. There was a risk that service delivery could be affected. This required a performance audit to see whether there is a link between the vacancies and the issues picked up surrounding management and service delivery. Within the government departments they made sure that the salaries were in line with public service rules and regulations. If bonuses were paid outside the rules and regulations then this would be picked up as part of the audit testing. There had been a lot of debate surrounding the bonuses paid out by the public entities. However many of these entities were not covered by the public service rules and regulations.

Mr Wang asked whether the alternative means of increasing capacity had been suggested to the departments.

Mr Fakie said that on aspects of training, their responsibility was to highlight the problem within the department. They engaged with the National Treasury and the Department of Public Service and Administration on that matter and they drove a lot of the training initiatives. The AG would highlight if the cycle of vacancies went on for too long. There needed to be streamlining of the system to get things moving faster.

Ms Mabe said that it had been highlighted that departments were increasingly relying on the use of consultants and they did not monitor and verify the consultant's performance. She wanted to know if the situation had improved for this financial year.

Mr Trent asked how to resolve the problem where departments were not dealing with the skills deficit but were instead getting in consultants. This meant that no skills transfer was taking place.

A Member said that when the next report was published, a cross party committee should be established whereby all the departments' Director-Generals were present, as well as SCOPA and interested Members from other Committees. This would enable Members to give the report the consideration it deserved.

Mr Fakie said that the situation surrounding the appointment of consultants had not improved significantly. The issue of skills transfer was still a problem but the departments were becoming aware that there needed to be an element of skills transfer taking place. Parliament had published a Best Practice Guide on the Appointment of Consultants. If departments implemented the appointment and management of consultants with reference to this guide then the problems would decrease.

Asset Management
Mr S Ndou (ANC) asked that when the AG performed a forensic audit, what were the factors that were taken into account in considering the audit process. Oversight work experiences showed that there was a drive towards putting barcodes onto state property and assets. However, there were instances when these were always reported missing, fraudulently occupied or owned. In some cases police investigations took place. He wanted to know if the AG had the full picture when conducting the asset management audit and if the departments were helpful in providing the full picture. It appeared that the Department of Public Works (DPW) had not completed or was not successful in compiling an overall asset audit register for all departments. He asked if individual departments were now responsible for their own asset audit register, and if so, how this impacted on the initial intentions of DPW. The national survey report on the implementation of the PFMA revealed interesting results on progress within departments. However 91% of the existing asset registers could not be easily reconciled with data accuracy and updates. He wanted to know what the department thought was the source of the problem and what the practical measures were to address the problem.

Mr Fakie said that forensic audits were performed if during the progress of the audit serious fraud or corruption was discovered that required a more detailed forensic investigation. Forensic audits were also ordered if complaints from the department were received that serious fraud was taking place in a particular department and that there seemed to be merit to the allegation. The audit process that was followed was risk based. More audit attention was placed in areas identified as high risk. In most cases the full picture regarding asset management was known. In most cases the department cooperates. With regards to the DPW initiative to create a register, DPW was still responsible for fixed assets, for example the building. Movable assets such as furniture and computers were the responsibility of the department. Asset management was a huge challenge as some departments were massive and the practical difficulties needed to be understood. There were hundreds of thousands of individual items that needed to be recorded. It was common practice when items were reported missing that it would be found that the items had merely been moved from one office to another and this had not been recorded correctly. The movement of the asset created many of the difficulties in asset management. The question regarding the implementation of PFMA would be more appropriately answered by the National Treasury.

Dr G Woods (IFP) asked whether the requirement for asset registers was a module of the Fixed Management System (FMS).

Mr Trent said that the statistics given suggested serious deterioration.

Mr Fakie said that the fixed assets were not done through the FMS, but was done through the Basic Accounting System. This was another system that was used to record and manage the assets. It was not integrated on FMS. This was one of the challenges to moving forward. When the move towards full accrual accounting is made, full integration would be essential. The audit office was increasingly focusing on asset management. There was a sharper focus from the audit side in bringing more audits to the table to make the departments readier to move across. There were many public entities that still had to table reports. However there were no departments who were listed as not yet tabling reports to Parliament. There were 25 public entities whose reports had not been received.

Public Entities
The Chairperson said that on page 27, paragraph 3 of the report the AG indicated that significant contravention of PFMA requirements was an obstacle in the accountability process and a matter of concern. Only 44% of the public entities provide a complete annual report. He wanted to know what they attributed this to, whether it was a lack of knowledge of the PFMA or a limited knowledge of accountability by these entities and accounting officers.

Mr Fakie said that it was a combination of both. Some of the public entities had ensured they understood the requirements of the PFMA and aligned themselves to the schedule. There were other entities which had not applied their minds adequately to the requirements of the PFMA and had found themselves in a situation of non-compliance through not taking the time to understand what the requirements of the PFMA were. An example of this was the Financial Services Board.

The Chairperson asked what the reason for entities not compiling annual reports on time was.

Mr Fakie replied that to a large extent the executive authority should take responsibility to make sure that the public entity that falls within its portfolio submits its account on a timely basis. The PFMA was quite explicit in that regard. The second line of responsibility lay with SCOPA and Parliament. There needed to be a mechanism within Parliament to bring the entities to account. Many of the entities escape the accountability net because of a lack of attention by SCOPA.

Mr Trent referred the AG to page 138. He said that the information regarding entities in the portfolio not audited by the AG was disturbing. Of the 16 reported, for 9 the reason was information not available. In certain instances an unqualified opinion in a previous year had moved to information unavailable. He asked whether this information been brought to the attention of the relevant departments and what steps were taken thereafter.

Mr Fakie said that the entities referred to were entities not audited by the AG. They had tried to give as comprehensive a picture as possible in this report. This gave Parliament and Committees an overall picture of what the situation in the departments was. The table on page 138/9 referred to the Ministry of Trade and Industry. The audits had either not been completed or they had experienced difficulty receiving the data. Pressure had been put onto his staff that the Activity Report could not be kept open. Parliament should be told that the information was unavailable and the report finalized. The full report had been made available to the departments and they could see the section applicable to them.

Mr Trent asked that when the AG did not do an audit whose responsibility was it to report to Parliament.

Mr Fakie replied that it was the executive authority's responsibility. It was the Minister's responsibility to make sure that the public entity's report reached Parliament.

Activity Report
Mr V Smith (ANC) said that eighteen months ago the Directors-General agreed with the capability model. The AG's input indicated that they were still negotiating and that it would take another 18 months before this model is enacted. There was not the luxury of another 18 months. The executives had been given time frames by the President to deliver. The executives could not deliver if the departments were not up to speed. They were not able to get a sense of which departments were improving because there were no benchmarks. If the capability model were in place then accountability would increase. The Committee needed to be informed of the bottlenecks and why it took eighteen months to agree on a format and a framework. In the input it was indicated that 90% of the salaries were related to Human Resources. It was also indicated that there was a very high risk in procurement and that specialised audits would happen some way down the line. At the same time it was indicated that a special audit would take place with regards to sick leave. If HR and procurement contributed so much to the budget, why were these being relegated to the bottom? He asked if it was possible that the Committee be afforded some sort of input into what special audits take place. If it had been brought to the Committee, then many of the Members would have argued that it should have been carried out in procurement. He wanted to know what constituted readiness of the department with regards to performing a performance audit. They needed to move after ten years to a situation where they could measure both the qualitative and quantitative nature of service delivery. It was one thing if the Department of Housing built 1000 houses but it was another thing if the money they spent building those houses was spent unwisely.

Mr Fakie said that they were refreshing comments. They had taken note of the President's State of the Nation Address and were looking at the delivery aspects that the President expected from departments. With regards to the capability model, 18 months ago it was only at the thinking stage. It required a lot of thinking and planning. They were now at the stage of starting to flesh out this thinking. They took note of the urgency and moving forward was a matter of urgency. To ensure the capability model had credibility there was a need to go through the whole cycle. The special audit was a once-off thing that would be followed up in three or four years. When it came to HR management and procurement this was seen as an ongoing audit that would take place every year. In the past they had not paid enough attention to these two high-risk areas from an audit point of view. In the regular audit, either under emphasis of matters or qualification formed part of the report or these issues would take more emphasis. A special audit into these areas could be considered if the Committee thought it appropriate. It would require planning and some reprioritisation. They had already earmarked housing and sick leave as areas requiring a special audit. The other issues were an ongoing issue and would be reported on a yearly basis. There was a need to differentiate between two aspects. A lot of performance related auditing was not in the hands of the department. The PFMA clearly indicated that performance indicators were a requirement for each department. Until departments started reporting on these matters, it was impossible for the Audit Office to do any auditing on these matters. If departments do not have their internal controls and have not implemented the basic financial management systems, then to subject them to a performance audit should not be a priority. Performance could only be enhanced when the basics were right. Currently the Audit Office's attention was on the first three levels of the Capability Model. Once departments have matured then performance aspects could be looked at in more detail. Phasing in of performance auditing was not a deliberate attempt to delay but was what was required.

Mr Smith said that if after ten years departments had not started working then serious questions had to be asked. It was quite worrying that ten years down the line that the argument that the departments did not have the basics correct was still being used. The Committee needed to be told why they did not have the basics correct. If civil servants did not want to perform, they should do the honorable thing and leave. He said that could only happen if the Committee was told that certain departments did not want to improve their systems. The danger was that the Committee would become a talk shop. 'The time has come where we say that independently the Auditor General is saying that you are not performing please leave", he concluded.

Mr Fakie said that the comment was very valid but that when a comparison of ten years was taken it needed to be broken down into two periods. The PFMA only came into being in 1999. In the past there was no progressive legislation in place that focused on service delivery. It had been focused on the old method of the budget having been allocated, it had to be spent. It should only be looked at from the time the PFMA was implemented.

National Treasury briefing on PFMA
Mr Nols Du Plessis (Chief Director of Norms and Standards) presented the salient points on PFMA. The last report submitted was in July 2003 and a new survey was carried out in January 2004. This survey was done in accordance with the normative measures document. The reason for the normative measures document was compiled together with the office of the AAG and the intention was to keep it in line with the Capability Model. Once the work has been carried out on the policies and frameworks, further adjustments will be made to the Normative Measures document. The first part of the report referred to progress made specifically by National Treasury on PFMA implementation. Good progress had been made with the supply chain framework as published as a regulation 5/12/2003. This moved away from the old state tender board regulations and allowed departments to play a more prominent role in procurement of goods and services. This was also in line with a PFMA requirement. A Master Systems Plan regarding the Financial Management Systems has been submitted to the Minister. The Report made specific recommendations on the way forward regarding Financial Management Systems. There was some detail of the implementation of delivery accounts practice in the report. There was a step-by-step process set out by the AG about how to move from cash to accrual-based accounting. The new economic reporting format has been implemented. The implementation of PFMA was regarded as the final step in the accountability process. A distinction was made between the non-financial parts of the report and the financial statements of the auditor statements. They agreed with the AG on the report regarding public entities, in certain cases there was compliance issues within the public entities. The progress of the institutions was provided in a graph in the Report. With regards to compliance issues there had been good progress. The Normative Measures document was only issued as a document to assist accounting officers with the evaluation of financial management. Law did not prescribe many of the measures in the document and there was nothing in the PFMA with regards to the appointment of financial accountants and management accountants. However, it was proposed that it was sound financial practice to appoint those individuals. There was a need to improve the performance of the internal audit committees. Once the plan was approved by the audit committees there was no mechanism in place to regularly monitor performance. There was a clear indication that public entities were not complying. Regarding planning and budgeting departments were improving on a yearly basis. There was a huge improvement with regards to the constitutional institutions if one compared them with the previous year's report. Intervention by National Treasury to assist departments in the implementation of PFMA was included in the Report. It would also address many of the question previously asked.

Mr P Gerber (ANC) said that the document was very statistically based. With statistics it could be proved that a man standing with one half of his body in ice and the other in boiling water, was half warm. When in practice the man will be dead, so with statistics it may look as if there is an improvement but there is still room for further improvement. When the comments were made on departments was it the department on its own or was it the department including all its entities? Would that not change the statistics considerably? In the AG's report on page 35, it mentions that the National Treasury should provide direction and guidance regarding compliance issues. On page 5 of the same report, it stated that the responsibility for rectifying these problems rests with the National Treasury.

Mr Kganyago (Director-General) said that in 2002 for the first time measurable objectives were introduced. The measures that were used had to be chosen very carefully. The Minister of Finance made a statement regarding this issue for the first time, one of the examples he used was Parliament and one of the measures he used was the number of telephone calls received and answered. His example came from one of the provinces where performance measures was the number of people on disability grants. If this is the measure then the drive was to get as many disabled people as possible. This showed some of the problems that the National Treasury faced in the issues of performance. This meant that the process of measurement was a steep learning curve not just for it treasury but also for the other departments. A joint team consisting of the National Treasury, the AG, the Department of Public Services and Administration, and the Presidency was established to develop a framework for performance information. Many of the issues that came out of the State of the Nation address could be measured. Generic measurements across the government departments were not possible. It was not easy for many to grapple with the service delivery performance indicators. With the framework it should be clearer. There were three documents tabled in various Committees in Parliament, viz. he 'Estimate of National Expenditure', the Strategic Plan of each department, and finally the annual report of the department. To evaluate whether a department had performed each of these documents were looked at.

For the annual reports departments were given formats which the department should follow. The big issue was the non-financial performance indicators. The departments and entities were examined. The data that came from the public entities showed they were still lagging behind in terms of tabling reports. Ninety-seven percent of government departments tabled reports on time, but in public entities it was only 58%.

Mr Du Plessis said that the National Treasury had followed up the specific issues on the transversal systems highlighted by the audit report. In many instances revised procedures had been implemented to address those problems. Once the procedures were revised it would be possible to place reliance on the transversal systems. The Integrated Financial Management System report was in the process of being developed and this may make further recommendations on the upgrading of the transversal systems.

Mr Gerber asked what criteria entities had to follow before they were able to write off an asset. Should there not be a standardized policy? In the report mention was made of the state tender board that was going to be abolished in 2004. This abolishment should not be done in a vacuum. The state tender board may be frustrating but it was transparent. The places where fraud and corruption happened were the areas that the state tender board did not have control over. The whole process must stay transparent even after the state tender board is abolished. The report said in July 2002 that Cabinet approved the joint appointment of National Treasury and the Department of Public Services and Administration to conduct a rigorous governance review of all entities listed in schedule 3A and 3B to the PFMA. He wanted to know the results of the review.

Mr Kganyago said that the study into entities started in July 2003 and it was expected that the first report would be made in October 2004. There were a number of issues that necessitated that review. The first one was that the mandates of the public entities seemed to be overlapping. There did not seem to be any standards on a number of issues.

Mr F Nomvalo (Accounting General) said the issue on investments related to the fact that the public entities were told that they could not invest unless given permission. The credit exposure of these entities to financial institutions had to be properly regulated. In the treasury regulations there was a specific guideline in terms of limits that could be put with a specific bank. The investment policy must deal with certain specific issues that would minimize the risk of exposure. They were not allowed to invest more than a certain percentage of their total investment budget. On the question of the write-offs the asset management guideline that had been finalized would be rolled out by the end of this financial year. The issue of recognition was included. Where assets were of no use to government further guidance would be given on how to deal with them.

Mr Du Plessis reassured Members on the issues surrounding the repealing of the state tender board. There was a supply chain management office in the National Treasury responsible for transversal systems. The unit would also provide the necessary support to the departments who were in the process of building capacity to take over the full responsibility for procurement.

Mr S Van Dyk (DA) said that page 1, paragraph 6 of the report referred to progress on the implementation of the PFMA by departments and constitutional institutions in certain areas. SCOPA welcomed the fact as mentioned in the report that the National Treasury was currently involved in initiatives that were aimed at providing further assistance to departments with regard to implementation. However, the implementation of the PFMA would take some time and there were still several issues regarding non-compliance. SCOPA needed clarity with regards to certain institutions' non-compliance. According to the report there was a vacancy rate of 18% in finance posts at departments. Only 57% of departments were spending in accordance with their cash-flow. Only 68% of departments had documented policies and procedures to comply with internal control. Eight national departments received a qualified audit report. The general problem was to convert from cash-based accounting to an accrual basis. Cash-based accounting recognised income and expenditure only when it was received or paid for by cash. Accrual accounting recognised income when it becomes due, and expenditure when it becomes a liability. This did not necessarily mean cash had to be received before it was recorded in the accounting books. As from 1996 training to departments took place and thousands was spent on the New Zealand model to be implemented in South Africa. Eight years later South Africa was still operation on the cash basis. South Africa was heading for chaos and disaster. The cash basis gave departments leverage and scope to hide information from SCOPA. What concerned the Committee was how the National Treasury was prepared to deal with departments that did not commit to changing to an accrual basis. SCOPA wanted to know what the current status in government was in its statement of objectives to convert from cash to accrual-based accounting. There needed to be a programme that indicated objectives, responsibilities and achievable dates.

Mr Nomvalo said that when cash basis recording took place a number of liabilities might not be reported. However, a number of procedures had been put into place. By the end of the year there will be a programme clearly stating what needed to be done in the transfer. There were clear indications that some aspects of accrual-based accounting needed to be implemented urgently.

Mr Kganyago said that they needed to develop the generally recognised accounting practices. At the moment there were three standards that had been issued. In terms of skills in institutions it was unlikely that accountants would only be trained in cash-based accounting. The high vacancy rate was a big challenge. The Chief Accounting Officers did not stick around as they gained experience and then left. They had to make three offers to get an internal auditor. The first offer that was made was beaten by a margin of R200, 000. The second person was already earning R200 000 more than what the Director-General earned. There were fundamental issues as the skills were present but they came at a price. The people retained in the National Treasury were the ones who were committed to the ideas.

Mr Van Dyk asked what the National Treasury planned to do about the listed problems. Next year the same issues might be in the report again, for instance inadequate resources, personnel and human commitment. This needed to be tackled otherwise the Committee would descend into a talk-shop. Saying people simply come and go is an easy way out. Surely there was a way to keep people through for example contracts. Five years after extensive training took place in the universities, SCOPA was not seeing the accrual-based system being implemented.

Mr Kganyago said the issue of training was more to do with getting people in who could do their work effectively. There were accounting clerks employed who could not count. People were not being fitted with positions.

Mr Nomvalo highlighted the lack of respect many companies had for contracts. He was approached and the company offered to buy out his contract. There were interactions with the Institute of Internal Auditors of South Africa and also internationally. Countries that were strong on internal auditing were identified and approached. The benchmark should be the best. The internship programme was intended to give the National Treasury skilled people who did not have the experience. People were retained on a contract basis for a year and they were provided the exposure while the treasury got the extra capacity. These people were put on a programme within the department whilst also contributing to the capacity of the department. They were able to recruit between 60 and 70% of these people at the end of the programme. Through this mechanism they hoped to build capacity. This was an effort to make a difference to the skills shortage throughout the country.

Mr D Gumede (ANC) said he had a question regarding the over-expenditure of R75m in respect of a lease commitment that was not adequately funded. He wanted to know what processes were used by the National Treasury in order to condone such expenditure and what measures should a department implement to ensure such risks were minimised. From a case-study, a contractor leaves work uncompleted, then the department employs another contractor to complete the work. This means the department pays twice the original cost. He wanted to know what the procedure was to stop this happening. Many public entities did not submit reports and he wanted to know if the department had laid charges against any.

Mr Kganyago said that when public entities did not submit reports it would be brought to the Minister's attention.

The Chairperson suggested that the issue of unauthorised expenditure should be dealt with when the Committee reconvenes on September 7 or 15.

Mr Du Plessis said that there were more than enough provisions to prevent unauthorized expenditure. The National Treasury must play a stronger role in the enforcement of the PFMA. There was no way that National Treasury could condone unauthorized expenditure. National Treasury would submit a bill on unauthorized expenditure at SCOPA's convenience.

Members did not have time to ask questions on unauthorised expenditure and it was agreed that the Committee should reconvene at a later date to make sure that this issue was dealt with in sufficient detail.

The meeting was adjourned.


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