Auditor-General on the Audit Outcomes for 2008/09

Meeting report

At the Auditor-General's request, the Committee met to hear a briefing on the Auditor-General's general report on the audit outcome for the year 2008-2009. The Chairperson was confident that Members would find the report a valuable 'bird's eye' perspective of the year under review. He asked Members to confirm that they had received the folders containing the presentations, which were to be delivered orally.

 

Office of the Auditor-General's Briefing

Ms Jillian Bailey, Corporate Executive - Audit, reviewed the Public Finance Management Act (PFMA) audit outcomes for the financial 2008-2009, beginning with a synopsis of audit outcomes. In conjunction with the powerpoint presentation, she referred to a table of departments and entities under her care, comparing audit opinions for 2008-09 and 2007-08 and outlining the specific problems of each.

 

Five national entities, namely the Compensation Fund including the Reserve Fund, the Electronic Communications Security (Comsec), the National Youth Commission, the Public Security Industry Regulatory Authority, and the South African Local Government Association (SALGA), and one national constitutional institution, namely the Commission on Gender Equality, had received disclaimers - the worst possible outcome. This outcome arose when the Auditor-General found insufficient evidence on which to express an opinion. Of especial concern in this category was SALGA, which had deteriorated from a qualified audit opinion for the previous financial year. No national departments had received disclaimers.

 

Two national entities, namely the Compensation Commissioner for Occupational Diseases and the Property Management Trading Entity, had received adverse audit opinions - the second worst outcome. The Property Management Trading Entity had deteriorated from a financially unqualified (with other matters) opinion the previous year. The Compensation Commissioner for Occupational Diseases had received an adverse opinion for a second year. No national departments had received adverse audit opinions.

 

One national constitutional institution, namely the Public Protector, having previously received a financially unqualified (with other matters) opinion, had received a qualified opinion. Qualified opinions were received also by 12 national departments, of which two (Provincial and Local Government and Public Works) had deteriorated from a financially unqualified (with other matters) opinion. Twenty national entities, of which six, (Sheltered Employment Factories, the Agricultural Research Council, the Construction Industry Development Board, the Film and Publication Board, the International Trade Administration Commission, and the Medical Research Council of South Africa), had deteriorated from a financially unqualified (with other matters) opinion the previous year. Thus there was a total of 33 qualified opinions.

 

The national legislature had received a financially qualified opinion (with other matters). Such an opinion was received also by six national constitutional institutions, 15 national departments and 96 national entities, giving a total of 118.

 

Ms Bailey pointed out that in six cases, the Independent Communications Authority of South Africa Revenue Fund, the Companies and Intellectual Property Registration Office, the Third Party Funds (Monies in Trust), the Energy Sector Education and Training Authority, the National Home Builders Regulatory Council, and the Public Sector Education and Training Authority (PSETA), the Auditor-General had still to express an opinion: 250 departments and entities had been reported upon, out of a possible total of 256.

 

One national constitutional institution had received a financially unqualified opinion (with no other matters) - the best possible audit opinion. The same best possible audit opinion was received also by six national departments, and 84 national entities, giving a total of 91 (Page 2 of power point presentation).

 

There followed a comparison with figures for 2004-2005 (Page 3). Ms Bailey said that this gave an extremely disappointing picture in that 'the pace of change is extremely slow' and that the amount of effort required for all auditees to improve sufficiently to be placed in the best category of audit opinion was 'phenomenal'. It really needed 'concerted effort'.

 

Three key internal control elements were identified as drivers to improve audit outcomes: leadership, financial management, and governance. Good financial management required monthly reporting to enable leadership to take appropriate decisions in order to achieve good service delivery. Good governance required that there be established proper risk management processes and internal controls. An effective internal audit function was also required (Page 4).

 

Percentages were given for areas qualified in the annual financial statements of national departments and entities qualified. These figures were given under the following headings: current assets, capital assets, liabilities, revenue, and expenditure. A number of auditees had failed to give sufficient attention to capital assets. There was insufficiency in turnaround plans with regard to asset management. Continuous monitoring of the process of managing capital assets was required. There appeared to be a low level of skills in asset management units. Also there was inadequate record keeping. The risk of fraud in the public sector impacted enormously on service delivery. Key to improvement was the issues arising in the capital assets arena (Page 5).

 

Percentages were given for warning signals for national departments and entities under the headings human resources, information systems risks, non-compliance issues, and material misstatements. These were areas of highlight on which the Auditor-General wished to focus in order to reduce risk. Ms Bailey noted an insufficiency of knowledge of good human practices. Moreover, many auditees did not have human resource plans. Background checks were not performed as required. People served too long in acting positions. There was a major budget overspend in human resource areas. There was a lack of clear differentiation between the roles of those involved in information technology, such as the State Information Technology Agency, and the department concerned. Ms Bailey also gave figures for non-compliance with the Division of Revenue Act (DORA) (Page 6).

 

Percentages were given for non-compliance with the PFMA and National Treasury regulations by national departments under the headings: prevention of fruitless and wasteful expenditure, creditors not settled within 30 days, irregular expenditure not disclosed, safeguarding of assets, monthly clearance of suspense account, and reporting on various aspects. Non-compliance exposed the state to fraud and loss of assets. The Auditor-General viewed the main causes of non-compliance as insufficient supervision of day-to-day activities by all levels of management and a failure of leadership to 'set the right tone at the top' by requiring compliance with laws and regulations (Page 7).

 

The Auditor-General had together with the National Treasury begun in 2005-2006 the introduction of auditing of performance information (AOPI). Engagements with stakeholders to clarify the approach to and essence of AOPI had taken place and would continue throughout the 2009-2010 financial year. The current financial year was envisaged as a further opportunity to prepare for expressing the AOPI opinion. Areas requiring improvement were: non-compliance with regulatory requirements, usefulness of reported performance information, and reliability of performance information. Performance information pertained to service delivery of the auditee. Ms Bailey noted difficulties in tracing performance information that was reported back to source documentation. This was a further area that required dedicated attention (Page 8).

 

Mr Paul Serote, Corporate Executive - Audit, AGSA Executive Committee, briefed the Committee in more detail on the departments and entities in his portfolio. The majority of them had unfortunately received qualified audit opinions. However, he was confident that with the right leadership, the causes of these qualified audit opinions could be corrected. Some qualified opinions were the result of departments' inability to fill key positions in good time.

 

Mr Serote said that the Department of Justice and Constitutional Development's audit opinion was qualified on grounds which included departmental revenue, contingent liability and receivables for departmental revenue: lack of adequate financial control system. To a lesser extent, the Auditor-General was concerned about the lack of controls over the capturing of leave; lack of supporting documents to calculate the future lease commitment; the condoning of irregular expenditure; and significant errors relating to the completeness of the capital and minor asset register and the existence of certain capital and minor assets. The Department had, under Emphasis of Matters, incurred irregular expenditure of R69 million, mainly as a result of proper tender processes that were not followed. The Department was still in the process of investigating the matter of possible fruitless expenditure of R18 million identified as a result of the audit. Also under Emphasis of Matters was noted a restatement of corresponding figures. Under Other Matters, the Department had not complied with the Treasury Regulations (TR): not all procurement of goods and services were within the threshold values.

 

The Department of Labour had received a qualified audit opinion on account of the inability to verify the valuation, existence and completeness of capital assets valued at R110.5 million. Also Public Private Partnership (PPP) assets of R134.9 million, of which the contract was being administered by Siemens, could not be verified. Other matters included non-compliance with the PFMA, the TR, and the Skills Development Levies Act. Also under Other Matters, there were material misstatements, and concerns with performance information. There were investigations into fraudulent activities relating to unauthorised payments. Pre-determined objectives were not included in the strategic plan. There was a lack of effective, efficient and transparent systems and internal controls regarding performance management. Information was inconsistently reported.

 

The Department of Rural Development and Land Affairs had received a qualified opinion. This Department and the Department of Public Works shared a similar task, Mr Serote indicated. They shared similar qualifications, in particular with regard to tangible capital assets. The Department of Land Affairs and Rural Development had received qualification on account of the lack of supporting documentation to verify the valuation, existence and completeness of receivables for departmental revenue. As regards tangible capital assets, its asset register was not complete. It was not possible to verify the accuracy and completeness of the immovable asset register. There was lack of sufficient audit evidence to support the completeness and rights and obligations of immovable assets disclosed. There was fruitless and wasteful expenditure discussed in the annual report amounting to R4.86 million as a result of irregularities in the acquisition of land reform projects, for example, paying more than the valuation value of the property. There was irregular expenditure amounting to R76.96 million due to Parliament's not retrospectively approving expenditure incurred in contravention of the Provision of Land Assistance Act in the previous years. Under other matters, there was non-compliance with TR 8.2.3: payments had been made 30 days after receipt of invoice for R19.98 million; TR 11.2.1 had been broken by failure to collect monies held in trust on behalf of the Department.

 

The Department of Co-operative Government and Traditional Affairs (COPTA) had received a qualification on account of lack of supporting documentation to verify the accuracy and valuation of adjustments to assets, balances, and to determine the completeness of assets and the existence and value of assets. Under emphasis of matter, the following were mentioned: uncertainty with regard to the outcome of legal cases; irregular expenditure due to non-compliance with supply chain management procedures. Under other matters, the following were mentioned: non-compliance with TR - payments were not made within 30 days; material adjustments to financial statements; significant deficiencies in the design and implementation of internal controls with regard to financial and risk management and compliance with laws; prior year audit findings had not been addressed substantially; controls to ensure accuracy and completeness of performance information were not adequate. The Department was investigating irregularities with regard to the awarding of a contract and officials who did not disclose their interests in companies.

 

The Department of Public Works had deteriorated from a financially qualified (with other matters) opinion the previous year to a qualified opinion based on an incomplete asset register; the Department, however, was a member of the task team charged with improving the control of assets.

 

The Presidency had incurred a qualification that was recurring: lack of a proper assets register and a lack of supporting documentation for adjustments to opening balances and disposal of assets. Mr Serote considered that lack of supporting documentation that was easily available and provided in a timely matter was an issue of governance that need not be difficult to resolve.

 

The Department of Agriculture, Forestry and Fisheries had deteriorated from a financially unqualified (with no other matters) opinion the previous year to a financially unqualified (with other matters) in the current year. Irregular expenditure had amounted to R15.5 million due to non-compliance with Section 38(1)(j). There had been non-compliance with TR 3.2.1 as no risk assessment had been conducted. The Department had reported performance information that was not relevant. There was a lack of source documentation.

 

The Department of Human Settlements (formerly Housing) had maintained in the current year its 2007-2008 position of a financially unqualified (with other matters). Under Other Matters, it had failed to comply with the PFMA. It had been party to a loan to the value of R100 million for the N2 Gateway Project without complying with Sections 66, 70(1)(a), 338(1)(c) (ii) and 38(2). It had not complied with TR requiring payment of creditors from 30 days from receipt of invoice. Under matters of governance, again there was lack of supporting documentation that was easily available and provided to the Auditor-General in good time. There was a special audit on the process flow of the N2 Gateway Project and the achievement of goals.

 

The Department of Trade and Industry maintained its previous year's position of a financially unqualified (with other matters) audit opinion. Under Emphasis of matter, there was a restatement of corresponding figures as a result of prior period error. Under Other Matters, there was non-compliance with the Public Service Regulations on leave and the human resource plan. There was also non-compliance with the Public Service Act regarding leave. Material adjustments were made to the financial statements. There were delays in the receipt of requested financial information, and deficiencies in the design and implementation of internal control in respect of compliance with applicable laws and regulations.

 

The Department of Public Works had been highlighted as one of the departments which had moved from a financially unqualified (with other matters) to a qualified audit opinion. The context of this was that the Department of Public Works' core business was assets. The Department had been given an exemption by the National Treasury on condition that progress was shown over a period of years. Unfortunately, some of the conditions were not met. Thus a qualification had occurred.

 

The Public Protector had moved from financially unqualified (with other matters) to qualified. The useful life of its assets (property, plant and equipment) was not reviewed during the current or previous financial periods. This was a technical accounting issue. Under Emphasis of matter, there were significant uncertainties relating to operating lease payments in respect of premises used by the Office of the Public Protector (OPP). There had been a restatement of previous figures.

 

Another regression was Sheltered Employment Factories, which moved down to a qualified opinion from a financially unqualified (with no other matters) opinion the previous financial year. The qualification was based on the failure of the valuation method for the inventory to comply with accounting standards. It was not possible to determine the valuation of work in progress. There had been fruitless and wasteful expenditure in so far as cell phone costs had been paid to non-employees. Cheques had been fraudulently cashed. An investigation was underway. There was a lack of effective, efficient and transparent systems and internal controls regarding performance information.

 

At the Agricultural Research Council, which had moved from a financially qualified (with other matters) to a qualified audit opinion, the Auditor-General had objected to the clearing without supporting documentation of previous years' unreconciled debits and credits (suspense account).

 

Mr Serote reviewed the list again, to ensure that he had fully covered audit disclaimers and adverse audit opinions.

 

The Commission on Gender Equality had received a disclaimer.

 

The Property Management Trading Entity had moved down drastically from a financially unqualified (with other matters) opinion to an adverse opinion. The reason was related to the expiry of a Treasury exemption. Reporting was now required in terms of the Generally Agreed Accounting Principles (GAAP) framework.

 

The Compensation Fund had again received an audit disclaimer.

 

The National Youth Commission likewise had again received an audit disclaimer, and had struggled to produce an audit trail. However, its functions were now being transferred to the National Youth Development Agency and the National Youth Commission's functions were being wound up.

 

The South African Local Government Association (SALGA) had moved down from a qualified audit opinion to an audit disclaimer. However, it was not a very common audit circumstance. There was a limitation of scope because of the restricted access to the KwaZulu-Natal office of SALGA. This affected PPE, Provisions, Revenue, Expenditure, accounts receivable, accounts payable, bank balances, employee costs, and contingent liabilities. The matters of qualification had actually improved from 2007-2008 to 2008-2009. However, the above difficulties of access to the KZN offices made it difficult to collect enough information in order to be able to express an audit opinion. Emphasis of matters included 'technical insolvency'. There was a going concern risk due to the current liabilities' exceeding current assets and other indicators. There was significant uncertainty due to pending legal cases. There was irregular expenditure due to non-compliance with supply chain management procedures and fruitless and wasteful expenditure due to interest and penalties on late payment.

 

The Chairperson commented that he hoped Mr Serote's colleagues would have better news to report, otherwise Members would emerge from the meeting quite drained.

 

Mr Eugene Zungu, Corporate Executive - Audit, AGSA Executive Committee, briefed the Committee similarly on the departments and entities in his portfolio.

 

Of the 105 auditees in Mr Zungu's portfolio, 89 were entities. There were seven qualifications in the year under review, which was a reduction from 12. None of the qualifications in his portfolio went beyond a qualified audit opinion. There was one disclaimer and one adverse audit opinion. As regards clean audit reports - unqualified audit opinions, there had been an improvement from 43 to 53. Within his portfolio were 12 departments, only one of which, Home Affairs, received a qualified audit opinion. Eight departments received financially unqualified (with no other matters) audit opinions. Three departments, namely the former Department of Education, the National Treasury, and the Department of Public Enterprises, received financially unqualified (with no other matters) audit opinions. There were two Constitutional Institutions in the portfolio. The Financial and Fiscal Commission received a financially unqualified (with no other matters) audit opinion, while the Independent Electoral Commission, received a financially unqualified (with other matters) audit opinion. Both maintained their previous year's audit opinions.

 

The Parliament of the Republic of South Africa had maintained its previous year's audit opinion of financially unqualified (with other matters).

 

The Government Printing Works received a qualified audit opinion, an improvement from the previous year's adverse audit opinion.

 

The Driving Licence Card Account received a financially unqualified (with other matters) audit opinion, an improvement on the previous year's qualified audit opinion.

 

The Project Development Facility and the SAMDI Training Trading Account received financially unqualified (with other matters) audit opinions. The former had deteriorated from (with no other matters) the previous year. The latter had maintained its previous year's position.

 

The Equalisation Fund and the Technical Assistance Unit achieved financially unqualified (with no other matters) audit opinions. The former had maintained its position. In the case of the latter, no comparison was available for the previous year.

 

The Cross-Border Road Transport Agency and the Afrikaanse Taalmuseum again received qualified audit opinions as they had the previous year.

 

The Film and Publication Board and the Medical Research Council both received qualified audit opinions, having moved down from financially unqualified (with other matters) audit opinions in the previous year.

 

Mr Barry Wheeler, Corporate Executive - Audit, AGSA Executive Committee, briefed the Committee similarly on the departments and entities in his portfolio. He said that he was pleased with the audit reports: 17 out of 39 were unqualified with no other matters. There were also 17 unqualified but with other matters.

 

Five audit reports were qualified. The Department of Correctional Services had a long history of qualified reports. It had been qualified on asset management. There had been no reconciliation by the Department. The root causes were insufficient monitoring by senior management. The second qualification was received by the Department of Defence, although it had shown some improvement. The Department had not maintained proper asset registers as required by the National Treasury. Supporting documents could not be provided. Nearly R3 million had been paid for services rendered by consultants. The Department of Sports and Recreation also received a qualification. Boxing South Africa received a qualification for late submission.

 

Ms Alice Muller, Corporate Executive - Audit, AGSA Executive Committee, briefed the Committee similarly on the departments and entities in her portfolio. She reported four qualified opinions.

 

The Department of Health, which again had a qualified audit opinion, had, however, successfully dealt with the issue of assets, but the expenditure incurred for the usage of motor vehicles in respect of the National Fleet Public Private Partnership could not be reconciled to supporting documentation. The Department of Arts and Culture had improved from a qualified opinion to a financially unqualified (with other matters) opinion. The Pan South African Languages Board had improved from a disclaimer to a financially unqualified (with other matters) opinion. The Robben Island Museum had shown an improvement from a disclaimer to a qualified opinion.

 

Discussion

The Chairperson thanked the Auditor-General for a 'user-friendly' set of presentations. It was evident that that South Africa faced substantial challenges with regard to public resources. He observed a recurrent issue in the Auditor-General's set of presentations, namely departments and entities' failure to provide consistently the supporting documentation needed for the audit process.

 

Mr N Singh (IFP) observed that the Auditor-General had identified problems that defined the Committee's work. It was remarkable that there were so many highly-paid directors-general who did not comply with the applicable legislation and regulations and appeared to run their departments as if they were small shops. He asked how the Committee should endeavour to impress upon the Government the urgent need to take firm action against directors-general who failed to comply. Ms Bailey had spoken about a register of assets. Mr Singh asked why 15 years into the new democratic Government, South Africa still lacked an assets register. Government must know what it owned and what it did not. He asked further about exemption of assets. While the Auditor-General was not a correctional services institution, the Treasury and Auditor-General should work together to encourage compliance.

 

Ms L Mashiane (COPE) said that she had served on the Committee since 2004. She deplored the many irregularities, and fruitless and wasteful expenditure. She requested the Auditor-General to examine carefully the amounts involved. She suggested that Members take the Committee's work to a higher level and obtain the views of members of the public. She expressed concern about a news report on the state of the roads in the North West province.

 

Mr R Ainslie (ANC) thanked the Auditor-General for the presentation and noted an improvement, though, indeed, there were causes for concern. He asked what the Auditor-General expected from the accounting officers of departments and entities and from the leadership. He noted that the National Youth Commission again had had a bad report. There was need for a performance audit on it and on the Gender Commission.

 

A Member regretted the regression exhibited by some departments. She asked why they were going backwards. She also asked why there were reports outstanding, and whether this was the fault of the Auditor-General or of the departments concerned. She asked what future action should be taken.

 

Ms Bailey confirmed that there were improvements; however, she admitted that she was unable to quantify the percentage improvement, but she could prepare and forward such information subsequently. The disappointing aspect was the pace of change. With regard to the six outstanding audits, she said that Mr Wheeler had advised that two were now complete. With regard to unchanged opinions and attitudes, she asked Mr Kimi Makwetu, the Deputy Auditor-General, to take up the matter, because it related to the Auditor-General’s rethinking of current strategy to try to accelerate the pace of change. She would ask Mr Freeman Nomvalo, the Accountant-General, National Treasury, to respond to questions on chief financial officers.

 

Mr Serote pointed out that the National Youth Commission was in the process of being absorbed into the new National Youth Development Agency and was therefore being wound-up as an entity. So this would not be an issue for a performance audit unless the work concerned would be done within the new Agency. He said that there would be areas of cross-over. With regard to the Commission on Gender Equality, preparation of the financial statements had taken a considerable time. The issues had been driven by lack of the key permanent senior personnel, with the chief financial officer acting as the chief executive officer, and resignations taking place also at the level of chairperson. The Auditor-General had recently finalised the audit. However, there could be further consideration of the performance aspect. There was still an investigation pending concerning the entity’s previous audit report, which was a disclaimer. Another consideration was the new role of the entity within the new Government ministerial structures.

 

The Chairperson asked if there was a connection between the issues arising from an external audit and the conducting of a performance audit.

 

Mr Serote replied that there would be areas of cross-over. Performance information had a bearing on the credibility of financial information.

 

There was an ongoing issue with regard to Third Party Funds, which fell within the ambit of the Department of Justice and Constitutional Development, as to whether there should be a separate structure and with regard to the management system for those funds. There was not a system which, by pressing a button, could provide all the required information. So the gathering of that information was somewhat of a challenge to the Department.

 

The Chairperson pointed out that this was not a new entity. It had been audited in previous years. In its previous engagement with the Department, the Committee had gathered that there was a public-private partnership to resolve the issues. It seemed that one had regressed. He asked what had happened to the money invested in that process. He did not think that a plausible explanation had been given for why the audit had not been completed on time.

 

The Auditor-General responded that the delay was not on the part of the Auditor-General’s Office. Further information could be provided at a later stage. The audit for the State Information Technology Agency (SITA) had been finalised.

 

Mr Kimi Makwetu, the Deputy Auditor-General, spoke of his engagement at the Association of Public Accounts Committees Conference at Cape Town in 2009, and on the level of leadership. There had been commitment. 'We are in the cycle', he said. However, all could not be accomplished in one year.

 

Mr Freeman Nomvalo, the Accountant-General, National Treasury, responded to questions on chief financial officers. He referred to a task team. He had been asked to chair a meeting on the management of immoveable assets. He hoped that by the end of March or April 2010 a report would be ready.

 

Mr M Steele (DA) commented that Ms Bailey's 'high level' overview was very useful. However, he was troubled by the number of departments and entities that had, over a period of years, consistently failed to show any improvement. Such 'serial offenders' should not be rated as remaining the same but should be deemed to have performed worse.

 

Mr Steele asked Mr Wheeler if it was the nature or the extent of the problem. He asked Mr Wheeler to define 'royalties'.

 

Mr N du Toit (DA) asked if it was a catastrophe or a disaster. He asked how the Auditor-General proposed to exert pressure on the Government. On the basis of the present figures, he could not foresee any improvement in five years time. 'We are looking at a post mortem.'

 

A member called for preventive measures rather than naming and shaming. He referred to Project Consolidate.

 

Mr T Bonhomme (ANC) said that the Committee should allocate a special session to discuss the most serious problems.

 

Mr Singh asked about audits outstanding.

 

Ms Bailey explained the various categories of audit opinion which were based on international auditing standards. The worst opinion was a disclaimer. The overall results were that 289 opinions were unchanged. 43 entities were not addressed.

 

Mr Wheeler explained the use of the term royalties in respect to Boxing South Africa; in this case these were the amount paid for the use of sporting emblems; such royalties accrued to the Department of Sport and Recreation. In the case of the Trust, what was meant was revenue due to the king; these monies were referred to as 'royalty revenue'.

 

The Accountant-General referred to media monitoring and Project Consolidate. He said further that the success of any intervention depended on acceptance of assistance by the department or entity concerned. Imposed intervention seldom was effective.

 

A Member said that it was important to be proactive.

The meeting was adjourned until 14h00 when the Committee would reconvene with the Auditor-General on the Department of Correctional Services, Special Investigating Unit, Department of Defence, and Denel Annual Reports and Financial Statements for 2008/2009.