The Auditor-General had issued a disclaimer of opinion on the financial statements of the Compensation Fund for the fourth consecutive financial year. The Compensation Commissioner responded to questions from the Members of the Committee concerning the report of the Auditor-General included in the Fund’s Annual Report for the year ended March 2009. A three-year turnaround strategy had been approved by the Director-General of the Department of Labour in August 2008.
The Members of the Committee asked questions about the Auditor-General’s comments concerning the completeness and accuracy of revenue contributions from employers, the valuation and allocation of assessment debtors, the unreconciled differences in bank account reconciliations transferred to a suspense account, the failure to provide supporting documentation, the unexplained difference between the total claims approved and the general ledger, the failure to pay merit rebates to qualifying employers, the lack of creditor reconciliations, the valuation of fixed assets, plant and equipment, the lack of disclosures required in terms of International Financial Reporting Standard 7, the non-compliance with the provisions of the Public Finance Management Act, the Compensation of Occupational Injuries and Diseases Act and National Treasury Regulations, the lack of internal controls, the failure of the internal audit function, the poor functioning of the Audit Committee and the Board of the Fund, the failure to implement SCOPA resolutions and the failure to implement the recommendations of the Auditor-General for four consecutive years.
The Members asked questions about the appointment of the Chief Financial Officer, the actions taken by the management of the Fund to ensure that officials carried out their responsibilities, the training of employees in financial management and the document management system, the adequacy of the supporting IT system, the payment of bonuses to employees, the disciplinary action taken against officials for non-performance, the appointment of external consultants, the steps taken to fill the vacant positions at the Fund and the oversight role played by the Department of Labour.
Two weeks earlier, the Fund had uncovered fraudulent compensation claims totaling R24.692 million, involving eleven medical practitioners and certain employees. Criminal charges were laid against the officials and medical practitioners with the police.
The Auditor-General issued a qualified audit report on the financial statements of the Department of Labour for the year ended 31 March 2009. The Director-General, Chief Financial Officer and Deputy Director-General of the Department of Labour responded to the questions from the Members.
Members questioned the Department about the progress of investigations into fraudulent activity amounting to R900,000 and were perturbed that the suspected employees had not been suspended from their duties and were still at work. Questions were also asked about irregular expenditure of R648.6 million, which resulted from the Department’s failure to follow proper tender procedures for the training of unemployed persons. The request to National Treasury to condone the expenditure was refused and Members censored the Department for the failure to follow the rules on tendering.
The Chairperson welcomed the attendees to the meeting. The Chairperson and Members of the Portfolio Committee on Labour attended the meeting as well. The Members of the Committees and the delegates from the Department of Labour, the Compensation Fund, the Office of the Auditor-General and the National Treasury introduced themselves.
Mr Roy Ainslie (ANC) remarked that the number of delegates present at the meeting far exceeded the number of representatives invited by the Committee. He doubted that the contribution of some of the delegates would add value to the proceedings and felt that the additional expense incurred could not be justified.
The Chairperson supported Mr Ainslie’s comment and requested that the number of delegates to Parliamentary meetings was restricted in future.
Hearing on the 2008/09 Annual Reports and Financial Statements of the Compensation Fund (CF)
Ms Faith Muthambi (ANC) referred to the Auditor-General’s report on the 2008/09 financial statements of the Fund (see page 44 of the Annual Report of the Compensation Fund for the year ended 31 March 2009). The Auditor-General was unable to express an opinion on the financial statements of the Fund for the 2005/06, 2006/07, 2007/08 and 2008/09 financial years. The basis for the Auditor-General’s disclaimer of opinion was the same for four consecutive years and indicated a clear case of financial misconduct. She understood that an action plan had been developed by the CF to address the issues raised in the Auditor-General’s report. She wanted to know what action was taken to address the comments concerning the completeness and accuracy of revenue contributions totaling R4.5 billion (point 4 a)), the valuation of assessment debtors totaling R4.1 billion (point 4 b)), the valuation and allocation of assessment debtors with credit balances totaling R183.5 million (point 4 c)) and the unavailability of supporting documents.
Mr Jimmy Manyi, Director-General, Department of Labour, confirmed that a three-year turnaround plan for the Fund had been approved and implemented with effect from August 2008.
Mr Shadrack Mkhonto, Compensation Commissioner, CF, said that the opinions expressed by the Auditor-General did not reflect the current status of affairs at the Fund. He was able to provide the reasons for the recurrence of the issues raised by the Auditor-General and what measures were put in place to address the issues.
The Chairperson asked when Mr Mkhonto was appointed to the position of Compensation Commissioner.
Mr Mkhonto replied that he took office on 1 July 2007.
The Chairperson observed that the comments contained in the Auditor-General’s report on page 44 of the Annual Report indicated that the situation had deteriorated rather than improved.
Mr Mkhonto replied that the three major reasons for the adverse comments were the manner in which the Fund did the assessments, the lack of skills capacity and problems with the supporting information technology (IT) system.
The Chairperson said that the explanation would have been given to the Auditor-General, who nonetheless had issued a qualified audit report. He requested that the response from Mr Mkhonto was focused on the action that had been taken by the Fund to address the issues raised by the Auditor-General.
Mr Mkhonto replied that the turnaround plan was developed immediately after receipt of the Auditor-General’s report for the 2007/08 financial year and had been accepted by the Audit Committee.
The Chairperson observed that the comments of the Auditor-General dated from previous financial years but no strategy had been developed prior to 2008.
Mr Mkhonto replied that he found no action plan in place when he took office in 2007. He commissioned an investigation into the matter and consequently dismissed the incumbent Chief Financial Officer (CFO). He was unable to immediately replace the CFO and a further eight members of the financial staff complement left the organisation by accepting employee severance packages. Approval for a new organisational structure was given by the Minister of Labour in August 2008 and recruitment for the vacant positions commenced in April 2009. A new CFO was appointed in October 2009. The appointment of personnel to the vacancies in the finance department of the Fund was completed in January 2010.
Ms Mavis Matladi (UCDP) noted that according to the records, the CFO was appointed in September 2009 but Mr Mkhonto had said that she was appointed in October 2009. An acting CFO appeared to have been appointed in the interim.
Mr Mkhonto explained that the new CFO was appointed in September 2009 but only took up her post on 1 October 2009 as she had to complete her duties as the CFO of the National Skills Fund. Prior to her appointment, Mr Pitsi Moloto (Executive Manager: Financial Reporting) was the Acting CFO of the Fund.
Ms Muthambi referred to the Auditor-General’s comment concerning an amount totaling R86,4 million in unreconciled differences from the compensation and pensions bank reconciliations that was transferred to a suspense account (see point 5 of the Auditor-General’s report). She said that the reconciliation of accounts was a normal function of a financial officer but it was apparent that the responsible person had failed to carry out his/her duties. She wanted to know what steps were taken to ensure that officials carried out their responsibilities. She said that this was an issue of management and the exercising proper financial controls and noted that the Annual Report included the statement that personnel had attended management and financial training programmes. She asked for details of the training and who had attended the courses.
Mr Mkhonto replied that Mr Moloto was appointed the Acting CFO with effect from 1 May 2009. Prior to that date, the Fund did not have the required skills capacity and the assistants employed did not have the necessary skills to carry out the functions. A lengthy process had to be followed before the department could be adequately staffed. He carried out a check on the reconciliation of the accounts and instructed the supervisors to ensure that the matter was dealt with. He was able to report that currently the accounts were reconciled on a monthly basis and to date, a total of R68 million in the suspense account had been identified and allocated. He expected the remaining R18 million to be cleared by the end of March 2010. The progress made had been reported to the Auditor-General.
Ms Muthambi asked what progress had been made with the provision of supporting documents and with the scanning of documents.
Mr Mkhonto replied that the system for the scanning of documents had been upgraded and there had been an improvement in the number of documents scanned. However, during December 2009 and January 2010, there was a problem with broken scanners but the equipment had been repaired and the volume of scanned documents had increased. The Fund had approached retired employees to return and assist with the scanning and filing of documents. He believed that the problem was not the actual scanning of the documents but the correct indexing and filing of the scanned images. The Fund suffered from a lack of skills in this respect.
The Chairperson asked if special skills were required for the indexing and filing of the scanned documents.
Mr Ainslie referred to a table in the Commissioner’s report detailing the number of people trained in a variety of skills. He asked why training in the filing and indexing of documents was not listed in the table if the tasks were so technical and difficult. If filing was an essential area of competence, it should have been listed in the training programme. The failure to provide documentation was one of the fundamental areas of mismanagement identified.
Mr Mkhonto agreed that the scanning, indexing and filing of documents was an area where skills were required. He had been given the assurance that measures had been taken to ensure that adequate training took place. The Fund was currently employing an additional 24 employees to deal with the task.
Ms Muthambi remarked that all the Members agreed with her that all was not well at the Fund. She said that specific functions were required of an employee in a particular position but it would appear that employees were allowed to continue to fail in the carrying out of their duties. The same problems were reported by the Auditor-General for four successive years and the situation was getting worse rather than improving.
Mr Mkhonto replied that the Fund did have a performance management system in place as required for a public service entity. The performance of the employees was reviewed on an annual basis.
The Chairperson pointed out that the excuse of a lack of skills was being used but this would not have been the case if a performance management system was effectively applied. If a person was employed to do filing, the lack of skills to file should have been identified and corrected.
Mr Mkhonto explained that the indexing and filing of documents required someone with a thorough understanding of the operations of the Compensation Fund.
The Chairperson asked how the employees were appointed to the position if they lacked the necessary skills for the task.
Mr Mkhonto replied that the Fund needed more skilled people as the current number of employees was not sufficient to deal with the workload. For that reason, the Fund attempted to re-employ previous employees to assist with the task.
The Chairperson observed that the Fund’s problem was both a lack of skills and insufficient numbers. He reiterated his earlier question about how the employees were appointed without the necessary skills.
Ms Lorraine Mashiane (COPE) asked if new employees were not subjected to an induction programme to familiarise them with the tasks that had to be performed.
Mr Mark Steele (DA) referred to point 6 of the Auditor-General’s report on page 45 of the Annual Report. The comment indicated that the documents were scanned on to the Fund’s electronic document management system. He asked if the system was working and if there was anyone at the Fund with the skills to operate the system.
Mr Mkhonto explained that the skills to correctly identify the type of scanned document in order to allocate it were lacking in the organisation. He had mentioned in his report that the current IT systems were inadequate to support the organisation.
Ms Matladi remarked on the mention made of absenteeism in the Annual Report and the acceptance of the poor quality of work from employees in spite of a performance management system being in place.
Mr Ian Ollis (DA, Member of the Portfolio Committee on Labour) said that the Portfolio Committee on Labour were given an undertaking from the Fund that the existing nonfunctional IT system provided by Siemens would be replaced by a new system that was working. He asked if the new system had been installed and implemented and if the system was functioning. The IT system was the backbone of the CF and problems were experienced with providing responses to queries that the system was supposed to provide.
Mr Manyi conceded that the skills issue was a major challenge. He said that the skills of employees did not keep up with the increased sophistication of the IT system.
The Chairperson pointed out that the processing of claim documents was the fundamental purpose of the Fund. Employees lacking the necessary skills to carry out their duties needed relevant training.
Mr Mkhonto explained that the new IT system was found to be incompatible with the existing platform of the CS. The problems with the interface between the new system and the existing platform had been resolved and improved performance levels could be expected in the near future.
The Chairperson asked who had received bonuses at the Fund.
Mr Mkhonto advised that neither he nor any of the senior executives received a bonus.
The Chairperson asked what disciplinary actions had been taken against non-performing employees.
Mr Mkhonto replied that he had no knowledge of any disciplinary action that had been taken.
Ms Muthambi said that the problems at the Fund resulted from the failure of management to carry out their responsibilities. Management was responsible for disciplining non-performing employees. The claims processed by the Fund affected the lives of people and it was unacceptable that no remedial action was taken when employees failed to carry out their responsibilities. She wanted to see what was included in the Fund’s turnaround strategy.
Mr Mkhonto denied that no disciplinary action was taken against non-performing employees. In his first three months in office, he suspended and dismissed several non-performing officials.
Ms Muthambi called a point of order and requested that Mr Mkhonto responded to her questions.
The Chairperson said that questions concerning the disciplining of officials had been raised. The responses had revolved around the weaknesses in the system. The operations of the Fund were not in line with policy and the decisions that had been taken.
Ms Alina Rantsolase (ANC, Member of the Portfolio Committee on Labour) felt that a clear answer had not been received from the Commissioner on why the Fund had failed to correct the problems identified in the audit reports since he took office three years ago. It was unacceptable that the recommendations of the Auditor-General had not been implemented for four consecutive years.
Mr Steele reported that the Fund’s new IT system had been implemented the previous week. He referred to the Auditor-General’s report concerning the Fund’s document management system (see point 6 of the Auditor-General’s report). Most of the documents processed by the Fund related to medical claims, which needed to undergo a process of certification. Any weakness in the document management system increased the potential for fraud and corruption. The Auditor-General had reported an unexplained difference of R81.6 million between the total claims approved as per the claims system and the general ledger. The potential for fraud was apparent and he wanted to know if the Fund’s systems had been subjected to any forensic investigation to ensure that the potential for fraud and corruption was eliminated.
Mr Mkhonto advised that the Fund had a full management team since August 2009. The team had had tremendous success in identifying instances of fraud and corruption. An amount of R24.692 million in fraudulent payments had been reported. Eleven medical practitioners had been involved in the fraudulent activity and the matter was referred to the South African Police Service (SAPS) two weeks previously for criminal prosecution.
Ms Matladi referred to the statement made by the Commissioner that no bonuses had been paid. She referred Mr Mkhonto to the item reported on page 75 of the Annual Report. Under “working capital changes”, an amount of R382,000 as an increase in accruals for accumulated leave and service bonus was reflected. She requested an explanation of the item.
Mr Mkhonto advised that no performance bonuses were paid as it was felt that the poor performance of the officials did not merit such a bonus. The item in the financial statements referred to the accumulated leave and service entitlements payable to employees on cessation of their employment at the Fund.
Mr Mandlenkosi Mbili (ANC) asked what the target date was for the completion of the turnaround strategy.
Mr Mkhonto explained that the turnaround strategy was currently at the end of year one. He anticipated that most, if not all the corrections would be completed by the following year (i.e. 2011).
Mr Mbili asked if the Fund would again receive a qualified audit report from the Auditor-General for the current financial year.
Mr Mkhonto thought that the report from the Auditor-General would be different from the reports for the previous years as he had committed more resources to addressing the issues raised.
Mr Mbili repeated his question and insisted on an unambiguous reply from the Commissioner.
Mr Mkhonto admitted that the report from the Auditor-General would include qualifications as some areas for improvement would remain. The Fund would not receive an unqualified audit report but the qualifications would differ from the previous report. A number of areas were being addressed, such as the sources of revenue, fixed assets and bank reconciliations.
Mr Piet Pretorius (DA) asked if any members of staff were involved in the R24.692 million fraud that was uncovered at the Fund.
Mr Mkhonto admitted that employees of the Fund were involved in the fraudulent activity and had been arrested. Certain of the medical practitioners concerned had implicated the employees in the statements that were made. The medical practitioners involved were reported to the Medical Council for further disciplinary action.
Mr Narend Singh (IFP) remarked that the CF serviced people who were vulnerable and in distress. The Members of the Committee were extremely concerned when they were briefed by the Auditor-General on the disclaimer of opinion. The Fund relied entirely on funds collected from taxpayers and businesses. On page 5 of the Annual Report, the Commissioner reported that an amount of R4.5 billion was raised during the financial year. He asked if businesses would continue to be “fleeced” by the poor management of the Fund. He referred to page 45 of the Annual Report. Point 7 of the Auditor-General’s comments referred to accounts payable. The Auditor-General was unable to obtain creditor reconciliations totaling R89.6 million. He wondered how this situation occurred when there were so many officials present at the meeting and requested an explanation. He asked what oversight was carried out by the Department of Labour over the Fund.
Mr Mkhonto admitted that the creditor reconciliations and listings was a challenge but the Fund had taken steps to address the problems experienced and was currently producing monthly creditor receipts, doing monthly reconciliations, producing an age analysis and following up and clearing outstanding creditor balances. The Fund intended to make use of actuaries to calculate the interest accumulated on the unclaimed funds.
Mr Singh asked if the Fund had accounted for the R89.6 million and if the accounts had been submitted to the Auditor-General.
Mr Mkhonto advised that the creditor accounts were currently in the process of being audited and would be forwarded to the Auditor-General as soon as the process had been completed.
Mr Singh asked if the amount involved would be increased in the following financial year as the Fund was still in the process of dealing with the creditor balances of the previous year.
Mr Mkhonto pointed out that the Auditor-General’s comment referred to the documentation that had to be provided. The challenge for the Fund was that it did not satisfy the Auditor-General with regard to the documentation that needed to be provided but steps had been taken to rectify the matter.
Ms Matladi remarked that the person responsible for the Fund should be monitoring the operations of the Fund and internal controls should be in place that would indicate that there was a problem long before the Auditor-General found it. She asked what the management team was doing if the Fund waited for the Auditor-General’s report to find out what was wrong.
Mr Mkhonto replied that that the full management complement was only recently appointed and additional resources were brought in to clear up the problem areas indicated by the Auditor-General. He took full responsibility for the situation but had to follow a laborious process to capacitate the organisation.
Mr Singh awaited the next report from the Auditor-General to ascertain if the issue concerning the creditor accounts had been resolved. He suggested that the Department of Labour considered outsourcing the management of the Fund as it was in a mess. He referred to the inability of the Auditor-General to verify the completeness, accuracy and valuation of property, plant and equipment totaling R127 million (see point 8 of the Auditor-General’s report). He asked for an explanation of the Fund’s failure to provide adequate records on its assets.
Mr Mkhonto replied that the Fund did not have sufficient financial management capacity at the time. The issue here was the Fund’s failure to comply with accounting standards. He explained that some assets were not revalued when a valuation of the assets of the Fund was done. The employees of the Fund did not have a good understanding of the disclosure requirements. This aspect had now been addressed.
Mr Singh asked what interim measures had been put in place to ensure that the same problems would not occur in the future.
Mr Mkhonto replied that a verification of the assets had been done and a disposal committee had been appointed to deal with the disposal of assets. The Fund’s assets were revalued in accordance with the applicable international accounting standard and he was confident that the Fund will comply with the requirements by the end of the current financial year.
Mr Singh noted that the Fund had engaged consultants. He wanted to know what the brief was for the consultants, how many consultants had been appointed and at what cost.
Mr Mkhonto advised that the external consultants were appointed to assist the Fund in building the capacity of the financial team, to address the issues identified by the Auditor-General, to assist the management of the Fund and to provide training to the new employees. KPMG was one of the management consulting firms appointed. Other consultants were appointed to assist the Fund to build up an internal audit capability and to comply with the Public Finance Management Act (PFMA). A Chef Internal Audit Officer had been appointed and clearance was awaited for the incumbent to take up his post. Another team of consultants was appointed to assist the Fund with the organisational register, to conduct a skills audit, to determine if the employees fit the skills profiles and to benchmark the Fund against other organisations. He expected that the services of the external consultants would not be required after a period of three years.
Ms Lumka Yengeni (ANC, Chairperson of the Portfolio Committee on Labour) suggested that the questions from the Members were focused on the turnaround strategy in order to ascertain whether or not the strategy would be successful.
Mr Singh requested that details of the brief and the cost of the consultants appointed by the Fund were provided to the Committee.
The Chairperson requested that the information was provided to the Committee by Friday, 19 February 2010.
Mr Mkhonto agreed to make the information concerning the consultants available.
Mr Singh referred to the Auditor-General’s comments concerning the disclosures not made as required by the International Financial Reporting Standard 7 (IFRS 7) (see point 9 of the Auditor-General’s report). He asked for comment from the Commissioner on the matter.
Mr Mkhonto advised that the Fund had developed a template that would assist with satisfying the requirements of IFRS 7 and said that the matter had been addressed.
Mr Ainslie noted that in addition to the six disclaimer items, the Auditor-General commented on non-compliance with applicable legislation (see point 12 on page 46 of the Annual Report). In particular, the Auditor-General commented on non-compliance with Section 51 (a) of the PFMA. (The printed reference to Section 53 (1) (a) is incorrect). The relevant section in the Act dealt with the general responsibilities of the accounting authority of the institution and noncompliance was a very serious matter. He wanted to know if the Director-General of the Department of Labour, the Commissioner or the Board was the designated accounting authority of the Fund.
Mr Mkhonto advised that the Director-General was the designated accounting authority and the responsibility had been delegated to him as the Commissioner of the Fund.
Mr Ainslie referred to Section 83 of the PFMA, which stated that the accounting authority was guilty of financial misconduct if the provisions of Section 51 were not adhered to. He pointed out that every member of the Board was individually liable for financial misconduct as well. The Auditor-General’s report included several items of serious financial misconduct. He referred to the schedule of attendance at Board meetings on page 10 of the Annual Report. Several of the members of the Board had failed to attend Board meetings. He asked who was responsible for appointing the Board. He said that the Board did not appear to function very well and suggested that the members appeared before the Committee as well.
Mr Mkhonto advised that the members of the Board were appointed by the Minister of Labour in terms of the Compensation for Occupational Injuries and Diseases Act (the COID Act). The Board acted in an advisory capacity to the Minister.
Mr Ainslie stated that the Committee would have to consider making a recommendation to the Minister concerning the Board. He referred to point 13 of the Auditor-General’s report concerning compliance with Section 83 (5) of the COID Act. He understood that the provision made allowance for employers to qualify for a merit rebate if less than two accidents had occurred at the workplace. He wanted to know how employers qualified for the merit rebate.
Mr Mkhonto explained that the COID Act made provision for a merit rebate to be paid to employers with a demonstrated good track record in managing the health and safety of the workplace. The Director-General might identify such employers and encourage the continued good practices by paying a merit rebate should the resources of the Fund allow. Although the rebates had been paid in the past, he was unable to find the applicable policy document. A policy had now been determined and had been approved by the Director-General.
Mr Ainslie asked for confirmation that provision had been made for a merit rebate that was payable to employers but the Fund did not know what the requirements for qualification for the rebate were.
Mr Mkhonto confirmed that the rebates were paid in the past but he had been unable to find the policy document on the matter.
Mr Ainslie asked on what basis were the rebates paid in the past.
Mr Mkhonto replied that the rebates had not been paid since he took office.
Mr Ainslie asked what the policy was concerning the payment of merit rebates.
Mkhonto explained that an employer qualified for the rebate if there had been no accident in the workplace for a period of three years. The Fund had identified some employers who qualified for the rebate and determined that a total amount of R534 million was due to be paid to the employers in due course.
Mr Ainslie noted that the amount reported by the Auditor-General was R578.7 million.
The Chairperson noted that the R578.7 million had been set aside in the 2006 and 2007 financial years but had not been paid out. He wanted to know why the rebates had not been paid out.
Mr Mkhonto replied that the provision made amounted to R578 million but the actual amount due was determined to be R534 million. He gave the assurance that the rebates will be paid to the employers concerned.
Ms Matladi felt that the reasons provided for the non-payment of the rebates were inadequate.
The Chairperson understood that a provisional amount was set aside and that the process of identifying who qualified for the rebates was only recently completed.
Mr Ainslie referred to point 14 of the Auditor-General’s report that stated that Section 31.1.1 of the National Treasury Regulations was not complied with. The regulation required that bank accounts had to be reconciled on a weekly basis.
Mr Mkhonto advised that the matter had been addressed and bank accounts were now reconciled on a weekly basis.
Mr Ainslie asked who the official was that would be responsible for the review of the bank account reconciliations.
Mr Mkhonto advised that the CFO would be responsible.
Ms Mashiane referred to the schedule of attendance at Audit Committee meetings on page 12 of the Annual Report. There were supposed to be six members of the Audit Committee but only four persons were appointed, with a fifth member appointed in December 2008. Only two persons attended the meetings on a regular basis, which meant that the Committee did not have a quorum at any of the meetings that were held and would have been unable to take any decisions. She asked what the policy was concerning the Audit Committee and how the absenteeism of the members affected the functioning of the committee.
Mr Mkhonto confirmed that only four persons were appointed to the Audit Committee. Two of the members had asked to be relieved of their duties. He considered the Audit Committee to have been one of the most effective committees he had worked with.
The Chairperson understood that the Audit Committee was responsible for identifying the problems but that the necessary corrective action was not taken by the management of the Fund.
Ms Mashiane was adamant that the Audit Committee was not functional as there were only two members present at the meetings.
The Chairperson understood that the Fund currently had a functional Audit Committee.
Ms Mashiane referred to point 16 of the Auditor-General’s report, which dealt with the deficiencies in internal controls. She wanted to know why no records were kept when money was paid out by the Fund.
The Chairperson asked if the Auditor-General’s comment referred to the problems with filing discussed earlier in the meeting or if there was another reason.
Mr Mkhonto replied that he had lost several employees, who had elected to take the severance packages offered but currently had a fully functional financial unit and had commenced the process of addressing the comments made by the Auditor-General. He said that no accounting policies were in place when he took office and that he had to start from scratch. He was confident that a functional financial unit was currently in place.
Ms Mashiane expected that the Committee would have to deal with the same problems at the Fund during the following year as the turnaround strategy would not have been fully implemented by the end of the current financial year. She referred to the terms of reference of the Audit Committee stated on page 11 of the Annual Report and asked if the committee was in fact carrying out its responsibilities.
Mr Mkhonto believed that the Audit Committee was currently carrying out its responsibilities and pointed out that the committee was independent.
Mr Steele called a point of order and suggested that the Commissioner considered his reply very carefully. He referred to the Auditor-General’s report on page 48 of the Annual Report, which listed three items where the Audit Committee had failed in carrying out its duties.
The Chairperson asked if the Commissioner had discussed the findings concerning the Audit Committee with the Auditor-General.
Mr Mkhonto replied that he did not dispute the findings but his experience with the committee was that the members did in fact carry out their oversight responsibilities.
The Chairperson accepted that the members of the Audit Committee were doing their best but felt that their best was not good enough.
Mr Ainslie asked on what the turnaround strategy was based. Referring to page 49 of the Annual Report, he pointed out that the Auditor-General had found the internal audit function to be completely ineffective. An ineffective internal audit function would not have provided accurate information on which a turnaround strategy could be based. He wanted to know what the basis for the turnaround strategy was if the Fund did not have an effective Board, Audit Committee and internal audit function and requested that the Commissioner’s response was provided to the Committee in writing.
Mr Pretorius noted that the Audit Committee had a quorum at only four of the ten meetings held and wanted to know if the members of the committee were paid for attending the meetings.
Ms Rantsolase disagreed with the Commissioner’s statement that the Audit Committee was functional as the Auditor-General clearly disagreed.
The Chairperson stated that the findings of the Auditor-General were not in dispute and were accepted by the Committee.
Ms Matladi referred to the Auditor-General’s findings on page 49 of the Annual Report and asked why the Fund had failed to substantially address the audit findings from the previous year and had failed to implement the resolutions passed by SCOPA.
Mr M Malale (ANC) referred to the statement of the Chairperson of the Audit Committee on page 14 of the Annual Report that the committee was not satisfied with the content and quality of the monthly and quarterly reports prepared and issued by the accounting authority of the Fund. He asked what measures had been put in place to improve the quality of the reports.
Mr Ainslie said that the failure to comply with Section 38 was a serious transgression by the accounting authority of the Fund. It was clear that the Audit Committee was not functioning. He stated that the Commissioner had failed in his responsibility to ensure that the committee was functional.
Mr Mkhonto conceded that the quality of the financial statements that were issued had not been satisfactory. He had considered the comment made by the Chairperson of the Audit Committee and gave the assurance that he will attend to the matter of the quality of the reports from the accounting authority. He undertook to monitor the attendance of the members of the Audit Committee at meetings. He conceded that the Fund was not compliant with the requirement concerning the SCOPA resolutions at the time of the audit. He said that there had been attempts to implement the resolutions and undertook to provide the Committee with an updated report.
The Chairperson awaited the written responses from the Fund. He thanked the Commissioner for his participation and noted his commitment to address the issues raised in the Fund’s Annual Report. The Commissioner was responsible for ensuring that the Fund was compliant with audit requirements and that all the employees carried out their responsibilities and implemented the policies of the entity. He expected the Commissioner to show strong leadership and to ensure that the Fund operated correctly. Any person implicated in fraudulent activity must be subjected to firm measures. He pointed out that the claimants for compensation from the Fund were already vulnerable and in distress and were doubly punished if they were failed by the Fund as well. He wished the Commissioner success and hoped to see a significant improvement in the operation of the Fund during the following year.
Hearing on the 2008/09 Annual Reports and Financial Statements of the Department of Labour (DOL)
Ms Thapelo Chiloane (ANC) referred to the report of the Auditor-General on page 80 of the Annual Report. The basis for the Auditor-General’s qualified opinion was the problems concerning capital assets and public/private partnership (PPP) assets. The same audit opinion appeared in the audit reports for the previous four financial years. She wanted to know what the root causes were for the long-standing problems at the Department with the management of assets and what was being done to correct the situation.
Mr Manyi replied that the problem was caused by the absence of a dedicated asset management unit. The unit had now been established and the necessary employees had been appointed.
The Chairperson observed that the asset management unit were established in March 2008 and had therefore had a whole year in which to address the Auditor-General’s finding in the previous audit report.
Mr Manyi replied that the asset management unit was established at the Department’s head office but there was a problem at the provincial offices as well.
The Chairperson asked if the establishment of the units had been completed or if the process was still underway nearly two years later.
Mr Manyi replied that the appointments had been made but the Department was waiting for the vetting process to be completed before the units can begin operating.
Mr Steele asked if the report from the Auditor-General was correct in the statement that the asset management unit was established in March 2008.
Mr Manyi replied that the units were in fact established in March 2009.
Ms M Nkau, Office of the Auditor-General, advised that according to her records, the head of the asset management unit was appointed in March 2008. The Office of the Auditor-General was aware that the number of employees in the unit had since been increased.
Mr Manyi confirmed that although the head of the unit was appointed in 2008, the unit was only staffed in March 2009.
The Chairperson remarked that it took an entire year to establish the unit.
Mr Manyi reported that the unit had completed the process of implementing an asset control system, classifying the assets and compiling an asset register. The reconciliation of the asset management systems had been a challenge and it had been necessary to train the personnel to ensure that the details of the assets were correctly captured on the system. All assets were allocated a unique identity number and were bar-coded. Log-in systems were implemented at the Department’s head office and provincial offices. He was confident that all the concerns raised by the Auditor-General concerning the assets had been addressed and he was able to provide the Committee with a detailed list of all the action that had been taken by the Department.
Ms Chiloane stated that the report tabled by the Committee to Parliament on 11 March 2008 had included the same information from the Department as was provided at the meeting. The Director-General had said that the unit was established in March 2009 and she wanted to know if the process was a continuance of an existing action plan or if a new plan had been put in place.
Mr Manyi explained that there were more than 175 operating units in the Department. The asset management unit had been put in place at the head office but it had since been established that additional units had to be established at the provincial offices as well.
The Chairperson noted that the information provided by Mr Manyi was included in the report from the Department to the Committee on 28 October 2009.
Ms Chiloane referred to point 7 of the Auditor-General’s report. The Auditor-General had found that certain assets on the asset register were included at incorrect values, the asset register was not adequately maintained in accordance with the requirements of the National Treasury regulations and the reconciliation of the prior year balance of R106 million with the asset registers for 2007 and 2008 was outstanding.
Mr Manyi confirmed that the assets had now been included in the asset register at the correct values.
Mr B Maduma, Chief Financial Officer, DOL, explained that the reconciliation of the previous year’s balances could not be done unless the assets had been correctly classified. The Department would have to produce reconciliations for the previous years and would not merely post a correction entry.
Ms Nkau confirmed that Mr Maduma was correct.
Ms Chiloane referred to the Auditor-General’s comment on page 81 of the Annual Report concerning the inability to verify the valuation, existence, completeness, rights and obligations of the property, plant and equipment amounting to R110.5 million. She asked the Department to comment on this matter.
Mr Maduma explained that the amount concerned referred to the value of the Department’s assets as at March 2009. The value of the assets would be verifiable once the reconciliation to the previous years’ balances of R123 million in 2007 and R106 million in 2008 had been done.
Ms Chiloane asked the Department to explain the Auditor-General’s comment that sufficient and appropriate audit evidence for the adjustments of R14 million made to the prior year’s PPP asset closing balance were unavailable.
Mr Maduma explained that the PPP assets referred to the assets under the control of the Department’s IT partner. The Department had experienced difficulty in the past with verifying the IT assets and reconciling the PPP asset register. The Department was working with the PPP to resolve the matter.
Ms Chiloane referred to a report submitted by the Department in 2009. The report included an action plan and stated that the verification of the PPP assets had been completed. The responsible official was given as the CFO of the DOL. She asked the Department to explain the discrepancy between the statement made in the report that the matter had been finalised and the statement made by the CFO in the meeting indicating that the matter was a work in progress.
Mr Manyi confirmed that the Department was overall responsible for the asset management of the PPP. The Department was currently engaged in addressing the matter.
Ms Matladi said that the Department should not state in a report that a task had been completed when it was not. The information provided during the meeting contradicted the information provided in an earlier report.
Mr Manyi confirmed that the issues raised by the Auditor-General had been attended to and had been completed. The assets at the PPP have been classified as required by the Auditor-General.
Ms Matladi asked if the PPP assets amounting to R134.9 million could be accounted for.
Mr Maduma replied in the affirmative and had the necessary documentary evidence available.
Mr Manyi offered to provide the documentary evidence to the Committee but the Chairperson suggested that the records were submitted to the Auditor-General.
Ms Chiloane said that the Committee would be unable to establish whether or not the required corrections had been carried out as the actions taken by the Department were still work in progress and would not be completed before the end of the current financial year.
Ms Mashiane established that the Director-General took office in September 2009. She referred to the report of the Audit Committee on page 77 of the Annual Report. The Chairperson of the Audit Committee had stated that the system of internal control at the DOL was not entirely effective during the year. She asked what the reasons were for the comment.
Mr Manyi explained that the comment referred to the high vacancy rate for officials in the financial section of the DOL. The Auditor-General had recommended that the vacant positions were filled as soon as possible. Although the vacancies were filled, most of the officials appointed soon left the Department for better-paid positions in other Government Departments. Three of the DOL’s internal auditors were transferred to the Department of Higher Education. The lack of capacity and the budgetary restraints were the reasons for the audit comments.
Mr Singh asked if the employees had left the Department for higher positions or if other Departments paid better salaries for the same position.
Mr Manyi advised that the employees were offered higher salaries for the same position.
Ms Mashiane agreed that poaching amongst Government Departments was an ongoing problem. She recalled that the Committee was advised that there were no problems with internal audit effectiveness and capacity in 2007 and 2008 and the problem appeared to have arisen only in 2009.
Mr Manyi replied that the internal audit function suffered from the same problem of a lack of capacity. The Department was focusing on capacitating the function and worked closely with the internal auditors to ensure that problem areas were uncovered and corrected timeously.
Ms Mashiane asked if the Department experienced similar problems with IT and systems auditors.
Mr Manyi replied in the affirmative. Obtaining sufficient IT and systems auditors was especially challenging.
Mr Malale asked if the Department paid better salaries in an attempt to retain internal auditors.
Mr Manyi replied that the Department had improved salaries as well as implemented various motivational measures in an attempt to retain staff with scarce skills.
Mr Malale asked how many internal auditors were employed by the DOL.
Mr Manyi advised that five internal auditors were currently employed. The number was eight but three were deployed to the new Department of Higher Education.
Ms Mashiane referred to page 86 of the Annual Report. Point 18 under the Auditor-General’s report mentioned the investigations conducted by the Department into fraudulent activities. She asked what progress had been made with the investigations and when a conclusion could be expected.
Mr Maduma advised that two fraudulent transactions involving the supplier accounts were uncovered. The amount involved was R900,000. A forensic investigation was done and a report had been received. The Department’s security department was currently formulating charges against the employees concerned. Both criminal charges and internal disciplinary charges would be laid.
Ms Mashiane asked if the employees had been vetted before they were employed.
Mr Manyi did not have the information at hand.
Ms Mashiane asked when the investigation was completed. She was concerned that the suspected employees were still at work.
Mr Manyi explained that the Department had to ensure that the necessary evidence was acquired before taking action against the employees. He gave the assurance that the Department was proceeding without undue delay on the matter.
Ms Mashiane asked how long the case had been going on.
Mr Manyi said that the matter arose during his very first meeting at the Department (i.e. in September 2009). The matter had been referred to SAPS for further criminal investigation.
Ms Muthambi pointed out that the Department did not have to wait for the police to lay criminal charges before instituting disciplinary action against the employees. If the employees remained at work, the opportunity for further fraudulent activity was increased.
Mr Ainslie advised that all the Government entities were requested by the Committee to provide regular, comprehensive reports on all disciplinary action that were taken.
Mr Malale said that information was required on the internal disciplinary case and the criminal charges laid by the police were a different issue.
The Chairperson reiterated that an internal disciplinary action was not subject to a criminal police matter. Disciplinary action against employees must not be delayed for that reason.
Mr Manyi gave the assurance that the Department was not averse to implementing disciplinary measures against employees. However, the Department needed to ensure that sufficient evidence was obtained as staff brought their own lawyers to disciplinary hearings.
The Chairperson asked if the investigation had been concluded.
Mr Maduma replied that the forensic investigation had been completed but the investigation linking surveillance records with the forensics were still under way.
Ms Mashiane asked if the employees were still at work. She said that the Department was laying itself open for further instances of fraud as the suspected employees continued to have the opportunity to teach other staff members and to intimidate potential witnesses.
Mr Manyi confirmed that the suspected employees were still at work.
Ms Mashiane strongly advised Mr Manyi to suspend the employees concerned immediately upon his return to the office in order to minimise the potential for further fraud.
Ms M Mangena (ANC) asked if the employees identified were the main perpetrators of the fraud or if they were the small fry acting on the orders of someone else.
Mr Malale suggested that the employees were suspended without delay as there was sufficient evidence from the forensic investigate to justify immediate disciplinary action.
Ms Mashiane referred to the Auditor-General’s comment concerning the lack of effective, efficient and transparent systems and internal controls on performance management (see point 25 on page 87 of the Annual Report). She asked for a response to the comment made.
Mr Manyi admitted that the audit finding was justified. He gave the assurance that the matter had been attended to and was confident of a clean audit report in this regard for the following year.
Mr Ainslie referred to the report of the Audit Committee on page 77 of the Annual Report. He suggested that future attendance reports were presented in a table similar to that provided in the Annual Report of the Compensation Fund. He noted that the Audit Committee reported being entirely satisfied with the content and quality of the reports from the accounting officer yet the Auditor-General had issued a qualified opinion. He asked if the reports included the progress made on the issues raised by the Auditor-General, i.e. the asset register, internal control function and key governmental responsibilities.
Ms Matladi asked if the Chairperson of the Department’s Audit Committee was the same person who was the Chairperson of the Compensation Fund’s Audit Committee. She noted that an amount of R8.8 million was paid to employees in performance awards (see note 4.1 on page 131 of the Annual Report). She wanted to know which employees received performance bonuses in the light of the Auditor-Generals comment that the accounting officer had failed to ensure that there was an adequate performance management system in place.
Mr Manyi replied that he had implemented a performance review system whereby the performance of executives and employees were reviewed on a monthly rather than an annual basis. He pointed out that the Department had more than 8000 employees and confirmed that the performance awards were paid to the junior employees. None of the senior executives had received any bonuses.
Ms Mangena referred to the Auditor-General’s comment that the Department failed to prepare a strategic plan for monitoring performance in accordance with National Treasury Regulations 5.1, 5.2 and 6.2 (see point 17 of the key governance responsibilities detailed on page 86 of the Annual Report).
Mr Sam Morotoba, Deputy Director-General, DOL, explained that the Department’s strategic plan was not in line with the Estimates of National Expenditure (ENE) and excluded the desired outcomes. He gave the assurance that the necessary corrections to the strategic plan had been made.
The Chairperson remarked that the payment of bonuses without the required framework being in place was unacceptable. This issue had been a problem with the Department in the past but he was reassured that the issue would no longer arise.
Mr Singh referred to the comments made by the Chairperson of the Audit Committee on page 78 of the Annual Report. Concerns were raised over the fact that only 73%of the internal audit plan could be executed due to the lack of capacity in the internal audit department, there was a lack of capacity to perform IT audits and too many employees remained in an acting capacity. He wanted to know what was being done to address the concerns of the Chairperson.
Mr Malale asked if the performance award of R8.8 million was less than 2% of the Department’s wage bill.
Mr Manyi confirmed that the total bonus amount was less than 1.5% of the total wage bill. The audit plan had been revised according to the available capacity of the Department and the IT audit function had been outsourced as there was no internal capacity in this regard.
The Chairperson questioned whether the reduction in the internal audit plan because of a lack of capacity was acceptable. He said that the internal audit function was a core function that should not be compromised.
Mr Ainslie asked why the DOL appointed consultants at a substantial cost instead of employing some of the many unemployed persons on a permanent basis.
Mr Manyi replied that the appointment and vetting process of new employees was very time consuming. The time constraints and nature of the matters that needed attending to required skilled people to be available at short notice.
The Chairperson said that the appointment of consultants should be an interim measure only and should not become a permanent feature at the cost of appointing permanent employees and developing the capacity of the public sector.
Mr Pretorius referred to the Auditor-General’s comments concerning non-compliance with applicable legislation (see point 12 on page 81 of the Annual Report). The Department failed to comply with the provisions of Section 38 of the PFMA, certain National Treasury Regulations and the Skills Development Levies Act (the SDL Act). He asked why the Department had made payments to entities without service level agreements being in place.
Mr Morotoba explained that the audit comment referred to regular payments made by the Department to the National Council for the Blind and the Deaf Society. The documented service level agreements made prior to 1994 could not be found in time. The payments to the entities were suspended and the Department approached the National Treasury to obtain permission to resume the payments provided that a documented policy would be put in place within the following two years.
Mr Pretorius asked if the Auditor-General found the arrangement acceptable.
Mr Morotoba confirmed that the policy was in the process of being developed but had not yet been approved.
Mr Thomas Matjeni, National Treasury, undertook to investigate the matter and provide a written response to the Committee.
The Chairperson asked if it was possible to make such an arrangement with National Treasury.
Mr Pretorius was satisfied that there had been an agreement with the entities concerned. It was clear that the payments had to continue but the necessary policy documents had to be put in place as soon as possible. Referring to the non-adherence to National Treasury regulations, he asked for the reasons why the Department did not have a fraud prevention plan in place.
Mr Manyi confirmed that the fraud prevention plan had been developed and the approved plan had been submitted to the Auditor-General.
The Chairperson remarked that the plan should not merely be developed and approved but should be implemented as well.
Mr Pretorius referred to the audit comment concerning the recovery of debts owed to the Department. He understood that the debt referred to was moneys owed to the Department by employees who had left the employ of the Department. He asked why the Department did not have a policy in place to recover moneys owed by staff members.
Mr Manyi explained that the debts were incurred when persons left the Department before the end of the calendar month. He said that the Department had managed to recover R2 million and that a relatively small amount of R350,000 had been written off.
The Chairperson pointed out that any amount written off was of concern as the Department was funded by public money. The problem was a lack of effective procedures to prevent debts from occurring in the first instance.
Mr Manyi confirmed that the procedures have been amended to prevent the problem from occurring. The Department’s payroll system was in the process of being improved as well.
Mr Pretorius asked for comment on the finding of the Auditor-General that regular assessment of the supply chain management performance was not carried out.
Mr Manyi confirmed that supply chain management had been a challenge. Procedures have been put in place to implement demand management and to monitor the performance of the supply chain.
Mr Pretorius asked if the failure to sign the performance contract with the Chief Financial Officer was an exception.
Mr Manyi confirmed that it was an oversight and the contract had been signed.
Mr Pretorius asked if the matter concerning the payment of levies in terms of the SDL Act had been resolved.
Mr Manyi confirmed that a standard operating procedure had been approved and submitted to the Auditor-General. A meeting was held with the Auditor-General and the South African Revenue Service (SARS) concerning the exact amount payable.
Mr Singh referred to the Auditor-General’s comment concerning irregular expenditure of R648.6 million resulting from the Department’s failure to follow proper tender processes (see point 9 on page 200). He asked for an explanation of note 17 on page 235 concerning the Department’s request to National Treasury to condone the expenditure incurred in prior years related to the training of unemployed persons. The request was refused.
Mr Manyi explained that the matter referred to the decision made by the Department to pay a flat rate for the training of unemployed persons instead of putting the training contracts out for tender. The Department had found that the service providers colluded to charge exorbitant rates for the training provided and had attempted to save money by charging a flat rate.
The Chairperson asked several questions to obtain clarity on the matter.
Mr Steele said that if service providers were colluding on the rates charged for training, the Department should report them and they should be prosecuted for price fixing.
Mr Singh asked why National Treasury refused to condone the expenditure.
Mr Matjeni replied that National Treasury might condone irregular expenditure if good reasons were provided.
Mr Manyi felt that the Department was held at fault because they did not follow the book but acted in the interest of the taxpayer.
Mr Malale pointed out that the Department had not acted properly by not following the tender rules. The amount of R648 million was substantial and the action taken meant that the Department could pay out millions without following proper tender processes. He felt that the matter was extremely serious and required further debate.
The Chairperson requested a detailed, written report on the matter from the Department, including information on the amounts concerned and who were paid.
Mr Mbili remarked that there was a history of problems at the DOL. He appreciated the character shown by the Director-General and the attitude displayed towards the Committee. He said that the Committee could not condone the failure to follow proper tender procedures under any circumstances.
Mr Manyi noted the comments made by the Members. The matter referred to a historical situation and he gave the assurance that the Department was currently following the laid-down tender procedures.
The Chairperson concluded the meeting by thanking the participants for their input.
The meeting was adjourned.
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