The Auditor General South Africa (AGSA) gave a short presentation on how audits were conducted, the mandate of auditors, and the different kinds of audit processes and audit findings given by the Auditor-General. Representatives who had conducted audits then presented their findings on the 2007/08 and 2008/09 audit reports on the Commission on Gender Equality and the National Youth Commission. The Commission on Gender Equality received an audit disclaimer for 2008/09. The Commission had been plagued by consistently unfilled vacancies. Various persons acted for short periods of time, and there was no permanent chairperson and not all commissioners’ posts had been filled. In the 2007/08 financial year, irregular expenditure and fruitless expenditure were identified but there was no attempt to rectify the position nor hold anyone accountable. There had been no effective auditing committee since 2007, and supporting documentation was not provided to the Auditor-General, which meant that a disclaimer was issued. Even in the financial statements that were presented, thee were material audit adjustments, the annual report was late, and there was a lack of policies or procedures approved or implemented and approved. The financial systems were not appropriate for the preparation of financial statements. There had been no risk assessments conducted, so there was no fraud prevention plan, and the Public Finance Management Act was not adhered to. There were also no performance management systems or staff appraisals. An investigation was currently being conducted by the Auditor-General and Office of the Public Protector. Members questioned why the Commission was given a budget in the year following this disclaimer, what interventions had been made by the Auditor-General and why the Department of Justice, who transferred funds to the Commission, had not undertaken its own investigations. Members asked about the current litigation, but the Auditor-General, not being a party to the litigation, could not give any opinion. It was suggested that some of the issues be taken up with the Department of Justice.
The National Youth Commission (NYC) had also received a disclaimed audit opinion for the 2008/09 financial year, which was the last year in which the National Youth Commission was effectively operating, as its activities and those of Umsobomvu Youth Fund (audited by a private firm) had now been amalgamated under the National Youth Development Agency. Although a final audit would be done for the 2010 financial year for the NYC, it was expected that this would result in a disclaimer. The governance of the NYC had gradually deteriorated to the point that the internal audit function was not properly operating. More than 25% of its expenditure in 2008/09 was found to be irregular (about R4.5 million) and there was non-compliance with supply chain management principles, lack of proper management, and lack of oversight by the board and commissioners, linked to lack of continuity within the leadership and a generally weak internal control environment and ineffective oversight of governance.
Members were critical that the National Youth Development Agency was not yet able to present a budget aligned to its quite ambitious targets, which had been questioned by Members at previous meetings. Members were concerned that it would not be able to respond to issues taken over from the National Youth Commission and must provide assurances that the budget would be used correctly. It was agreed that the budget would be presented at the next meeting.
Auditor-General of South Africa (AGSA) briefings:
Overview on external Audit Process
Mr Lourens Van Weer, Representative of Auditor General South Africa (AGSA), tabled and explained the terminology and processes used within auditing, using his document on “An Overview of the external audit process and types of audits”. He said that the mandate given to external auditors was to give actual findings and to confirm achievements or lack thereof with the documentation supplied. He clarified that at this stage AGSA was not expressing its opinion, but stating only the findings made. However, from the 2009/10 period AGSA would be giving an opinion on the management report, so that it would be giving an opinion not simply on the factual figure findings in the audit reports. He emphasised that the information that AGSA reported on in the audit report would be very helpful and would enable the Committee in its oversight processes. He highlighted the importance of external auditing within government organisations, governance and legislation. He went on to define the different kinds of audits and their processes and audit definitions of audit opinions (see attached document for details)
Commission on Gender Equality Audit Report 2009: AGSA Presentation
Ms Trudie Botha, representative of AGSA, took the Committee through the Commission on Gender Equality (CGE) Audit Report for 2008/09. The CGE was an institution set up in terms of Chapter 9 of the Constitution, as opposed to something like the National Youth Development Agency (NYDA), which was a public entity. The Public Finance Management Act (PFMA) listed the public entities in the second part, whereas the Constitutional institutions were listed in the first part of the same Act. Many of the requirements were similar, but there were some differences.
Ms Botha summarised her presentation named Briefing on Audit Report of Commission of Gender Equality Annual Report 2009 as an introduction, entity overview, organisational structure, funding, government structure, financial statements, audit history and then said she would give information on the investigation taking place at the Commission of Gender Equality.
The Commission on Gender Equality, whilst being a Chapter 9 institution, had its own Act to govern it, which set out its specific responsibilities in terms of monitoring and evaluating Government’s gender policies and activities concerning gender. The organisation needed to educate, support and provide information to South Africa in terms of gender, and needed to review legislation and do investigations on gender issues.
The CGE was led by a number of commissioners. There was provision for a chairperson, a deputy chair and a maximum of 11 commissioners. The administration was to be handled by a Chief Executive Officer, a Chief Operating Officer and a couple of head of divisions who had to manage specific projects and finances.
For the years 2007/08 and 2008/09 the CGE received its funding from the Department of Justice. It received R46 million for 2008/09 and R40 million for the previous year.
Ms Botha reiterated the remarks made in the first presentation, noting that if proper governance structures were not implemented this would lead to qualified or disclaimed audit opinions. In the past there had been huge instability in top management in CGE, which led to lack of oversight direction and monitoring, and also directly resulted in the current financial situation of the CGE. The position of Chair of the Commission had been vacant for sometime (there was currently someone in an acting position) and there were also some vacant commissioner positions, which needed to be filled by the President. The CEO’s position had also been vacant for a long period although there had been many individuals that acted in that position. The same had happened with the Chief Financial Officer’s position, where, once again, there had been no permanent appointment but several acting officers. There should be six Heads of Division but since 2007 various people acted in those positions.
Ms Botha noted that in previous years, prior to 2007, the CGE was following Generally Accepted Accounting Practices (GAAP). However, there were problems from the time that the Auditor-General’s office identified irregular expenditure in the amount of almost R50 million. From the time that this audit was finalised, management had taken no action to investigate the people who should be held accountable, and it was not disclosed in the financial statements, leading to a specific paragraph in the audit opinion. There was also fruitless expenditure, in terms of penalties paid, amounting to R300 000.
For the past two years there had been no effective auditing committee in CGE. There was at one stage such a body, but either no meetings were held or auditors were not invited to those meetings. The same applied to internal audits; there was an outsourced unit a while ago but their contract came to an end. They had wanted to renegotiate, but in the end no internal audit reports were forthcoming. Internal audits need to test and ensure that the internal controls were in place, which gave external auditors some assurance that they could rely on the controls the organisation had in place. The Auditor-General’s office experienced significant delays in receiving supporting documentation during the audit. That was why AGSA gave a disclaimed audit opinion, because CGE’s management could not provide adequate documentation to satisfy AGSA that the financial statements were fairly presented. Also the financial statements were not submitted in the required time frame. Even in such financial statements as were submitted, there were material audit adjustments that were made. The annual report was submitted very late and was also tabled outside of the time frame required by the PFMA. Throughout the audit, because so many people were acting at various times, no key management member was able to assist AGSA with the audit process. There were significant deficiencies in the design and implementation of internal controls. There were no policies or procedures that were implemented and approved. The financial systems that were used were not appropriate for the preparation of financial statements. No risk assessments were conducted, so there was no fraud prevention plan, and the powers and duties set out in the PFMA were not followed. CGE did not have policies, procedures, systems and information systems to prepare the performance information for the performance evaluation. There was no performance management system to ensure that performance appraisals on staff were done, or to ensure that anyone not performing properly would be held accountable. There was a significant amount of irregular expenditure at CGE. There was lack of budgetary control and monitoring, no declaration of interest and there were a high number of vacancies and staff turnover. All of this meant that not enough information was provided for AGSA to express its opinion on the financial statements, leading to the disclaimed audit opinion.
There was currently an investigation being conducted by the Office of the Auditor-General and the Office of the Public Protector. The final report had been issued to management. Once the final comment had been received from management, AGSA would evaluate this to check whether findings have been resolved or whether there were extra items that needed to be looked into. AGSA would then finalise its decision as to whether this report needed to be tabled separately in Parliament.
The Chairperson queried why the CGE was given a budget for the year after such disastrous audit findings.
Mr Van Weer explained that the CGE was a Constitutional institution, so its existence was embedded in the Constitution. A section in the PFMA prohibited the transfer of funding from entities who received their funding from a national department, but this specifically did not apply to Constitutional institutions. For this reason, it was virtually impossible to cut off the funding to this organisation.
The Chairperson said this situation placed the Committee in an extremely difficult position. She thought that CGE was working in an extremely careless manner.
Ms P Duncan (DA) asked AGSA what interventions had been undertaken since the AG gave the CGE a disclaimer opinion for the financial year 2007/08. She asked why investigations had not been conducted sooner. She suggested that it would have been ideal to have quarterly audits of CGE.
Mr D Kekana (ANC) reiterated Ms Duncan’s query, and questioned the task or duties of the Auditor General, as he did not understand what systems or processes could have prevented the AG’s intervention in the earlier stages, sooner after detecting a problem within the CGE.
Ms H Malgas (ANC) said that she was confused as to how the very same accounting officers who had pending litigation against them for allegedly failing to comply with the PFMA could have valid reasons to execute counter-litigation processes against the CGE.
Mr Van Weer said that AGSA could not comment on the litigation question, as although this office was aware of the legal processes it was not part of the processes. He once again explained the meaning and relevance of a disclaimer opinion. He noted that it was based on lack of adequate information to support the figures in the financial statements and said that an investigation would only be conducted at a point where other information came to the attention of AGSA that suggested that there might have been something else wrong, such as irregularities, fraud or other issues that needed to be investigated further through processes other than an audit. He went on to define internal auditing as a very important part of ensuring good governance, and said that in the CGE’s case it did not function. Internal Audit should sweep ahead and as required by the PFMA, each entity should have an internal audit section controlled and directed by an internal audit committee. The audit committee had not been in existence for a large part of the period under review. If the governance structures were not operating effectively, then inevitably such cases would persist. Internal audits should raise the first warnings of lack of controls or policies and procedures. An internal audit was done by AGSA on the CGE, simply because it was a small organisation. In future, AGSA would be asking entities to develop action plans on how they would address audit findings, and AGSA would then look at how to implement those plans. Management retained the responsibility to make sure the entity did implement those processes.
Ms Botha said that it was very important to remember that a disclaimed opinion was given, meaning that there was no adequate documentation. It would therefore not be possible, in this instance, for management to recalculate, process the corrections and move on. It would, instead, have to go back through every transaction, in the financial records, tracing each transaction back to reliable source documentation. She added that because of the large numbers and high turnover of acting staff, they did not know how to move forward, therefore it had been identified that no progress had been made with matters found in the previous year.
The Chairperson acknowledged this, and stressed that the AGSA, in this case, could only state how matters should have been handled. Since AGSA did not have access to missing documentation, most of the Committee’s questions could not be answered.
Ms Duncan questioned whether or not AGSA gave an opinion on the Department of Justice’s transfer of money to CGE in the year 2008/09.
Ms D Robinson (DA) said that when AGSA gave a disclaimer opinion, it was surely the responsibility of the Department of Justice to call the CGE to order, and she queried why action was not taken.
Mr van Weer said that as he understood the position, the President had delegated the oversight role to the Department, but suggested that such questions would be best posed to the Department of Justice.
Ms D Ramodibe (ANC) asked at which point the Auditor General would intervene to do an investigation, after giving an unqualified opinion.
Mr Van Weer said that this would depend on the circumstances. Investigations were very expensive. There was a process that would be followed to ensure that the situation warranted an investigation.
The Chairperson said that the report back on the CGE had proven to be highly beneficial since the Committee was now conducting oversight on this body, and a number of issues needed clarity.
National Youth Commission (NYC) Audit Report 2009
Mr Yusuf Isaac, representative, AGSA, referred to the document “Briefing on Audit Report of National Youth Commission Annual Report 2009”, and said that this document was similar to that on the CGE, since the audit environments were substantially similar. The Committee should therefore expect to hear similar conclusions.
He gave an overview of the entity. The National Youth Commission (NYC) was formed to develop the integrated national youth policy, and also had to liaise with similar bodies having similar objectives. During the 2008/09 financial year, the idea of a National Youth Development Agency was raised. On 16 June 2009 the President announced the establishment of the National Youth Development Agency (NYDA), which was a merger of the NYC and Umsobomvu Youth Fund (UYF). The latter was not audited by the Auditor General but by a private firm. A Government Gazette issued on 5 March 2010 put into effect the last phases of the transition that were outstanding. In effect the NYC now had ceased to exist. The Auditor-General would be auditing the NYDA in future. The 2010 audit on the National Youth Commission would be the final audit for that body.
Due to the fact that the structure of the organisation had changed, The NYC had come to an end during the last financial year. None of the former management was now involved at the NYDA, which was, in structure and effect, more like the former Umsobomvu Youth Fund.
The NYC had been reliant on the Presidency for funding. It received an allocation of R24 million during the 2009 financial year. Audit structures, such as the audit committee and internal audit functions, had been in place, but the governance environment had deteriorated over the years. In its last two financial years, for 2007/08 and 2008/09, NYC had received disclaimers of audit opinions, which was similar to the CGE situation. The internal auditor and audit committee were all available, but due to the lack of cooperation and the change in management it was very difficult for them to exercise their actual oversight responsibilities in a proper manner.
More than 25% of the expenditure of NYC was found to be irregular. This indicated non-compliance with supply chain management principles. About R4.5 million of irregular expenditure was disclosed.
Mr Isaac noted that the report summarised the audit reports for the past three years. Almost every account balance on the financial statements that was audited by the Auditor General contributed to the disclaimer of audit opinion. The root cause of this was lack of proper management, and lack of oversight by the board and commissioners. The entire amount of R24 million was treated as irregular expenditure in the books of the Presidency, due to non-compliance to legislation. Since the NYC was a public entity, the Presidency had the responsibility to exercise some oversight before transferring the funds. The root causes of problems were lack of continuity within the leadership and a generally weak internal control environment and ineffective oversight of governance. It was expected that the NYC’s 2010 audit would also be disclaimed and the main reason was simply due to the fact that the NYC’s management had moved on and therefore, although NYDA would be responsible as the takeover body, its management would not be able to provide the assurances or necessary proof that the auditors would need.
The Chairperson said that the Committee could not shift the responsibility of checking whether recruitment processes had been done correctly nor whether other operational processes were done correctly, although this would involve more work, as these entities were accountable to the Committee. This was a challenge that should not be taken lightly.
National Youth Development Agency Budget 2010
The Chairperson asked the National Youth Development Agency whether the Agency had a budget aligned to its targets as there were many issues that the Committee had previously raised concerning its targets.
A representative of the National Youth Development Agency, said that the organisation had a budget, but that he had not prepared it for presentation to the Committee.
Mr Kekana said that there had been serious concerns about the potential disclaimer opinion that the National Youth Development Agency might be given. If the organisation could not give clarity or tell the Committee how it intended to turn things around and use the budget correctly, then there was no point in continuing to discuss this matter.
Ms Robinson said the Committee had discussed these matters with the NYDA, but was disappointed that there was once again no clarity being given. She noted that the targets seemed quite extravagant and she wanted to know whether or not the Agency had the budget and knew how to reach these targets.
The Chairperson said the Presidency’s budget vote would be held on 12 May, which meant the Committee needed that information before 12 May 2010.
The NYDA representatative agreed to make preparation and presentation of the NYDA’s budget a priority for the next Committee meeting.
The meeting was adjourned.
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