Auditor-General's Audit Report in Department of Human Settlements Annual Report 2009/10

Meeting report

The Chairperson, Ms B Dambuza (ANC), said that the Office of the Auditor-General would report on the contents of the Annual Report prior to the briefing by the Department of Human Settlements on the Annual Report. She believed that the Auditor-General’s presence would facilitate the Committee’s ability to perform their oversight role.

Auditor-General’s Audit Report on the 2009/10 Annual Report
Mr Lourens Van Vuuren, Business Executive, Office of the Auditor-General, said that the Annual Report of an entity was a useful tool and that there was a lot of good reading within the document. He added that he would go through the Audit Report in the context of the financial statements of the Annual Report. Page 4 of the Department of Human Settlements’ Annual Report alluded to issues raised in the Audit Report.

The Audit Report was divided into two parts: an opinion on the financial statements and compliance with legislation, regulations and the Public Finance Management Act (PFMA). The Department had received an unqualified audit for their financial statements. However with regard to performance information management and compliance there were still a few issues. Page 146 of the Annual Report contained the opinion of the Auditor-General on the financial statements.

On page 147, under Emphasis of Matters, three issues had been flagged. The first, Basis of Accounting, was not a cause for concern as it appeared in all national and provincial department reports. It reflected the change in accounting practice from a cash system to an accrual system of accounting.

Irregular Expenditure, note 24 to the financial statements (page 192), showed that irregular expenditure to the amount of R920 000 occurred. This was caused by gifts for stakeholders at the Minister of Human Settlements’ end of term function not being procured through the proper processes, payments for bids being in excess of the bid amount and non-compliance with the Public Service Regulations (PSR) when paying someone an acting allowance for more than 12 months.

With regards to Significant Uncertainties, there were R72 million in claims against the Department. The worst case scenario was that if the Department lost against all these claims they would have to pay up to R72 million. On an oversight note, the Department needed to ensue that they had the mechanism in place to fight these claims. There was no wrongdoing on the Department’s part, but they had to be cognisant of the risk.

For the 2009/10 financial year, the Auditor-General did not express an opinion on performance information, but rather reported factually on findings. The Department did not provide the relevant strategic plan to Parliament in the stipulated 10 days prior to the Budget Vote. In order to evaluate the budget, this information was needed timeously. In terms of the presentation of reported information, the reasons for the variations between reported and set targets was not clarified. Each item needed an explanation when a target was not met. In the Annual Report only a broad explanation was provided.

With regard to timeliness of reported performance information, under Programme 3 (page 59-90), they could not verify the information, because the information was not submitted in time for the Audit Report. If quarterly reporting was in place, then this problem would not exist. In terms of usefulness of reported information, consistency, relevance and measurability were examined. Details were in the Audit Report.

In terms of consistency, changes to the planned performance information was not approved. The approval process was important and needed to be approved by the executive authority. Changes to planned performance information was not disclosed in the Annual Report and the requirement of having to report on all performance objectives was incomplete. Many items did not have clear targets, and were not specific or time-bound. This all related back to the need for the determination of these during the phase when targets were set. Targets for Programme 4 also could not be validated. Therefore there was still work to be done on performance information in order to obtain an unqualified audit opinion.

Under Compliance with Laws and Regulations, the Department did not always pay its creditors within 30 days. On the matter of leadership, the Department did not have sufficient internal control monitoring controls. The Department lacked a reliable performance management system for capturing performance information. It was not necessary to have a computerised system, but simply a formal system in place. With regards to governance, the effectiveness of internal control over supply chain management (SCM) was not adequate. This was relevant to irregular expenditure.

The South African Housing Fund (SAHF) was included in the Annual Report (page 205), but this fund had been dormant since 2003, when a decision was taken to close the fund due to the Division of Revenue Act (DoRA). It was important to note that note 4 on page 209 of the SAHF financial statements said that in 2003 it was de-listed from the PFMA by National Treasury. This fund could only be disestablished by changes to the Housing Act. Therefore it was important from an oversight viewpoint that this entity was properly closed down, as it caused unnecessary administrative work.

Discussion
The Chairperson thanked Mr Van Vuuren for a very clear and concise report.

Ms M Borman (ANC) said that the briefing had been an extremely useful exercise and thanked Mr Van Vuuren.

Mr A Steyn (DA) referred to note 24 dealing with irregular expenditure and asked whether the opening balance would simply continue to be carried over year to year, without anyone being held accountable. He asked whether Mr Van Vuuren referred to Parliament or Cabinet when he mentioned executive authority.

The Chairperson interjected that it was her understanding that it was Parliament, as they approved the budget.

Mr Van Vuuren replied that with regards to irregular expenditure the ideal situation would be that the Department should deal with this where it was found and resolve it. The Committee should engage with the Department in order to find out why it was still there. The executive authority in this case was the Minister, as National Treasury regulation 5 defined the executive authority as the responsible minister.

Mr M Mdakane (ANC) asked what the Auditor-General’s overall conclusion was after going through the Annual Report and if there was an improvement by the Department in terms of its financial management. He asked when matters of emphasis became actual problems.

Mr Van Vuuren replied that the Auditor-General’s opinion was that the Department was currently financially unqualified and that if the Department could maintain its current control environment then it should not be at risk for financial qualification in the future. In May the Auditor-General had started to engage with the financial officers from departments and ministers on key control mechanisms that could prevent qualifications. If the Department maintained these controls it would be fine. However, part of the key controls included controls on how to deal with performance information, which the Department was lacking. Going forward, performance information key controls needed to be put in place. The Department should put into practice quarterly reviews and use the internal audit process to ensure that they did not have issues when it came to Auditor-General’s audit. With regard to matters of emphasis, there was very little leeway for including something as a matter of emphasis as opposed to a qualification.

Mr Mdakane asked whether it was Mr Van Vuuren’s general opinion that matters of emphasis did not have a general impact on the opinion of the Auditor-General. He asked what issues at a policy level, the Committee should raise with the Department in terms of oversight. The Auditor-General’s opinion helped the Committee to identify and raise matters in order to obtain the required outcome of service delivery in housing.  Engagement with the Auditor-General was to help the Committee ensure that changes wrought in terms of the budget assisted in changing the quality of people’s lives.

Ms Borman said that the concern of the Committee was to get delivery on the ground but there came a point when the Committee wound up micro-managing issues. She added that there were perhaps key points they should hit on and asked Mr Van Vuuren how they achieved a balance between the two.

Mr Van Vuuren replied that in the housing sector, in the forthcoming general report, there would be some focus on service delivery. Good research for the Committee would be the nine provincial department reports on housing, as they contained details that were not in the national report. Provincial reports dealt with issues of backlogs and other problems. He added that on a strategic and performance level, they could discuss the improvement in terms of delivery with the Department.

Mr Steyn referred to Conditional Grants on page 197, and expressed concern that in three provinces the amount transferred was marked as uncertain. He asked whether this would not lead to a qualification.

Mr Van Vuuren replied that that specific page was a printer’s error and that Mr Steyn’s focus should be on page 196. He had verified with the provincial departments that they had in fact received the transfer. These transfers were simple and easy to follow financially. The Auditor-General was comfortable that this was not an issue and had confirmed that everything was fine.

The Chairperson said that the Auditor-General’s report was important as it gave the Committee lots of information on issues that they needed to oversee. She thanked the Office of the Auditor-General, as they depended on the reports of institutions that provided support for the Constitution.

The meeting was adjourned.