Department of Social Development 2009/10 Audit Report: Auditor-General's briefing

Social Development

11 October 2010
Chairperson: Ms Y Botha (ANC)
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Meeting Summary

The Auditor General South Africa briefed the Committee on the annual financial statements and audit findings for the Department of Social Security (DSD) and the National Development Agency (NDA) an noted that the financial statements of the South African Social Security Agency (SASSA) were still being audited, because they had been submitted late to AGSA. It was noted that the NDA and the five separate Funds controlled by DSD had received unqualified audit opinions, although there had been irregular spending of R881 819 by the NDA when proper procurement processes were not followed.  Qualifications were noted in respect of the DSD, because of inadequate support given by SASSA for grants that, although paid by SASSA, appeared in the financial statements of the DSD. From a sample of files selected for audit, 3.24% of the sample could not be presented, and 8.8%did not contain the documentation that was required before the beneficiary should receive the grants. Although management attested that the correct documentation was received, it could not be located or retrieved, due to poor filing systems in SASSA. There were uncertain lines of responsibility in respect of Social Assistance grants, between the DSD and SASSA. Various deficiencies had been identified at SASSA, in respect of leadership, the failure to embed quality performance and failure to exercise proper oversight on reporting compliance and internal controls, including information technology controls in the SOCPEN system, which meant that there was not full integrity or security of data, and that there was not sufficient certainty as to whether transactions had occurred, and whether they were fully and accurately processes. There were also deficiencies in the internal governance systems. Finally AGSA noted that SASSA had contracted with the Special Investigation Unit to investigate and prosecute any individuals who had perpetrated social security fraud and these investigations were still ongoing.

Members sought clarity on whether the audit findings were qualified, asked about the filing systems at SASSA and wondered if electronic systems would alleviate the problems, asked whether the provinces were cooperating, and expressed their concern about SASSA’s failure to account properly for funds received. AGSA confirmed that it was not mandated to enquire into the status of projects funded by the Department and suggested that this could be investigated in oversight visits by the Committee.

Meeting report

Department of Social Development (DSD) Audit Outcomes 2009/10: Auditor General South Africa (AGSA) briefing
Mr Musa Hlongwa, Business Executive, Auditor-General South Africa, tabled the report of the Auditor General South Africa (AGSA) on the 2009/10 financial statements of the Department of Social Development (DSD).  He outlined the reputation, promise and mission of AGSA, outlining that it had a Constitutional mandate as the supreme audit institution (SAI) of South Africa, and strengthened democracy by enabling oversight and accountability in public departments, thereby building public confidence.

His briefing would outline AGSA’s comments on the audit opinions for the Department of Social Development (DSD), National Development Agency (NDA) and the South African Social Security Agency (SASSA) for the 2009/10 financial year. These were all given allocations under Vote 16.

He outlined that the mission of the DSD was to ensure provision of comprehensive social protection services, to the vulnerable and poor sectors of society, within the Constitutional and legislative framework, thus creating an enabling environment for sustainable development. The DSD further aimed to deliver integrated, sustainable and quality services, in partnership with all those committed to building a caring society for all.

The activities of the DSD were organised under various programmes for the financial year 2009/10, which he outlined as Administration, Comprehensive Social Security, Policy Development and implementation support for Welfare Services, Community Development, and Strategy and Governance.

The total budget for the financial year 2009/10 amounted to R86 508 187, and total expenditure amounted to R85 318 160. He further provided a comparison of budgets and spending for the previous financial year (see attached presentation for details). He then broke down the spending. The budget for the Administration programme had been R178 035. Its expenditure was R177 820. For Comprehensive Social Security, the Department’s budget was R85 652 549, with the expenditure at R84 465 729. For Policy Development, Review and implementation support for Welfare; the budget for 2009/10 was R316 345, and expenditure was R315 890. For Community Development, the budget was R241 473, and expenditure was R238 954. For Strategy and Governance, the budget was R119 785 and spending was at R119 767.

The DSD also managed the Disaster Relief Fund, Social Relief Fund, Refugee Relief Fund, State President Fund and the High School Vorentoe Disaster Fund.

In respect of these funding entities, for 2009/10, the DSD had budgeted an amount of R86.5 billion. Included in that amount was R79.2 billion as the amount for households under Programme 2 of the Comprehensive Social Security allocations to SASSA. The National Development Agency had received a transfer of R5.1 billion.

Mr Hlongwa summarised that when AGSA had done its audit, it could issue an audit opinion that was “unmodified” (formerly referred to as unqualified), “unmodified, but with emphasis of matter”, and “modified” (formerly referred to as qualified).

An unmodified audit opinion was given when the auditor concluded that the financial statements reflected the true and fair view, and were presented fairly, in all material respects, within the applicable financial reporting framework.

An unmodified audit opinion, with emphasis of matter, would be given where the auditor felt that although the financial statements reflected the true and fair view, and were presented fairly, in all material respects, there were certain matters that the auditor had noted, although these did not finally affect his or her opinion on the fact that the statements were fairly presented.

A modified audit opinion was expressed when the auditor concluded that an unqualified opinion could not be given, because there were disagreements with management regarding departures from financial reporting framework, or limitations on the scope of the reporting. However, these may not be of a material nature, or be pervasive enough to require an adverse audit opinion or disclaimer.

An adverse audit opinion would be expressed when the effect of the disagreement with management in regard to departures from the financial reporting framework was material and was so pervasive that the auditor must conclude that the financial statements were either incomplete or were misleading.

A disclaimer would be given when the auditor had not been able to obtain sufficient appropriate audit evidence to form an opinion on whether or not the financial statements were correct.

Mr Hlongwa concluded that in the financial year 2009/10, there were 6 unqualified audit outcomes, as compared to 8 unqualified audit outcomes in the financial year 2008/9. He noted that it was only in the 2009/10 financial year that transfers to households were made.

Mr Abrie Adendorff, Senior Manager, AGSA, then dealt with the audit results.

In the preceding two years, other entities within the Social Security Cluster, (which included SASSA, NDA, the Disaster Relief Fund, the Social Relief Fund, the Refugee Relief Fund, the State President fund and the High School Vorentoe Disaster Fund), had not had any audit qualifications. For 2009/10, the NDA and the five funds also received unqualified reports. SASSA was still being audited, because it had submitted its financial statements late to AGSA.

The DSD had received qualifications in its own report in respect of the transfers and subsidies to SASSA, due to limitations placed on it by SASSA.

Mr Adendorff explained that in respect of the transfers to households, 2 160 beneficiary files had been selected to be used as a sample for audit purposes. Of the files that were called for, 70 files (3.24% of the sample) were not presented for audit. The extrapolated information, based on grant type and province, gave a figure of R4.9 billion.

Of the 2 090 files that were received, 191 did not contain the documentation that should have been insisted upon before the beneficiary could receive the grants. That represented 8.8% of the sample, and the amounts extrapolated, based upon grant type and province, gave a figure of R5.65 billion. The overall result of the total scope limitations were thus R10.59 billion. Management attested that the correct documentation had been received by SASSA, but it could not be located nor retrieved, due to the SASSA poor filing management.

Mr Adendorff reiterated that SASSA had had an unqualified audit opinion for the preceding two years and that AGSA was currently doing the audit for the 2009/10 financial year.

Mr Adendorff then explained that the basis of accounting policy within the DSD was to prepare financial statements on the modified Cash basis of Accounting, determined by National Treasury, as described in Accounting Policy Note 1.1.

He noted that Note 31 of the financial statements dealt with irregular expenditure of the NDA, in an amount of R881 819. This happened because the proper procurement process had not been followed.

In terms of the Flow of Funds, as indicated in the report of the Accounting Officer, he explained that despite the Social Assistance Grant expenditure being reported in the Annual Financial Statements of the Department of Social Development (DSD) there was in fact a dual accountability relationship between the DSD and SASSA in respect of Social Assistance grants. This meant that actions by SASSA could have an impact on the audit report of the DSD.

In respect of other legal and regulatory requirements, Mr Adendorff said that there were no findings on the audits of entities within the Social Services Cluster. There was no significant non-compliance with laws and regulations for any of the entities in the Social Cluster.

Mr Adendorff then moved on to discuss the internal controls of the DSD. Because of the legislated reporting lines, the oversight responsibility of the DSD did not focus on the detail of the operational functions performed by its agency, SASSA, but those operational functions should be supervised by the management of SASSA. The lines of accountability between the DSD and SASSA were not clearly defined, resulting in uncertainties about the responsibility and accountability for the Social Assistance Grant expenditure.

SASSA fulfilled its mandate to distribute Social Assistance grants, in terms of the agency relationship with the DSD. Those Social Assistance grants were therefore disclosed in the financial statements of the DSD. As already outlined, deficiencies identified at SASSA therefore impacted upon the DSD financial statements.

He outlined that various deficiencies at SASSA had been identified. In terms of leadership, not everybody seemed to understand that quality was a prerequisite and it was not embedded in the SASSA’s values, nor was performance on quality measured. The accounting authority did not exercise oversight responsibility over reporting, compliance with laws and regulations and internal controls. The commitment to quality was not adequately communicated. Control weakness were not analysed. Appropriate follow-up actions were not taken to address root causes.

In respect of internal controls, he then focused on matters relating to financial and performance management. The information requested by AGSA relating to the social assistance grant expenditure was not available, and was not supplied timeously. General information technology controls relating to the SOCPEN system were not designed to maintain the integrity of the information systems and the security of the data. Manual or automated controls relating to the Social Assistance grants expenditure were not designed to ensure certainty that the transactions had occurred, and that they were fully and accurately processed.

In respect of governance, he noted that internal controls were not set and developed that would have
prevented, or would have detected and corrected, material misstatements in financial reporting, and reporting on predetermined objectives.

He informed Members that further investigations were in progress around the Social Assistance grant expenditure. As part of an effort to clean up the Social Security database and reclaim amounts owing to the State, SASSA had contracted with the Special Investigation Unit (SIU) to investigate and prosecute any individuals who had perpetrated fraud within the social security system. Those investigations were still ongoing.

He noted that a report to Parliament on the performance audit of projects that were funded by the National Development Agency was tabled in November 2009.

Discussion
Mr V Magagula (ANC) asked why the audit findings of 2009/10 were reflected as “qualified” when it now appeared that this was not the case.

Mr Hlongwa answered that it was the DSD financial statements that were qualified. He noted that the audit on SASSA had not been included, due to the paper work having been received late.

Ms J Masilo (ANC) asked whether the auditors had looked into whether the records of the entities,  including SASSA, were in order.

Mr Adendorff replied that it the auditors had noted that the filing systems of SASSA were so inadequate that some files were in boxes and some papers were lying loose on top of files, with some not having been filed for more than three years. Although in general the DSD financial statements reflected correct entries, SASSA had not submitted the paper work that should have reflected the R85 billion that was transferred in to SASSA. This was despite the fact that SASSA was allocated an amount of R5 million for administration, salaries and communication systems. He stated that documents reflecting an amount of R10 million had also not been submitted by SASSA, and it had, most recently, failed to comply with submissions on 10 May 2010.

Ms W Nelson (ANC) asked how difficult it was for AGSA to obtain files from the entities. She also enquired about the state of co-operation from the provinces.

Mr Adenhoff answered that there were difficulties in terms of obtaining files, particularly in the Limpopo Province and in Mpumalanga. The provinces that did comply with requirements for auditing purposes were the Free State and the Western Cape.

The Chairperson expressed deep concern about the lack of compliance by SASSA. She stated that there were serious problems that needed to be addressed, particularly since it had failed to account for R5 billion. She asked whether there was room for improvement in the SASSA filing systems.

Mr Adenhoff agreed that there was room for improvement for filling systems. However, he stressed that even an electronic filing system would only be efficient if it was based on the hard copies of the documents.

Ms Nelson asked whether the auditors’ investigations included an enquiry whether projects funded by the Department were actually in existence, and the state of those projects’ operations.

Mr Adenhoff stated that investigation into projects was not included in the auditors’ mandate. However, he recommended that the Portfolio Committee could do oversight visits to the provinces to look in to the state of affairs of projects, as well as investigate other pressing issues.

He concluded that although the DSD had gone out of its way to compile good financial statements, not all parties pulled their weight. He assured the committee that the DSD was working well, but that there certainly were problems to be rectified.

The meeting was adjourned.

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