Department of Transport financial statements 2010/11: Auditor-General's briefing

Meeting report

Chairperson’s opening comments
The Chairperson noted that the Committee would, in the fourth quarter, be focusing on the Budget Review and Recommendation Reports and the briefing by the Auditor-General on the audit outcomes for 2010/11 would enable the Committee to consider these matters. The Department of Transport (DoT or the Department) and its entities would commence briefing the Committee on the Annual Reports from the following day.

The Chairperson noted that she had received a letter from Mr S Farrow (DA) highlighting the overspending by the Ministry, in relation to travel, but had not had an opportunity yet to deal with it, for personal reasons. She thought that it would be appropriate to deal with the matter during the budget review process, as it related to the expenditure of the Department, and the Committee would need to debate Mr Farrow’s suggestion that the Minister should be invited to appear before the Committee.

Department of Transport financial statements 2010/11: Auditor-General’s briefing
Mr Ettienne Smith, Senior Manager, Auditor-General South Africa, stated that the Auditor-General South Africa (AGSA) had consolidated all the information about the Department of Transport and its entities, and would present a combined portfolio report during this meeting. Some questions about the direct operations of the Department could not be answered by AGSA, but it could try to assist in getting information if needed.

Mr Smith briefly outlined the Constitutional mandate of the AGSA as a Supreme Audit Institution (SAI) of South Africa, noting that it existed to strengthen the country’s democracy by enabling oversight, accountability and governance responsibilities in the public sector through auditing, thereby building public confidence. He noted that the audit report on the DoT and entities had been presented already to the Department, and the Director General and Chief Executive Officers had committed to an action plan that they would present to this Committee to address the issues raised by the AGSA.

The DoT’s Transport Portfolio was divided into four modes, which included road, rail, air, and maritime transport. The entities that fell under road transport included the South African National Road Agency Limited (SANRAL), Road Accident Fund (RAF), Cross Border Road Transport Agency (CBRTA), Road Traffic Management Corporation (RTMC), Road Traffic Infringement Agency (RTIA), and the Driving Licence Card Account (DLCA). The rail mode constituted the Passenger Rail Agency of South Africa (PRASA), the Rail Safety Regulator (RSR), Autopax, and the Intersite Asset Investments. The air mode of transport consisted of the South African Civil Aviation Authority (SACAA), Air Traffic and Navigation Services (ATNS), and the Airports Company South Africa (ACSA). Maritime entities included the South African Maritime Safety Authority (SAMSA), and the Ports Regulator of South Africa (PRSA).

Mr Smith stated that 40 departments were audited nationally, and 228 public entities, but 48 public entities that were Section 4(3) public entities were not audited by the AGSA. There had been a regression on the audit findings across the board. Only three departments (as opposed to the four of the previous year) were given unqualified audit certificates with no findings or matters of emphasis in relation to predetermined objectives or compliance with laws and regulations, in the 2010/11 financial year. 88 entities, as opposed to 110 in the previous financial year, received this finding. 25 Section 4 entities, as opposed to 30 in the previous year, received a completely unqualified finding with no matters of emphasis. Those entities who received unqualified reports, but with matters of emphasis or findings in respect of predetermined objectives or compliance, totalled 26 departments (an increase from 19 in the previous year), 119 public entities (as opposed to 89 in the previous year) and 18 Section 4 public entities (compared with 11 in the previous year).

Mr S Farrow (DA) asked whether AGSA did receive the reports relating to the section 4(3) public entities.

Mr Smith responded that indeed it did, and these entities were included in the AGSA general report, which was tabled annually.

Mr Smith continued that qualified opinions had been given to 12 departments in 2009/10, as compared to nine in 2010/11. There was an improvement also in relation to public entities, as 17 received qualified opinions in 2009/10, but only 12 in 2010/11. Three Section 4(3) entities were qualified in 2010/11, as opposed to one in the previous year. In 2010/11, no departments received a disclaimer, as opposed to one having received this in the previous year, whilst the number of disclaimers for public entities was four (as opposed to five in the previous year), with no disclaimers issued for public entities.

South African had conducted audits on 44 departments, 228 public entities, and 48 section 4(3) public entities.

Mr Smith noted that in the transport portfolio, there was one national Department, 13 public entities and, 2 section 4 (3) public entities. Three public entities had received completely unqualified audits with no findings both last year and this year, as well as two section 4(3) entities.

The Department itself had received a financially unqualified report, but with findings, in both the 2010/11 and the previous financial year. A similar report was given to seven public entities. A qualified opinion was issued in respect of the CBRTA. An adverse opinion was given for the RTMC, as it had been also in the previous year. A disclaimer was given for the new RTIA.

Mr Smith tabled a graph of audit outcomes (see attached presentation) and summarised the figures for qualified audits, disclaimers, adverse reports, and other findings. He noted that this slide also showed which entities had improved or regressed, and cited Autopax, which improved from having received findings in the previous year, to an unqualified report with no findings in this year. He again repeated that the RTMC, RTIA, and CBRTA had qualified reports.

The areas of qualification for RTMC related to capital assets and current assets. For RTIA and CBRTA, the areas of qualification were current assets and revenue. In addition, the RTIA was qualified in relation to revenue, and unauthorised, irregular, fruitless and wasteful expenditure.

Mr M De Freitas (DA) interjected to ask that more details should be provided on areas of qualification in financial statements, saying that this information was not shown on the slide.

Mr Smith confirmed that more details would indeed be provided to Members.

Mr Smith then noted that in the past, the AGSA had found that there were numerous material mis-statements in the financial statements submitted for audit, which inhibited the finalisation of audits. AGSA also focused on the quality of information in relation to predetermined objectives. Another area of focus was supply chain management, and whether there was compliance with the laws and regulations relating to that area, whilst there were also investigations done in relation to human resources (HR) and Information Technology (IT) and its controls.

Mr Smith noted that the graph in slide 9 indicated where material misstatements had been corrected by AGSA. The Department showed no material misstatements in relation to capital assets, but the public entities showed 20% of material misstatements in their financial statements, and AGSA needed to effect adjustments. 7% of misstatements led to qualification, and 74% were material misstatements. There were no misstatements on current assets by the DoT but again, 20% of public entities’ misstatements led to qualifications, although 27% were corrected and 53% caused no problem. The DoT had correctly disclosed other items, but 47% of other items had to be corrected by the public entities. The Department had correctly stated its revenue, but in the entities, there was 13% error, and this had led to qualifications. 40% of the misstatements here were corrected during the audit and 47% were not material. The Department showed no unauthorised, irregular, fruitless and wasteful expenditure, but there was a 7% divergence on this point by the entities, leading to a qualification. 13% was corrected during the audit and 80% required no material adjustments.

Discussion
Mr L Suka (ANC) asked what was meant by “misstatement”.

Mr Smith responded that if the figures for assets reflected in the financial statements that were submitted for audit were not correct, then this was a misstatement, and the entity would have to effect the corrections, so that the line items now showed the correct figure.

Mr Suka asked what was meant by “7%” of unauthorised or irregular expenditure.

Mr Smith said that public entities accounted for 7% of unauthorised, irregular, fruitless and wasteful expenditure.

Mr Suka asked which of the entities were responsible for that 7% of unauthorised, irregular, fruitless and wasteful expenditure, since there were 13 public entities of the department.

Mr Smith responded that this was attributable to RTMC alone.

Mr De Freitas asked whether AGSA had ascertained the reason for the misstatements or the provision of incorrect information. He also asked what was done to ensure that those misstatements were not repeated.

Mr Smith responded that AGSA had ascertained all the root causes for the misstatements and that information was now included in the management report and the audit report. AGSA had also asked the Department and entities to compile an action plan and give commitments to address those mistakes in the future.

Mr De Freitas requested Mr Smith to give the Committee the copy of that report of AGSA.

Mr Smith continued with the presentation. He tabled the Department’s revenue and that of the entities, and noted that the Department showed a surplus of R622 000 and a negative bank balance. The state entities varied in terms of their revenues, expenditure trends, surpluses and bank balances. He tabled these figures (see attached presentation for details).

Ms D Dlakude (ANC) interjected to ask for clarity why there was a surplus for the Department, but it had a negative bank balance.

Ms Brenda Mushambadzi, Manager, AGSA, responded that the negative bank balance was due to the fact that the Department had incurred expenditure because of the bus subsidies, but it had applied to National Treasury for permission to write-off the surplus against that expenditure.

Mr Suka understood the question of the write off, but noted that SANRAL showed a deficit in the financial statements, yet showed a bank balance of R2.7 million. He asked for an explanation on that.

Mr Smith responded that the positive bank balance here resulted from the surplus carried forward from the previous financial year.

Mr Farrow added that tenders sometimes ran over from one financial year to another and that could be the reason for the discrepancy here. However, he said that the accounting for tenders and income was quite complicated. The Department tended to defer tenders that ran for few years, and only recognised the income over the period of the asset that had been capitalised.

Mr Smith continued with the presentation. Slide 10 indicated the corrections of material misstatements identified by the auditors. 37% of misstatements were identified by auditors, 44% were not material misstatements, and 19% were partial corrections, in terms of qualified and adverse opinions as already mentioned above.

In terms of predetermined objectives findings, he explained that AGSA, when auditing predetermined objectives, focused on the compliance and non-compliance, presentation of performance information, the usefulness of performance information, and the reliability of the performance information. In respect of the total transport portfolio, the findings in respect of non-compliance were 13% in 2009/10 but had increased to 38% in 2010/11. The findings in relation to presentation were that there was a problem in 13% of cases, as opposed to none in the previous year. Findings on the reliability of information were shown to have regressed from 13% in the previous year to 32% in the same period. There were no findings on the usefulness of information.

Mr De Freitas interjected to ask what might be the causes of the downward trend. He commented that AGSA should come up with some interventions for improvement.

Mr Suka asked who provided training, saying that the regression seemed to indicate that any training was ineffective. He also asked who was responsible for evaluating the training to ensure that intended objectives were achieved.

Mr Smith responded that insufficient training was definitely one of the material root causes for regression in the public entities although there were other reasons also.

Mr Smith clarified that all entities were supposed to submit quarterly performance information to National Treasury against predetermined objectives, and were supposed to comply with the standard format of National Treasury. The comments on presentation would be raised when the presentation of the information did not follow the prescribed format. The reliability of information related to whether there was sufficient or correct supporting evidence or information. Where the information was described as “not useful”, this meant that it did not comply with the “SMART” principles that it should be specific, achievable, realistic, and time bound.

Mr Suka asked if there was any action plans proposed by the Department to remedy the situation.

Mr Smith responded that there were action plans in place for both the Department and entities, which could be used to remedy the situation.

Mr Smith continued with the presentation. AGSA had discovered, in relation to compliance with laws and regulations, that both the Department and entities faced challenges in their strategic planning and performance management, and strategic planning being used as the basis of predetermined objectives. There were also challenges in the annual financial statements as a direct result of material misstatements. AGSA also found problems in procurement, internal audit, management expenditure, budgets and in audit committees.

The Chairperson asked if 27% of audit committees of entities were also non-compliant with laws and regulations.

Mr Smith responded that they were not necessarily totally non-compliant, but AGSA had picked up some issues in relation to the audit committees. For instance, an audit committee might not meet quarterly, as it was supposed to, but might only meet three times in the year. That would be included as a finding for the entities.

Mr Suka also asked if whether the entities were budgeting properly.

Mr Smith responded that they needed to budget according to the regulations, by remitting their budgets. There was 36% non-compliance of entities in relation to the budget.

The Chairperson was concerned on the finding of 55% non-compliance with laws and regulations for strategic planning and performance management. She would assume that the Department and entities then needed to concentrate on trying to achieve better compliance, as the impression was created, in the absence of any other explanation as to how that happened, that they were acting with disregard for the laws and regulations. She also noted that the indication of “64%” on non-compliance with laws and regulations made her wonder what could be done to address that percentage, as well as the “27%” noted for non-compliance with laws and regulations by audit committees.

The Chairperson also said that she was concerned about the manner of reporting, as there were no notes to explain or qualify the percentage indicators. She asked if there was a better way in which the findings on non-compliance with laws and regulations could be reported.

Mr Farrow noted that that situation reflected poorly on the overall performance of departments and entities. Half of the entities were apparently not complying with laws and regulations. Similarly, there were problems with the budget. One entity had no Board, and therefore held no meeting, and that reflected very badly also on the others. He suggested that the whole report needed to be clarified. That would enable the Committee to hone in exactly on where the irregularities were, entity by entity, to allow for a better focus on each.

Mr Smith noted what the Committee Members were proposing, but said that AGSA’s report to the National Assembly would take this form, but he could provide the Committee with the requested amount of detail in respect of each entity. The percentages that were indicated in the report were an average of findings against the total number of entities, and it was difficult to quantify this in terms of rand value. The findings on non-compliance with laws and regulations were very difficult to measure, but AGSA would definitely make a note and a proposal to the general reporting team for more contextualised reporting in future.

Mr De Freitas thought the slides were too broad and too general. He too requested detail on the Department and each entity, saying that the broadness of this report meant that it was not useful or meaningful. Some entities might be doing well, but others performing poorly might be hidden through the current processes. He hoped that AGSA would work on improving this.

Mr N Duma (ANC) agreed that the broad report should be put into more specific context. He also wanted to see individual reports on each entity.

The Chairperson noted that the most worrying indicator seemed to be that in four out of seven performance areas, there were high degrees of non-compliance with laws and regulations. Where there were higher instances, this seemed to indicate that the entities could not plan and could not manage the performance. She felt that this report was too broad, and created a bad impression by lumping all the instances together, although the Committee was aware that some entities were excelling, although it was also aware that some were performing badly. The latter group would be able to learn from the former if the hearings were held jointly. However, it was not helpful when the report was presented in such a generalised manner, without specifics. The Committee had done its work, although this report might suggest that it had not.

Mr Smith explained that the objective of the presentation was not to go into detail. He reiterated that this report was the same one that would be presented to Cabinet and National Assembly. However, AGSA would make arrangements to give the Committee a separate presentation with more details.

Ms Dlakude agreed with her colleagues that this report did not assist the Committee. In another meeting that morning, she had, however, seen a report from AGSA that isolated the entities specifically. She suggested that Mr Smith should now concentrate on producing an entity-specific report.

Mr de Freitas indicated that he was not interested in general principles, although perhaps this might be useful to Cabinet. This Committee required details, and it was vital that those be provided as the Committee would be starting its hearings on Annual Reports on the following day. He suggested that in future AGSA should differentiate between what was presented to the Executive and what was presented to the Committees.

Mr Smith then noted the recommendations of AGSA around the reports. Firstly, he said that the Committee should receive quarterly reports from entities on predetermined objectives and on areas of non-compliance with laws and regulations. The Action Plan that was being compiled to address the audit findings would be made available to the Committee. The Auditor-General had recommended that there should be interaction between the Chair of the Audit Committee and the Portfolio Committee, as well as interaction between Audit Committee Chair and the Executive Authority.

Further recommendations related to the need for entities to compile an Action Plan, and that would need to be monitored as far as implementation went. Some departments and entities merely used the Action Plan as a “tick the box” exercise, and did not monitor and follow up that it was being continuously implemented. AGSA could also give feedback to the Committee on those action plans.

The Chairperson noted that the Committee was unanimous about the way in which it would like to see reports being presented. She reminded AGSA that other issues had also been raised in the past. The Committee was also looking at the changes that would come about from the deployment of financial resources. It would be engaging with AGSA on that issue. It wanted to ensure that there were Over financial controls, management performance monitoring and compliance with laws and regulations by the Department and entities. The Committee was very mindful of the fact that the financial resources provided were intended to change the situation at ground and community levels. The Committee therefore wanted to focus on whether value for money was being achieved, and whether the financial resources were making a proper and positive impact on the socio-economic needs of society. It was therefore of concern to the Committee that this report had addressed the strategic planning and performance management, financial statements, and budgets in such a generalised way. It was necessary that there must be follow up and a focus on entities that were weak, to ensure that they executed their mandate. She requested AGSA to note the points made by the Committee and to produce a more detailed report on the entities.

Draft Report of the Portfolio Committee on the Oversight Visit to North West, KwaZulu Natal and Eastern Cape Provinces
The Chairperson informed Members of the Committee that it was not intended that this Report be adopted at this meeting, but that there would be a formal adoption in the following week. The Draft Report was tabled so that Members could check the recommendations, and raise issues of concern.

Ms Dlakude confirmed that she agreed with the recommendations and thought everything was captured correctly.

Mr Farrow agreed with Ms Dlakude.

Draft Report of the Portfolio Committee on the Oversight Visit to South African Maritime Safety Authority (SAMSA)
The Chairperson asked if Members had any questions on the findings and recommendations contained in the Draft Report.

Mr Farrow noted that there was only one aspect, which came out of the visit to the port in Durban. He was concerned about the relationship that existed between the Portnet Authority and SAMSA, in relation to the accident. There seemed to be a problem with line-functions, and who had oversight or overriding authority to make decisions on implementation of certain measures. This was not, however, reflected in the Draft Report. He thought that issues had been raised with the Port Captain and PortNet. He thought that the relationship should be addressed, to avoid similar recurrences. Even the Port Manager had admitted that something must be done to determine the port-line stalls.

The Chairperson asked the delegation from SAMSA if there was any progress in terms of that relationship.

Mr Tsietsi Mokhele, Chief Executive Officer, SAMSA, responded that a Memorandum of Agreement was concluded between Transnet, and the Port Authority, setting up joint structures and delineating the lines of communication. He said that the reason for some of the overlaps was that although SAMSA bore certain authority, the National Ports Authority Act had regulations in relation to the old “harbour limits”. Maritime accidents within the harbour limits were the responsibility of the National Ports Authority. However, a reading of the Convention and Act seemed to indicate that SAMSA would not have to be part of the solution. The joint structure was operational at a strategic level.

Mr Farrow commended the action taken by the Ports Authority.

The Chairperson also commended SAMSA on its swift action. He thanked SAMSA for making itself available to clarify issues. The Committee was happy with the findings and recommendations in the Report. The Reports would be adopted in the following week.

The meeting was adjourned.