Department of Mineral Resources 2010/11 audit outcomes: briefing by Auditor-General

Meeting report

The Chairperson said that the Committee would receive a briefing from the Auditor general on their view of the annual statements from the Department of Mineral Resources (DMR). Once there was a quorum the Committee would deal with the Committee Programme and the adoption of minutes.

Auditor-General on audit outcomes of Department of Mineral Resources for 2010/11 financial year
Mr Naveen Mooloo, Senior Manager: Auditor General South Africa, explained the mandate of the Auditor General. The DMR had received a qualified audit opinion on its financial statements. On its reporting of pre-determined objectives, no findings were made. The DMR had failed to comply with the Public Finance Management Act and it had material misstatements which were both corrected and uncorrected. The Council for Geo-science received an unqualified audit opinion. No findings were made about non-compliance with laws and regulations and its reporting on pre-determined objectives. There were no material misstatements corrected. The same was true for the Council for Mineral Technology (MINTEK) and the State Diamond Trader. Mr Mooloo said they were examples of a perfect set of reports. The Mine Health and Safety Council also received an unqualified financial statement and no findings were made on its reporting on its predetermined objectives. However there was non-compliance with the PFMA and material misstatements had been corrected. The same was true for the 2009/10 audit outcome. The South African Diamond and Precious Metals Regulator received an unqualified audit opinion. However there were corrections of material misstatements and there was non-compliance with the PFMA and Treasury Regulations on supply chain management.

An outline was given of legislative requirements for predetermined objectives. These were the Public Finance Management Act, Treasury Regulations, the Framework for managing programme performance information, the Framework for strategic plans and annual performance plans (which helped departments develop Key Performance Indicators (KPIs) and lastly the National Treasury Instruction notes.

The audit criteria were briefly explained to the Committee. The three main areas were compliance with regulatory requirements, usefulness and reliability.

Discussion
The Chairperson said that the structure of the presentation took the Committee through the concepts the AG applied in the analysis of a performance of a Department. He reiterated that the Department had received a qualified audit opinion and that they had failed to comply with the PFMA. The structure that had been used by the AG had assisted the Committee in getting an idea of how assessments were done.

Mr M Sonto (ANC) said that the presentation was short, sweet and straight to the point. There was however need for explanation in some areas such as the audit outcomes for DMR. He noted that the DMR had received a qualified report but there were no findings on predetermined objectives. In addition the Mine Health and Safety Council had an unqualified audit report yet they had failed to comply with the PFMA legislation. He asked how this was possible.

Mr Mooloo responded that the financial statements were not free from material errors. As such, non-compliance with the PFMA was linked to material misstatements. In the audit environment, they audited compliance and some of the compliance matters did not have a “financial” impact. The AG did not issue opinions on the audit of performance information in the audit report. The audit report only contained factual findings. No matters found their way into the audit report in terms of the performance information but rather in terms of the financial statements. This impacted on the audit opinion. As such the audit opinion was an opinion on the financial statements. The financial statements and the annual report were two separate reports but they were supposed to be read together.

The Chairperson noted that the audit report in the DMR Annual Report made reference to the material loss of R5.8 million in assets that could not be verified. He asked if the assets were in the assets register. Could the assets not be verified? Furthermore he asked if the unaudited supplementary schedules were presented to the AG or if they were withheld from the AG. Internal controls were a recurrent problem for the Department. He asked if the Department could resolve such as problem or if it was a standard matter that the AG placed in the report.

Mr Mooloo responded to the question on material losses by saying that the PFMA set a deadline for 31 July. The AG met with the Minister before 31 July to try and address those matters that could result in qualifications. Matters that needed attention were receivables for Department revenue and the assets. In terms of the Framework the Treasury provided, when a Department discloses the assets in the financial statement they were supposed to put a heading that said disposals or transferred out. The R5.8 million came from this process. The assets were on the asset register but they disappeared.

Ms F Bikani (ANC) was concern about the total amount versus the payable amount. She asked if R53.5 million in payable balances would be recovered.

Mr E Lucas (IFP) asked if the assets that had been lost had been identified.

Mr Mooloo responded that the assets could be identified because they were on the asset register.

The Chairperson asked if the Department was investigating or if they were writing off the assets.

Mr Mooloo responded that the assets were written off.

Mr Lucas highlighted that there was need to identify the assets and close the matter.

The Chairperson said that the Department would be asked to table the list of assets that were missing.

Mr Mooloo responded that accruals were a worrying aspect for the AG. If accruals had been paid there would not have been unauthorized expenditure. The bulk of the R 41 million was money that was due to Department of Public Works (DPW) that was regarded as rental expenditure. The rental expenditure was paid in arrears. The AG was told that the DMR did not have assurance in the Public Works process hence the money accrued before they paid.

The Chairperson said that when the Committee engaged the DMR they were told that they were still verifying invoices because they were not in agreement with the invoices submitted by Public Works. He asked if the money accumulated interest.

Mr Mooloo responded that the money did not accumulate any interest. He stressed the need for reconciliation between the DPW and the DMR. The unaudited supplementary schedules were part of the framework for financial statements provided by National Treasury. The unaudited supplementary schedules were annexures in the financial statements that were found after the disclosure notes. In terms of the Treasury framework, the AG was not required to audit these. If there were findings in any of the areas of predetermined objectives, non-compliance to laws and regulations, material misstatements not corrected on the financial statements, it would result in an internal control deficiency. Audit findings about internal controls found deficiencies in either one of three areas: namely leadership, financial and performance management and government structures. An overall conclusion in the area of internal control would be formulated. In respect of payables the receivables for departmental balances affected several other balances and the reason was because of a change in the Mineral and Petroleum Resources Royalty (Administration) Act. As of 1 March 2010, royalties were supposed to be paid to SARS. There was a need to establish how much was due to the Department and the balance would go to SARS.

The Chairperson asked why the AG was not clear on the contingent liabilities that were there in the DMR. He asked whether or not the figure of R30 billion for ownerless and derelict mines was repeated to the AG. If so had the AG failed to believe the figure of R30 billion?

Mr Mooloo responded that the audit process was informed by discussion, documentation and coupled with management, judgments and estimates. Contingent liability meant that there was a possible or probable obligation. There may or may not be a liability. A contingent liability was uncertain such as a court case. Certain aspects were considered contingent liabilities if amounts could not be estimated. Every year there was an amount voted for rehabilitation by the Department. After this process, there would be a move from a contingent liability to a provision. The figure for derelict and ownerless mines was unreliable because the sample that had been used was incorrect, hence the process resulted in the figure of R30 billion. It was all discussion but there was nothing that supported the discussion. A whole lot of accounting and expertise was supposed to have been done in order to get a proper assessment.

Mr G Mackenzie (COPE) noted that it appeared that for two years there was a qualified audit with a similar basis of opinion. He asked if there was a reason for a similar basis of opinion in the two qualified reports. If the opinions were similar, had the DMR been engaged with so that the report would become unqualified?

Mr Sonto asked what the term “consecutive non-compliance” in expenditure management meant.

Mr Mooloo responded that there was progress from 2009 especially with regards to a proper database of balances, which was not in existence in the previous financial year. A number of issues were not addressed timeously such as the leadership issue. Proper control mechanisms were supposed to have been put in place. Mr Mooloo expressed his optimism that the problems identified by the AG in the DMR could be addressed. There were supposed to be engagements with external parties to address the problems.

Mr Mackenzie stressed the point that the Committee wanted an unqualified audit report from the DMR. The Committee did not want to see a third qualified report.

Ms Bikani asked if the correction of Treasury systems would not affect the type of report that the Committee wanted from the DMR.

Mr Mooloo replied that the issue involved less of Treasury and more of the DMR dealing with royalty debtors. The DMR had to correct their balances and determine what was due to SARS and what was due to it.

The Chairperson asked if the problems of the Mine Health and Safety Council and the South African Diamond and Precious Metals Regulator were similar in as far as they related to non-compliance with the PFMA or were they different.

Mr Mooloo responded that the lack of compliance with the PFMA was more or less similar compliance matters but not to the extent of the DMR.

Mr Gololo asked for clarity with regards to material misstatements that were corrected and uncorrected.

Mr Mooloo replied that the reason why DMR had both corrected and uncorrected was because the uncorrected statements spoke to qualifications. The statements could not be corrected because the DMR did not know what the extent of the misstatement was.

The Chairperson said that the AG had clarified the audit report. The DMR would be engaged on the understanding that had been provided by the AG. There was need for the Committee to get assurances beyond mere commitment by the DMR. The DMR would present both financial and non-financial information.

Mr Sybrand Struwig, Senior Manger: Auditor-General, highlighted that it was very important for governance structures such as the audit committee and internal audit to be utilised especially since the DMR had received two qualified reports.

Adoption of fourth term Committee programme
The Chairperson said that the Committee would be receiving financial and non-financial reports and section 32 reports from National Treasury and the DMR would be presenting on these issues on 18 October. In addition the DMR would update the Committee on the implementation of the 2009/10 Budget Review and Recommendation Report. On 28 October the Committee would be briefed by Aurora Empowerment. The Chairperson emphasised the need to close the matter properly and to receive update reports about the monies owed to workers. The Committee was awaiting a reply from the Chair or Chairs for the 2 and 9 November. The Committee had invited 10 mining company CEOs such as De Beers, Anglo America, Anglo Gold Ashanti, Extrata, BHP Billiton, Exxarro, Impala, ARM. The intention was to listen to CEOs about the Mining Charter and raise the issue that transformation in the mining industry was not a matter of voluntarism. The Committee would discuss the efforts being made to create jobs targeting young people. Public hearings on the beneficiation strategy would be conducted on 16 and 18 November. The Committee would receive a briefing by the South African Women in Mining Association (SAWIMA) on 23 November. The Committee would also conduct a joint oversight visit with the Labour Committee. On 6 December the Committee would adopt a report on the public hearings.

Ms Bikani noted that the key issue on the 29 November was a briefing by the state owned mining company. She asked if there was need to make it an open process by getting views from the mining industry.

The Chairperson agreed and suggested that the Committee invite the Chamber of Mines and South African Mining Development Association (SAMDA). He further suggested that the study tour report be postponed to 6 December

Mr C Gololo (ANC) asked if the Committee was going to undertake a visit to the state owned mining company.

The Chairperson said that the chances were minimal. The state owned mining company was not yet there in terms of the vision of DMR. Anything that was done was done under the auspices of the Central Energy Fund.

Ms Bikani asked if the Committee Members could add their own view in relation to the Mining Charter. She stressed that there were a lot of things that were wrong in the Mining Charter.

The Chairperson responded that the Committee had asked the Committee research section to condense and consolidate all of the recommendations made by those that participated in the public hearings on the Mining Charter. The Committee would choose which recommendations were workable or implementable such as addressing the matter of proper participation of previously disadvantaged people in the mining industry, and the issue of net value which would result in unencumbered ownership. The third leg would be to determine how the recommendations were supposed to be included. They needed to decide if the Committee would refer the Mining Charter recommendations to a particular body or incorporate the Mining Charter into the amendments of the MPRDA. This would enable the Mining Charter to have legal standing and obviate the Committee having to try and persuade mining companies to comply with the Mining Charter.

The Committee's fourth terms programme was adopted.

Consideration and Adoption of Minutes
The minutes of 17, 24 and 26 August 2011 were adopted with amendments.

Ms Bikani suggested that the Committee's research department formulate a critical assessment of the overall views that were forwarded during public hearings concerning the Mining Charter.

The Chairperson raised concern about the work of not only the Committee's researchers but all the other researchers. The researchers were not critically analysing documents. There was a need to engage with the Research Unit and express their disappointment.

The meeting was adjourned.