Department of Communications and entities, Government Communications Information Services: 2010/11 financial statements: Auditor-General's briefing

Meeting report

Chairperson’s Opening Statements: Committee Programme
The Chairperson welcomed Members back from recess, and pointed out that in the next few weeks the Committee would be focused on annual reports and budgets, and had to complete its  Budget Review and Recommendation Report (BRRR), an important process that had to be taken seriously in order to improve the area of service delivery.

He noted that some of the Members of the Committee were attending the International Telecommunications Union (ITU), so the Committee would not be able to hold meetings between 24 and 28 October 2011.

The Chairperson reminded the Committee that the short-listing of the candidates for the boards of the Media Development and Diversity Agency (MDDA) and the South African Broadcasting Corporation (SABC) had already been completed.

He noted that the Committee had held a Print Media Transformation Indaba, during which it was indicated that on average, black ownership was 14% in this industry, and the average for women-ownership was 4% for the past seventeen years. Media houses had, however, asked to make their own specific presentations to clarify issues around compliance and other matters. Their presentations would be heard on 15 and 16 November 2011.

On 22 November 2011, the Committee would discuss the progress report from the monitoring task team that comprises of the National Treasury, the Department of Communications (DoC), and the South African Broadcasting Corporation (SABC) on the matter of government guarantees and other related issues. An international study tour was scheduled for 29 November to 9 December, and a constituency period from 12 December to 19 December. Parliament would open again on 6 January 2012.

Ms J Killian (COPE) made a formal proposal to adopt the programme.

Ms N Michael (DA) said she was in favour of adopting the programme, but requested that, in order to avoid embarrassment to Members if they had to miss meetings, changes be notified well in advance.

The Chairperson agreed that this would be done and the programme was accepted.

The Chairperson informed the Committee that he had spoken to the South African Post Office (SAPO) about the petition from SAPO employees regarding the temporary status of employment, and had asked SAPO to assist its employees in getting representatives, and the Committee was now awaiting the list of representatives.

Briefing by Auditor General South Africa (AGSA) on audit outcomes 2010/11
Government Communications and Information System (GCIS)
Mr Lourens van Vuuren, Business Executive overseeing Government Communications and Information System, Auditor-General South Africa, outlined briefly the types of audit opinions that could be given by the Auditor-General South Africa (AGSA) and the audit report structures (see attached presentation).

He said that the GCIS received an unqualified audit opinion with emphasis of matter, due to significant uncertainties discovered by AGSA. Claims of third parties, to the amount of R20 million, were seen as a contingent liability, because the outcome of these claims could not be determined at the date of the audit report. An investigation was being conducted, at the request of the GCIS, into whether procurement and approval processes were followed prior to payments being made to a service provider.

AGSA also found that certain goods and services with a transaction value of over R500 000 were not procured by means of a competitive bidding process. There were some employees who performed remunerative work outside their employment in the department, without written permission from the relevant authority. Although the accounting officer did detect and disclose irregular and fruitless and wasteful expenditure, it was found that there were not effective controls to prevent this. In terms of revenue management, the annual tariff structure for revenue was not approved by the relevant treasury.

AGSA recommended that compliance processes had to be put in place to prevent and detect irregular expenditure. This could be achieved through staff and management training as well as constant communication. Management had to follow up on money due to the GCIS timeously and regularly. The formal code of ethics had to be communicated to all staff members and monitoring had to be undertaken by the accounting officer. All employees performing remunerative work outside their employment had to obtain prior written approval from the executive authority of the Department. The budget had to be prepared and approved in accordance with legislated requirements. It also recommended that the Accounting Officer must review all fees, charges and tariffs that related to revenue on an annual basis, and must obtain approval from National Treasury (NT) for the proposed tariff structure.

AGSA found that the preventative monitoring controls in place at the GCIS were breached in certain instances, indicating that the monitoring controls were not totally effective and that there was an issue with leadership.

GCIS now had to develop an action plan to address all audit findings, and this plan would be monitored regularly at audit steering committees, and feedback would be provided at audit committee meetings. AGSA also advised that the GCIS should focus on compliance matters.

Discussion
Ms Michael addressed the issue of procurement investigation. It was a serious problem when procurement was done incorrectly. She understood that AGSA could not answer for the GCIS but urged that this not be down-played. She asked when the Committee would be informed of what the precise problem had been, and the outcomes of the investigation into procurement. She asked how the AGSA would monitor the position around procurement.

Mr van Vuuren replied that he thought it was important that the investigation should be finalised before the Committee considered the matter further. It was possible that the Accounting Officer would be notified of the outcomes of the investigation later in the year. If the investigation was not finalised by the time of the next audit, there would be report that the investigation was conducted. He suggested that additional information should be obtained from the Accounting Officer. He confirmed that AGSA performed various tests to ensure that there were no inter-family dealings in procurement

Ms W Newhoudt-Druchen (ANC) asked what “other matters” were, as noted by AGSA. She also asked how the fact that some GCIS employees were performing remunerative work outside the budget affected the GCIS budget, and how this was discovered.

Mr van Vuuren reported that some of the “other matters” entailed compliance issues and irregular expenditure. He confirmed that the outside work by some employees had no effect on the budget. However, this did possibly impact on the amount of time that the employee was spending on GCIS work, which was why permission was required from the executive authority. He noted that employee performance should also be monitored.

Ms Killian noted that in the previous financial year, AGSA had raised questions about the usefulness of the reported performance information. She asked if, in the 2010/11 financial year, AGSA felt that the way objectives were determined made it possible to evaluate GCIS performance against more measurable goals. She also asked if the emphasis of matter in the 2009/10 year, relating to the basis of accounting, had been adjusted in 2010/11. She wondered if the regular reporting from AGSA on leadership, management and control, together with the recommendations it made, were sufficient to ensure that standards of reporting and performance would be improved in GCIS, or whether there were further steps that the Committee should follow to ensure that GCIS performed better.

Mr van Vuuren responded that AGSA was satisfied with the usefulness of the performance information supplied by the GCIS. He said that “emphasis of matter” was a technical issue and that the Committee should not be too concerned about it. GCIS had previously operated on the “modified cost basis standard” although audit standards generally recognised standards such as “generally recognised” or “generally accepted” accounting principle standards.

The Chairperson asked if it was possible for GCIS to challenge the findings made by AGSA, or if AGSA and GCIS engaged when the findings were made.

Mr van Vuuren answered that both the GCIS and several other entities had come very close to having completely “clean” audits. However, there were some compliance issues that had to be resolved. He noted that an audit report would be regarded as final when it was signed off. Issues were always discussed with entities before the report was signed off.

The Chairperson asked what entities could do if they were not satisfied with the audit outcome.

Mr van Vuuren replied that it was possible to have a difference in opinion, but the AGSA would discuss these in a proper forum.

Ms Killian noted that the GCIS was still using a modified cash basis model. She wondered to what extent the Committee should feel comfortable with the audit opinion, if the GCIS was using a system that AGSA did not think was the best system, and wondered when this would be revised.

[From this point on, the audio system in the venue was faulty].

Mr van Vuuren answered that other entities had already moved to different systems, but said that the GCIS was not actually doing anything wrong. Before GCIS could move to another system, it would need to ensure that another fully-integrated system was in place.

Ms Killian asked if the GCIS would have better controls if they moved to a better system.

Mr van Vuuren answered that this would not necessarily follow.

Department of Communications 2010/11 Audit Report
Mr P Phukudze, Senior Manager in charge of the Department of Communications and its entities, AGSA, noted that the Department of Communications (DOC) had received an unqualified audit opinion, which was an improvement from the previous year's qualified opinion. The Independent Communications Authority of South Africa (ICASA) received a qualified report, which remained unchanged from its 2009/10 outcome. The National Electronic Media Institute of South Africa (NEMISA), the Universal Service and Access Agency of South Africa (USAASA), the Universal Service and Access Fund (USAF) and Telkom all received unqualified reports for the second year in a row. The South African Broadcasting Corporation (SABC) received a qualified audit opinion, which was a regression from its 2009/10 unqualified audit outcome. Sentech showed improvement by receiving an unqualified audit opinion, in comparison to the qualified audit in 2009/10, and the South African Post Office (SAPO) received an unqualified audit opinion with matters of emphasis, which was a regression from its 2009/10 unqualified audit outcome with no findings.

AGSA found that ICASA and the SABC both struggled with issues of non-compliance, and there were questions raised on the usefulness of the financial information provided by ICASA, the SABC and USAASA. AGSA also questioned the reliability of these entities’ information. There were difficulties with the presentation of ICASA's information. Sentech was also questioned on issues of non-compliance. There were no findings on pre-determined objectives for the DoC, NEMISA, USAF and SAPO. Telkom was exempted from compliance matters.

The SABC and Sentech were found to have issues of non-compliance in relation to laws and regulations on strategic planning and performance management. USAASA was questioned on non-compliance with regulations concerning its annual financial statements. The SABC had issues with its budget and revenue management. All the entities except Telkom struggled with non-compliance with procurement and contract management laws and regulations.

The SABC had pointed out to AGSA that it had film and sports rights with a carrying value of R310.6 million, and work in progress of R332,95 million. However, AGSA was not provided with supporting documentation to substantiate the carrying amount of R296.97 million, relating to originated programme and film rights included in originated programme, film and sport rights, nor with information supporting the work in progress to the amount of R312.59 million. Consequently, AGSA was unable to determine whether the cost price of amortised assets was materially misstated and the corresponding amounts were included in commitments and trade and other payables.

In respect of ICASA, AGSA had been unable to verify the National Revenue Fund amounts receivable, and resulting payable balances amounting to R899 906 346 and R906 839 654 respectively, as disclosed in the financial statements. This happened owing to the lack of control over the invoicing and collection of license fees. The entity's records did not permit the application of alternative audit procedures regarding the amounts receivable and payable. Consequently, the AGSA was unable to obtain sufficient appropriate audit evidence to verify the existence, completeness, valuation and allocation of rights and obligations pertaining to the National Revenue Fund. AGSA was therefore unable to reach a final conclusion on the valuation of rights and obligations, or the completeness, classification and understandability of the financial instrument disclosures in the financial statements.

Furthermore, ICASA had also used an incorrect method of calculating its depreciation and amortisation when a change in estimate occurred in the prior years. Because the AG was unable to determine the valuation of the opening balances for property, plant and equipment, and intangible assets, as at 1 April 2009, it could then not be satisfied as to the accuracy or completeness of the depreciation and amortisation in the 2010/11 financial year.

AGSA then reported on findings in relation to human resources (HR) matters. In the Department of Communications (DOC), some employees were not provided with written contracts of employment at the time that they were employed, and some appointments were made into posts that were not approved and funded in line with the Public Service Regulation (PSR) requirements. The correct process was not followed to verify claims made in the application forms, also in contravention of the PSR. It was found that executive authorities did not engage in HR planning with a view to meet the HR needs. Overtime pay exceeded 30% of the basic salaries in some instances. Funded vacant posts were not advertised within six months after becoming vacant, and were not filled within 12 months after becoming vacant, in line with the PSR. The executive authority did not plan within the available budgeted funds, for the recruitment, retention, deployment and development of HR to address the DoC's needs.

Finally AGSA noted that it had not been able to find sufficient or appropriate audit evidence that appointments were made to posts properly advertised in line with the PSR.

Discussion
Ms Michael was extremely concerned about comments made in this presentation, saying that AGSA had painted a very horrifying picture about what was happening in the entities. She commended AGSA for its superb presentation which had clearly highlighted the problems. The Committee appreciated this specificity, which directed the Committee to what questions had to be asked of the entities.

Ms Michael expressed her concern about the amount of irregular expenditure in SAPO. She expressed the view that this was surely not merely attributable to negligence, and asked at what point the fruitless and wasteful expenditure would become a matter for criminal investigations. She could tell that AGSA was also concerned about these findings.

Mr Phukudze replied that he had previously been asked why entities still showed irregular expenditure if they knew how to prevent it, and how people were being held accountable. The amount of irregular expenditure for the communications entities was indeed high. The question was why this was still happening, if the officials knew how it could be prevented. He pointed out that in terms of the Public Finance Management Act (PFMA), the Accounting Officer had a duty to prevent fruitless and irregular expenditure. If there was irregular expenditure, the Accounting Authority had a duty to investigate and take disciplinary measures against those responsible for it. Once AGSA started auditing the entity, the matter became the clear responsibility of the executive authority, and it was thus up to the Committee to investigate these issues further. It was obviously in the interests of the oversight Committee to know what was happening with the investigations and who was being held responsible for the mismanagement of finances.

Mr Phukudze added that fruitless and wasteful expenditure indeed could have some criminal elements. After such expenditure was discovered, an investigation had to be conducted. If it was found that officials had been guilty of transgressions, they could be suspended or criminal charges could be laid with the South African Police Service (SAPS).

Ms Killian aligned herself with the remarks of Ms Michael. The Committee had previously asked AGSA to point Members specifically to the provisions of the PFMA that held Accounting Officers fully accountable and provided for sanctions, but had been informed that no official in the public service had ever been fined for gross negligence. However, she felt that there was a need for the Committee to take a very severe stance. These entities had specific goals and outcomes that would impact on the lives of people in the country. There were significant expectations in the communications sector that if all the entities worked effectively, they could create jobs that would make a positive impact on all in South Africa. She again asked which provisions of the PFMA could be used by the Committee to ensure that the DoC and its entities performed better in the future. She also enquired whether AGSA was of the opinion that the necessary controls were in place within the different sections of the DoC that were overseeing its entities. She also asked at what stage AGSA would conduct a performance audit on the DoC. She further asked for comment on the interaction between AGSA and the Public Service Commission (PSC), pointing out that a report by the PSC, tabled in 2009, identified some serious managerial weaknesses within the DoC.

Mr Phukudze answered that the PFMA specifically said that the person responsible for the irregular expenditure had to be held accountable and steps had to be taken to recover the funds, and pay them back to the entity. However, he thought that the PFMA was perhaps not clear enough on the point, because if the irregular expenditure was made by the very same person who was supposed to conduct the investigation – the Accounting Authority – then there was no guidance as to what should happen then, although the logical step seemed to be that the Executive Authority should then step in.

Mr Phukudze added that the call for the AG to conduct a performance audit had to come from Parliament. In 2008/2009, Parliament realised that there had been misuse of consultants in the Department, and it had asked AGSA to investigate this. If Parliament wanted the AG to conduct an audit on fruitless and wasteful expenditure, it should request this.

Ms Newhoudt-Druchen said she would have preferred to see a presentation that dealt with each of the entities entirely separately, rather than putting all the information together. This would have made it easier for the Committee to understand and isolate all the issues.

Ms Newhoudt-Druchen asked for an explanation of what AGSA meant when it referred to “not useful” (on page 6) and “not reliable”. She also asked what was meant by “regression” and “unchanged”.

Mr Phukudze explained that an “unchanged” opinion meant that the entity achieved the same audit outcome as it had done in the previous year, whilst a “regression” meant that the entity had moved to a favourable audit outcome to one that was less favourable.

He elaborated on the improvements made by the DoC. The DoC had looked into the factors that formed the core reasons why its audit report had been qualified in the previous financial year. Those had related mostly to irregular and fruitless expenditure. In the 2010/11 financial year, the majority of the irregular expenditure was identified by the DoC, which was to some extent a positive development, as it showed that the DoC now had controls in places to identify irregular expenditure, and was able to disclose this information. He did not have much information about Sentech and the other entities. The Committee would have to ask questions of these entities when they appeared before the Committee.

Mr D Kekane (ANC) noted that AGSA had indicated that there had been an improvement with the performance of the entities, overall. However, it was important to look at the reasons why certain entities improved while others did not. This information could be used to help entities that were lagging behind.

Mr N van den Berg (DA) addressed the issue of wasteful and fruitless expenditure. He agreed that this was a serious allegation against the leadership of some the entities and the Committee had to get to the root of the problem.

Mr Phukudze replied that it was not the task of AGSA to uncover irregular expenditure, but instead it had the task of satisfying itself that the entities’ books, as presented to AGSA, were correct. He agreed that if indeed the amount of irregular expenditure reported upon was a true reflection of what was happening in the entities, then this was indicative of a leadership problem in government.

The Chairperson said there was nothing surprising about the information presented by the AGSA. He commented that the entities had attempted deliberately to mislead the Committee when they had given previous presentations to Members, and it seemed they were doing the same to the AGSA during the audit.

The Chairperson also asked what was meant by  “usefulness” and “reliability of information”, and commented that it was a worrying trend when this kind of information was provided to the Committee and other institutions.

Mr Phukudze explained that AGSA measured entities against their strategic plans, their business plans and their quarterly plans. Inconsistencies arose when information was contained in one report but not in the others, and in such cases AGSA would reach the conclusion that the information was “not useful”. If the information provided across the plans was not consistent, then AGSA would regard that information as “not reliable”. Information would also be regarded as unreliable if it was  not achievable, or had not been achieved, and was not supported by evidence. There was a certain way in which the information had to be reported to the AG, and it should not be split up or broken down.

Ms Newhoudt-Druchen asked how the Committee could motivate for more funding for the DoC if it still showed so much fruitless expenditure.

Ms Newhoudt-Druchen also pointed out that the DoC’s  Annual Report indicated that the audit committee did not meet as required during the 2010/11 financial year and asked how often it should meet.

Mr Phukudze answered that the audit committees were supposed to meet at least four times a year, but there were some entities whose audit committees met six times a year. The reason the DoC's audit committee did not meet was because the audit committee members’ terms of office had come to an end.

Ms Killian said that the Committee now seemed to have established, beyond doubt, that although some of the entities had previously been struggling, they were now in their “death throes”. Challenges in leadership and accountability had risen again. She asked if this was the point at which the Committee should use the PFMA to address the problems. She agreed that it would be difficult to convince the Committee that the entities should obtain more funding. She asked if there were other mechanisms that the Committee could use to address the problems.

Mr van den Berg said he thought the DoC's subsidiaries were “making a mockery of Parliament”. Members of Parliament represented thousand of people who voted for the political parties to look after their interests, yet those people were losing faith. He said that the Committee had now seen the problem several times. The Chairperson had used strong statements, including that the entities had “misled” the Committee. The Committee had to assert its authority, in line with its oversight and public representative function. The media had previously criticised this Committee for not doing enough, and he thought that Members should no longer tolerate excuses.

The Chairperson asked AGSA to present its recommendations for the DoC and its entities. He reiterated that he had thought that the entities only seemed to be misrepresenting the position to the Committee, and had not anticipated that inaccurate information was also provided to AGSA. Some entities were honest, but others were not. He hoped that the Committee could reach the stage of making recommendations for the removal of officials that misrepresent certain information in Parliament. The entities had a great deal of explaining to do on irregular and wasteful expenditure. The Committee needed clear reports and action plans from these entities.

Mr Phukudze said he had already made recommendations to Nemisa, USAASA and the DoC, who were already busy drawing their action plans. He said that in order for entities to improve, they had to resolve their leadership problems.

Ms Killian warned that the Members would expect an open approach from the DoC that informed the Committee precisely what difficulties it had. She reiterated that the Committee had to be able to hold the DoC and its entities to their objectives.

The meeting was adjourned.