The Auditor-General South Africa (AGSA) presented a report on the audit outcomes of the Department of Defence and the entities. Although the Department, similar to the two previous years, had received a qualified report, there had been some improvements and the number of qualifications had reduced. The Special Defence Account, with concurrence of the Auditor-General, was to be audited by the end of November. The Castle Control Board, the National Conventional Arms Control Committee and the SANDF Fund received unqualified audits. The Department of Military Veterans was not yet fully operational, and was still accounted for through the Administration programme of the Department of Defence.
In the past, the Department had received qualifications in relation to accruals, leave, contingent liabilities, income and expenditure, liabilities, and revenue items. It had been running a programme aiming to improve matters for the last three years. The Minister was taking a keen interest and had set up some systems to assist. The size and widespread nature of the Department made its work around asset management difficult, and it had a number of bases to which, in the past, items would be delivered but not accounted for. In the 2010/11 financial year, there had been some improvements, but sufficient controls were still not in place. The AGSA briefly explained the Generally Recognised Accounting Practices (GRAP) requirements. It was explained that the internal audit unit was not yet fully functional as, although it was set up, it was not staffed. A major problem was the insufficient direct involvement of senior management in addressing risks around disclosure of assets and asset management. Controls in respect of financial and performance management were not adequate to ensure adequate record keeping, in a timely and accessible manner. The Accounting Officer had not ensured that a fully-operational internal audit function was in place. Tighter measures therefore had to be implemented to ensure that all policies and procedures were fully updated, and complied with. There was also inadequate control over the safeguarding and maintenance of assets, to prevent theft, loss, wastage and misuse. There were no material findings around the Department’s annual performance report.
Members asked for more detail about the failure of the Department to comply with requirements around assets, and also asked for details on irregular expenditure. They also expressed control around other issues raised in relation to senior management, including the failure of some to declare their business interests, the fact that procurement policies did not ensure that tenders were properly awarded, and lack of capacity that had resulted in proper asset registers not being prepared, or that irregular treatment of those assets occurred. They furthermore noted that a large amount was paid to consultants and called for a report on this. They asked about the implications of the systems of accounting, noted that it was intended to ensure more transparency in the Special Defence Account, called for copies of the policies, and asked if the foreign missions were also audited. One Member thought that there were too many questions to be asked at this meeting, and suggested that the Committee should carefully examine the different areas and formulate suggestions for the Department to effect improvements, and the research unit was also asked to assist in this regard. Further explanations were given as to how the systems worked, and it was pointed out by AGSA that if the Department did not adequately equip its staff with both policies and the necessary training and manuals, few improvements would be seen.
The Committee adopted several sets of minutes between May and September 2011.
The Chairperson noted that, in the absence of a quorum, the Committee could not adopt minutes.
Department of Defence 2010/11 audit report: Auditor-General South Africa (AGSA) briefing
Mr Barry Wheeler, Corporative Executive, Auditor General South Africa, briefly outlined the history of the Department of Defence (DOD or the Department) audit outcomes over the past few years, and indicated that the Auditor-General South Africa (AGSA) would indicate the position in respect of the 2010/11 financial year, on findings that had been problematic in the past. These particularly related to accruals, leave, contingencies, income and liabilities, and revenue items. The DOD had embarked, in the last three years, on a programme to try to improve, and in the past year it had seen some resolutions made for better control and control mechanisms within the Department. He said that one of the main problems was the size of the Department, and its widespread bases, where items were delivered. Another problem was that many of the military personnel were not skilled in, nor trained in, administrative issues, which created a problem with record-keeping.
Mr Wheeler noted that the Minister of Defence had been fully apprised of the findings, and should be commended on her attitude and willingness for the Department to try to move to a cleaner audit. However, the bureaucracy had the potential to hamper progress, because some individuals tended to use that to slow down the necessary steps. There had been no clear vision of what the DOD wanted, and where it sought to be in five years. Many of the problems resulted in qualified audits resulted from the lack of enthusiasm and no initiative taken by its employees, as they were used to taking orders in the military arena.
Mr Wheeler explained that the resolution on the assets issue was in three phases. There had been a massive rollout, which was not easy to monitor or control due to the use of specialised equipment and the geographical placement, and the fact that people were moved from base to base. Movable asset record keeping was still problematic, although the situation in regard to immovable assets was settling down, as there was greater synergy between the Department of Public Works (DPW) and the DOD. Some immovable assets were taken over by DOD. There were, however, some concerns still on the intellectual property around the assets. It would be beneficial for Armscor to bring the asset register up to date and to report in that regard.
Mr Wheeler noted that the Chief Financial Officer should prepare quarterly reports which would determine the leave provision, contingent liabilities, accruals and debtors. That would ensure that a good practice was established in preparation for the annual financial report. It would yield credible information and not the mix-up that was currently seen at year end. There was also a need to formulate a compliance check list. The Minister had appointed a compliance officer. The check-list should create greater compliance in procurement. The DOD had R60 million worth of assets which were not registered on the asset register. The Committee should receive a quarterly progress report in this regard. He noted that the disposal of assets in the DOD was slow, and there were old items which still had to be maintained, but which should be cleared and give revenue and less expenses.
He suggested that the audit committee of the DOD should meet with the Committee Chairperson and brief the Committee on what it was doing about control in the DOD, and use their expertise to its full capacity. The special defence account/fund should be prepared on the Generally Recognised Accounting Practices (GRAP) form of reporting as this was the standard required by the National Treasury. Although the DOD had moved to a better position in relation to the audit, compared to previous years, and he noted that there had been substantial interrogation by this Committee, the DOD should still tighten the controls, and ensure plans to sustain good practices and processes put in place during this financial year.
Mr Wheeler then went on to provide further insight into the issues identified during the 2010/11 financial year, and noted that the AGSA had audited the Department of Defence, Special Defence Account, National Conventional Arms Control Committee (NCACC), Castle Control Board and the South African National Defence Force Fund. The Department of Military Veterans was not yet fully operational and all financial transactions for it were incurred by the DOD and reflected under Administration programme.
The Department was required to account on the modified cash basis of accounting and had to prepare its financial statements in terms of National Treasury Guidelines for National and Provincial departments. The Special Defence Account framework had changed from an entity-specific basis in 2010/11 and was using the GRAP basis of accounting. As the result of the change in the reporting frame the Department had still not submitted the signed financial statements to the AGSA, but was to do so in November 2011. Other entities prepared their financial statements in accordance with GRAP.
The appointment, functions and composition of the audit committee was done in terms of section 77 of the Public Finance Management Act (PFMA). The Audit Committee reported on the material break downs in the functions of controls, procedures and systems concerning the Department of Defence and Special Defence Account. The South African National Defence Force Fund (SANDF Fund) did not have an audit committee in place during the 2010/11 financial year. The Fund was very small, and did not justify having such a committee, so its internal audit function was filled by the DOD. The relevant audit committee had fulfilled its responsibility in respect of the Armscor Group and Castle Control Board (CCB). In terms of Section 38(1)(a)(i) an internal audit unit was approved by the Minister in 2008. The positions in this unit had been vacant, although advertised, so the unit, although established, had not been filled with qualified and skilled staff. Therefore their internal audit was also done by DOD for the moment.
Mr Wheeler reiterated that a qualified audit report for the Department had been issued in 2010/11, as well as 2009/10 and 2008/09. Tangible and intangible capital assets were a major area of concern. He reiterated also that the audit for the Special Defence Account was still awaited. The other three entities showed no serious qualifications.
AGSA commented that management should ensure that policies and procedures were implemented to address the control deficiencies in the asset control environment, which had to include controls over daily and monthly processing and reconciling of transactions, so as to disclose capital issues as required by the National Treasury. Another control deficiency was that there was insufficient direct involvement by senior management to address risks associated with the disclosure of assets and assets management. The policies and instructions of DOD around compiling an accurate and complete assets account were outdated and a proper action plan had to be developed, implemented and monitored to ensure accurate and timely reporting.
In respect of the financial and performance management, AGSA had found that management manuals or automated controls were not designed to ensure adequate record keeping, in a timely manner that was accessible and available. There was a lack of controls implemented to ensure that reconciliations were performed between the current LOGIS system and the financial system, with regard to additions and disposal. DOD also lacked controls to ensure the correct classifications of assets and to ensure that all assets were linked to the standard chart of accounts. In respect of governance, there were no internal audits or independent evaluations to ensure compliance with policies, procedures and disclosure requirements.
AGSA then moved to describing whether DOD had complied with the law. The Accounting Officer had not ensured that an internal audit function was in place in line with National Treasury Regulations. Steps therefore must be taken to ensure that the Head of Internal Audit was to be appointed. Measures should be implemented to ensure that policies and procedures were updated by the DOD leadership. The Accounting Officer did not implement an adequate control system for the safeguarding and maintenance of assets to prevent theft, loose, wastage and misuse. It was reported that some transactions to the value of R500 000 were not procured through a competitive bidding process. The Minister had now appointed a compliance officer to assist with developing a compliance framework, to facilitate compliance with laws and regulations. DOD had insufficient direct involvement by senior management to address risks associated with non-compliance.
There were no material findings on the Department’s annual performance report. DOD had no functioning internal audit division, and the audit process for 2010/11 financial year was still in progress. Measures must be taken to ensure compliance with laws and regulations in future.
There were no financial qualifications on the SANDF Fund.
The NCACC did not submit three quarterly reports from April 2010 to December 2010 to the Committee of Parliament, as was required in terms of Section 23(1)(b) of the Act.
The Castle Control Board had no financial qualifications.
It was also reported, in respect of adherence to legislation, that the Accounting Officer had not applied the requirements of the Preferential Procurement Policy Framework Act.
Mr Wheeler noted that the Department had been improving in respect of budget information. It had moved to having a cleaner audit. The DOD had spent fully against its budget, which meant that there was serious work being done. There was a large challenge on the issue of tangible and intangible capital assets, which were stated at R76.9 billion, but he referred to the previous comments in this regard. In respect of the DOD there were no material findings on the predetermined objectives. He commented again that in respect of the general control environment, the Department did not have a functioning internal audit division.
Mr D Maynier (DA) stated that the Auditor General had dealt at length with that issue of the audit opinion regarding the issues of movable and immovable assets, and had clear recommendations. He asked for more clarity on the concern about the sustainability of the good practices. He also asked for more comment on the employment of consultants by the DOD, including who the consultants were and how much they had been paid.
Mr Wheeler noted that consultants were paid R60 million.
Mr Wheeler said that the main concerns around asset management arose when the stocktaking was done and it was found that the asset registers were irregular, redundant or inaccurate, or that stocktaking was not done taken. The quality of information relating to assets was poor and this had an impact when the assets were transferred.
Mr Maynier sought further details and particulars on the R800 million of irregular expenditure, and said that they could be submitted later if there were not details available at present. He also sought more details on the expenditure that was still under investigation, again requesting a written report within a reasonable time.
Mr Wheeler responded that in respect of the issue of irregular expenditure, there were details set out on pages240 and 241 of the Annual Report, but the Department could also provide the Committee with additional information.
Mr Maynier asked about procurement and contractual management, which was not raised previously. AGSA had reported that in some instances those supplying had links to the State. There were some irregular bidding processes, where senior managers were not disclosing their business interests, and he asked for a written report, by AGSA, of which tenders were awarded irregularly and who was supplying goods to the state, as well as a report on those senior managers who had not declared their business interest. He believed that AGSA should do a more focused audit, which he said would be in the public interest, particularly since there appeared to be “skeletons in the closet” in respect of supply chain management.
Mr Wheeler said, in relation to the tenders, that he would revert to the Committee. However, he explained briefly that it was linked to the lack of policies compiled. He noted that there seemed to be a trend whereby an individual who was working in one State department would be the client, via a tender, in another Department’s work, without declaring interest, or that the next of kin or a spouse of an official would be the one to be awarded the tender. AGSA was looking into tightening controls around tenders, such as perhaps requiring National Treasury approval of tenders over a certain amount.
Mr Maynier asked about the implications of the transfer to the GRAP system of accounting, and the reasons and implications around the Special Defence Account.
Mr Wheeler said AGSA did not only audit for this Department, but others as well, and therefore the institution of GRAP would bring about more transparency in the procurement arm of Armscor.
Mr Maynier asked if it would result in a more transparent Special Defence Account.
Mr Maynier asked that AGSA should furnish the Committee with a copy of the supply chain management document.
Mr Maynier noted that the processes of the Department were sprawling in nature and he asked if AGSA or the DOD carried out an audit on foreign missions all over the world.
Mr Wheeler responded that, through the Foreign Affairs division, AGSA did visit missions in the
Ms H Mgabadeli (ANC) commented that she had had some time to look through the documentation, but there were numerous questions that she had. She thought the Committee should look carefully at each area of deficiency, and consider how these could be corrected, as this might be a good way to lead the Department to a better footing for the future.
Mr J Masango (DA) asked about the contingency claims and asked for further elaboration on this point.
Mr Wheeler said that the comment on contingent liabilities was set out at page 237 of the Annual Report. In this case, he explained, an employee would purchase a house and the Department would secure a guarantee on the loan until the paid up portion of the house was worth more than the guarantee, in which case the guarantee would fall away. That value was shown as contingent until that happened.
Mr Masango asked if AGSA could clarify the difference between “properly prepared” and “fairly presented” and asked what, according to the GRAP systems, would be regarded as acceptable.
Mr Musa Hlongwana, Business Executive, AGSA, noted that previously the Department reported according to the Modified Cash Basis system of accounting. There were various methods, including modified cash basis, GRAP or Generally Accepted Accounting Practices (GAAP). If an entity did not use GRAP or GAAP, AGSA would refer to the accounts as “properly prepared”. Those who did use the accepted frameworks were said to have had their accounts “fairly presented”.
Mr E Mlambo (ANC) enquired the meanings of two acronyms.
Ms N Mabedla (ANC) commended AGSA on its work. She thought that the Department had improved, reducing the number of qualifications in its report. She asked when the change-over to a different accounting system was implemented. She asked if the DOD would be penalised if it did not submit on time.
Mr Hlongwana said that the Special Defence Account process was anticipated for completion on time; the financial statements were almost ready and the report would then be presented. It would definitely be completed by end-November.
The Chairperson wanted to know if there was mismanagement or lack of management capacity where documents relating to assets had been lost. It seemed rather strange that the person in charge of booking out vehicles or equipment did not have a register, or could be unaware that a particular vehicle had been booked.
Mr Wheeler said that Members needed to be mindful of the fact that that the key component of producing credible information was that certain set requirements must be met. He noted that excellence was also tied to having capacity, and that did not necessarily mean how many people there were, but also went to wider issues such as how the Department would undertake skills competencies, how it would reward key performers, do appraisals and other issues. The question was therefore whether the Department added to the basic frameworks by carrying out training, having manuals, running seminars and other initiatives that would ensure that proper systems were in place and operating.
Mr Wheeler added that the SANDF had fallen behind, as some individuals were employed in areas that were not within their expertise – for instance one soldier was promoted to another position vertically, rather than horizontally, and that had created blockages. The Department seemed, at the moment, to have resolved the issues around loss of receipts and documents.
The Chairperson agreed that it would be useful for the Committee to follow the approach suggested by Ms Mgabadeli, and also suggested that the research unit should give input on the report, in order that the Committee could look into ways in which the Department could be assisted.
Adoption of minutes
The Chairperson noted that a quorum had now been reached, by the co-option of another Member.
Mr Maynier questioned if this was a correct procedure, seeing that Ms C Zikalala was not a Member of this Committee.
The Chairperson referred him to the Parliamentary Rules, which stated that any other Member, not necessarily a member of the Committee, may be co-opted to form a quorum.
The minutes of 22 May 2011, 28 May and 31 May were adopted, with amendments.
The adoption of the minutes of 1 June 2011 was postponed, pending confirmation from the recording on some points.
The minutes of 7 June 2011 were adopted, with corrections.
The minutes of 15 June, 29 June, 21 July, 2 August, 24 August, 5 September, 14 September and 21 September 2011 were adopted.
The meeting was adjourned.
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