It was resolved that Members would compile their own recommendations for discussion at the next meeting, and that they would also need to interrogate the Department further on the adoption of some of the recommendations from the previous year.
The Auditor-General South Africa (AGSA) then briefed the Committee on its mandate as a Supreme Audit Institute, tasked with exercising oversight and accountability in the public sector in order to build public confidence. A representative of AGSA briefed the Committee on the purpose and nature of financial reports and audits both of financial statements and performance, and explained the different types of audit findings that could be given. A brief outline was given of the performance of the entities within the overall energy portfolio. It was noted that the Department of Energy had received an unqualified report but there were some findings, which were outlined. It was in particular found that not sufficient internal monitoring and controls were exercised, and as a result there was a need to make material adjustments to the financial statements, whilst there was also non-compliance to laws and regulations, particularly in some of the entities. There were ineffective compliance checks, with the result that some transfers were made without ensuring that the legislative requirements had been complied with. Members commented that two years previously, the Department had already stated that the non-filling of vacancies at senior level was putting stress on the systems and asked if this was linked to the comments. They asked other questions about the technicalities of audits, the transfer of funds between programmes, and the procedures if any irregularities were uncovered.
Budgetary Review and Recommendation Report (BRRR): recommendations from study visits and recommendations from previous reports
Mr Arico Kotze, Committee Secretary, Portfolio Committee on Energy, read out all the recommendations that were contained in the Budgetary Review and Recommendation Report (BRRR) 2010, and notes on oversight visits that the Committee had conducted to PetroSA, and Central Energy Fund (CEF). He further read out recommendations relating to budget vote 29 and the recommendations arising out of the Study Tour to France, to guide members on key areas of deliberations. He told the Committee that his predecessors had not provided him with recommendations made on other visits to Mozambique, France, Lesotho and Ghana.
The Chairperson observed, during the reading of recommendations on the Atlantis visit, that no reference was made to the Cape Advanced Engineering Project (CAP) on which the Committee had promised to make a follow up.
The Chairperson noted the fifth recommendation on the CEF, and asked the Committee Secretary to look further into and report back on what was meant in relation to section 34.
Members expressed their concern that several issues that should have been included in the report were not mentioned. The Chairperson asked the Committee Secretary to produce recommendations or observations that were made in the period before May 2011, saying that the report contained information gathered only after he had joined the Committee. The recommendations in question were based on study tours to countries such as Korea, Mozambique, Ghana, Lesotho and France which were not reflected in the report.
The Committee Secretary could not produce the report on the tours, saying that he had not received any further information on the visits from his predecessor.
Mr S Motau (DA) expressed his shock at this, saying that he could not understand why Mr Kotze had failed to get reports on those tours, as the information had certainly been captured. He proposed that the former Committee Secretary should be approached and asked to explain this. He said that if the reports could not be produced, then action should be taken as this had inconvenienced the Committee.
Ms N Mathibela (ANC) and Mr E Lucas (IFP) agreed that information on reports could be obtained from previous Secretaries. They added that the Committee should also approach the then-Committee Secretary during the time that the reports were compiled on the French study tours.
The Chairperson told the Committee that he had instructed the Committee Secretary to secure the reports from his predecessor, but was told that he not secured them. He stressed that the recommendations or observations on the visits on prior reports were necessary in helping the Committee to produce the new Report, and in order to measure the progress made by the Department of Energy (DOE). It was difficult to understand why the two previous Committee Secretaries on Energy could not hand over the reports to the incumbent Secretary. The Chairperson asked the Committee to make a decision on the matter.
Mr E Lucas said that the reports on the visits were indeed produced at the time. He pointed out that the Committee Researchers should be able to shed some further light on the matter. He expressed his anger that the Report was clumsily worded and incomplete, saying that it showed wasteful expenditure and was an insult to the committee. He suggested that the Committee should approach the previous Committee Secretary and seek explanation on the missing reports.
Mr P Dexter (COPE) was also angered by the Committee Secretary’s failure to produce the report and said Members were not paid to attend meetings to engage in unfruitful debates. He suggested that Committee Secretaries who were incompetent should be replaced with competitive individuals. This kind of practice was unacceptable and also tainted the Committee’s reputation, and prevented Members from contributing meaningfully to the performance of the Department.
The Chairperson answered that the prerogative to dismiss incompetent Committee Secretaries rested with the Secretary of Parliament only. He told Members that the reports could not be entirely lost, as the study visits to various countries had been recorded by the then-Committee Secretary. He, however, questioned why the previous Committee Secretary could not release the information.
The meeting was temporarily stopped to allow the Committee Secretary to seek clarification on the matter from Mr Mkize, one of the Committee managers. The Committee Secretary was then given eight recommendations in relation to Budget vote 29 and two others on the France study tour, which Members found lacking and inadequate.
Mr Dexter said it was not the business of Members to ascertain where the reports were, and how they had disappeared. He suggested that the Committee Secretary be given a period of one week to find the reports. If they were not found, then a complaint could be lodged with the National Assembly. He also proposed that a meeting be held with the Secretary of Parliament and Committee Section managers to resolve the issue, commenting that this was not the first time incompetence had been seen. For the sake of time, he suggested that Members should draft their own proposals, to be tabled at the following meeting. The wording of the Report was misleading and spoiled the essence of the recommendations.
Members again expressed their dissatisfaction. The Chairperson said that it seemed someone was trying to “fool the Committee”. He said that this was indicative of a serious problem, and undertook to discuss the matter with the Section managers and the Secretary of Parliament to try to address this problem, as it was derailing the business of the Committee.
The Chairperson said the Committee could adopt some of the recommendations but there was still a need for members to verify, both with the Department of Energy and the Auditor-General, some of the progress made on the previous BRRR, and any areas of shortcoming. This matter would be discussed further with the Department of Energy during the next meeting. He reiterated that Members should check whether the recommendations made by this Committee had been adopted by the Department, and also needed to isolate any that needed to be carried forward into the BRRR for 2011.
The Chairperson thought that all recommendations on PetroSA could be adopted but there was still a need for the Committee to get further information from the Auditor-General and the Department on establishment of a Monitoring and Evaluation Unit, progress on implementation of the Integrated National Electrification Programme (INEP), the Solar Heater project and Transnet. He reiterated that this matter would be tabled again at the next meeting.
Audited financial report of Department of Energy 2010/11: Auditor-General South Africa briefing The Chairperson thanked the Auditor-General South Africa (AGSA) for expressing interest in improving the ability of the Committee to understand and analyse audited financial statements of the Department of Energy, but expressed his disappointment that this had not been done when first requested.
Mr Sybrand Struwig, Senior Manager, Auditor-General South Africa apologised for AGSA’s failure to table the presentation during the previous meeting and promised to address the concerns of the Committee in future engagements. He thanked the Committee for affording AGSA a second opportunity to make its presentation.
Mr Struwig noted that AGSA audited the financial statements of each government department annually, providing independent verified information on how the government was spending taxpayer’s money. He explained the categories of auditing, and explained how these helped to achieve public confidence in the work of government.
Mr Struwig then said that the main purpose of AGSA’s presentation was to assist this Committee in better understanding and analysing the audit report of the Department of Energy, to explain the auditing process and terminology, and stress issues of particular importance in relation to the audit. The total Energy portfolio comprised 47 different audit reports, as there were many subsidiaries.
He outlined the types of audit outcomes that AGSA could give. Financially unqualified statements could be given, either with no findings on predetermined objectives or compliance with laws and regulations, whilst a financially unqualified report could also be issued that did contain findings on predetermined objectives and compliance with laws and regulations. Alternatively, financially qualified statements could be reported, and there were further categories of adverse opinion, or a disclaimer of opinion (see attached presentation for more detail).
Mr Struwig noted that previously, this portfolio was reported under the former Department of Minerals and Energy, and this was the first time that the Department of Energy was being audited on its own.
Mr Struwig then set out and briefly went through the legislative requirements for reporting, noting that sections 40(1)(a) and (b) of the Public Finance Management Act required the Accounting Officer to keep records and prepare financial statements, and then to submit the financial statements to the Auditor-General in terms of section 40(1)(c).The Auditor-General was required by the Constitution of South Africa to audit the financial statements, and was also obliged, in terms of the Public Audit Act of 2004 to prepare an audit report containing opinions or conclusions on the financial statement and financial position, predetermined objectives and compliance with financial management.
Mr Struwig then explained the types of opinions in more detail, summarising again that these could be unqualified, qualified, disclaimer and adverse opinion. An unqualified opinion (positive opinion) would be passed when the auditor was satisfied that the financial statement submitted reflected a true and fair view of the state of the finances, in accordance with applicable financial requirements. He stressed that there were different financial reporting frameworks in the public sector. The modified cash basis of accounting was used for national and provincial departments, and two sets of financial reporting frameworks were used for public entities, decided by National Treasury. He then noted that a qualified opinion would be expressed when the auditor concluded that an unqualified opinion could not be expressed because of disagreement with management from the financial reporting framework, but when such departure or the limitation of the scope was not so material and pervasive to require an adverse opinion or a disclaimer of opinion. An adverse report would be expressed when the effect of a disagreement with management regarding structures in the financial reporting framework was indeed so material to and pervasive in the financial statements that the auditor concluded that a qualification of the report was not adequate to disclose the misleading or incomplete nature of the financial statements. Finally, a disclaimer would be given when the possible effect of a limitation on scope was so material and pervasive that the auditor had not been able to obtain sufficient appropriate audit evidence to form an opinion on the financial statements. This was the worst type of opinion, which indicated that the auditor did not have any confidence in the financial statements, mostly due to lack of supporting documents.
Mr Struwig then noted that emphasis of matters drawn by the Auditor-General would draw the attention of the user of the reports to matters, other than those directly relating to the financial statements, that would be important to the understanding of the report by the user, and which were usually regulated by international standards on auditing. These related more to the entity, and would draw attention to important matters. Additional matters, on the other hand, drew attention of the users to matters that were relevant to the understanding of the audit by the user. |
He listed the examples of emphasis of matter that could be highlighted in an audit. These included comment on the financial reporting framework, on significant uncertainties –such as pending court cases, whether there had been restatement of corresponding figures, any material under or over spending, accruals and the comment on the entity’s status as a going concern. He listed examples of additional matters which might include material inconsistencies in the Annual Report, the financial reporting framework and material underspending and significance of uncertainties.
Mr Struwig then turned to discuss the audit of predetermined objectives, which had been discussed in detail at a previous year. The 2010/11 audit on the Department of Energy had not included a separate audit opinion on performance information. In the current year, and in some years after 2005, the Auditor-General was now including such factual material in the audit report. However, in the management report the Auditor–General would offer both an opinion and cite material findings to prepare management to achieve a clean audit on the performance information.
When analysing predetermined objectives, there would be a focus on compliance with regulatory requirements, usefulness and reliability. He said one of the major problems in the Energy portfolio was the setting up of a measurability framework that the National Treasury now required in respect of performance information.
Mr Struwig noted that the subject matter of audit reports was determined by the governing legislation around budgets, audit committees, internal audit management, asset management, financial misconduct, strategic planning and performance management.
Mr Struwig then noted that AGSA had issued an unqualified report on the Department of Energy. He noted that in addition to the annual audit, other reports could be issued during the year through the AGSA or the Department, and there could be investigations or specifically agreed-upon audits. In this year, no such other reports had been requested or given.
There were matters raised by AGSA in respect of unauthorised expenditure. In relation to the predetermined objectives AGSA expressed concern over the usefulness of information, as the performance information was deficient in respect of consistency, relevance and measurability. The root cause of the findings were identified as deficiency in leadership and financial and performance management.
Mr Struwig commented that none of the entities falling under the DOE had received a qualified or modified audit opinion.
Mr S Motau asked the AG to explain the deterioration in financially unqualified reports on predetermined opinions, which had fallen from 13 in 2009/10 to 22 in 2010/11.
Mr Struwig said that in respect of the measurability of information, there were a number of issues raised around the usefulness of information. There were quite a number of entities also in the portfolio for Energy that had not complied fully enough, and that affected the result.
Mr S Motau said that the Committee was concerned about issues of staffing in the Department. He asked if this could have been responsible for the result.
Mr Struwig responded that the findings could be linked to inefficient leadership or internal control deficiencies, and financial and performance management that was lacking.
Mr S Motau said the results had confirmed a problem that was raised with one of the senior executive, who lamented about the difficulties arising from the existence of vacancies at senior level. He had noted that this point was raised some two years previously, but was obviously making its effects felt. He felt that the Committee should urge strongly that the majority of management positions must be filled, to address the problems.
Mr E Lucas wanted to know whether the Department was allowed to transfer funds from one project to another.
Mr Struwig said that there was a legislated procedure that had to be followed before the Departments could transfer money from one programme to another. It was possible to make such virements, but they must usually not exceed 8%.
A Member asked if the Auditor-General was mandated to make recommendations for investigations in issues of irregular expenditure, and asked what actions would be taken when an investigation was not publicised.
Mr Struwig said that there were indeed procedures followed when there was evidence of financial misconduct. The financial officer must follow the investigation process, and if someone was found to have transgressed, disciplinary action should be taken. In instances where the Accounting Officer did not follow provisions, the Auditor General would report such a case as a non compliance.
The Chairperson asked what entity had been added to the audits of the total energy portfolio, to bring them up to 47 in number.
Mr Struwig answered that the Department of Energy was now included.
The Chairperson commented that Members found it difficult to understand the terminology used in the financial reports.
The Chairperson asked why the highest number of findings related to measurability.
Mr Struwig answered that such a position was achieved when the Department set targets that were either not measurable, or did not clarify what type of policy it used to measure success.
The Chairperson asked if it was possible, from this audit report, to assess the progress of the Department of Energy.
Mr Struwig commented that as this was the first audit report for the Department of Energy as a completely separate department, no direct comparisons were possible.
The Chairperson asked why there were a large number of reports on consistency.
Mr Struwig explained that these arose from the fact that indicators and targets were not measurable or consistent. When there was no clarity on the policy or draft that an entity used to measure its targets, findings about consistency would be made. Often, inconsistency occurred in instances where a strategic plan differed substantially from the audit report, or in instances where an entity reported on indicators and targets which were changed from those in the strategic plan.
The Chairperson wanted to know about the findings on materiality.
Mr Struwig answered that when the Accounting Officer submitted the financial statements they were not fully prepared in all material aspects. This needed to be seriously addressed, as management would rely on material to make decisions, and there would be problems if that was misleading. He recommended that management should be doing monthly reviews and the internal audit unit must be involved in those reviews.
Mr Lucas said that lack of reviews by internal auditors caused the Department to sit with a lot of money at the end of the financial year, which was often wasted.
The Chairperson proposed that the Committee hold a meeting with the Department’s internal auditors to remind them of their role as early warning system in the Department.
Ms Mathibela confirmed that it was necessary for the internal auditors and audit committee to work together consistently during the year, otherwise they would failing the departments. She asked the Auditor-General to confirm whether there were recommendations in relation to investigations of financial misconduct.
Mr Struwig responded that if the Accounting Officer contravened the law, s/he would be accountable to National Treasury. However, if an employee was suspected of financial misconduct, the Accounting Officer should investigate the case and take action if there was found to be any transgression.
The Chairperson encouraged members to note the comments, in order to prepare for their meeting with the Department, and noted that it was hoped that the Department would improve on performance.
The Chairperson asked the Auditor-General to explain the number of audit comments.
Mr Struwig explained that smaller entities tended not to have, or not to have enough internal auditors. This was caused by administrative misalignment.
The Chairperson asked the Auditor-General to clarify the audit findings on transfer of funds.
Mr Struwig said that AGSA had found that in some cases funds were transferred to entities without ensuring that the information required in terms of the Division of Revenue Act (DoRA) or National Treasury had been provided.
Ms N Mathibela (ANC) asked if unauthorised transfer of funds could occur in respect of municipalities.
Mr Struwig answered that the reports of incorrect transfer of money from one project to another, as mentioned in the audit, was based on financial misconduct findings in one of the rural municipalities.
Ms Mathibela asked if the regional offices had their own budgets.
Mr Struwig said that the Department must answer this question. Expenditure incurred could be at regional or national Department office but the Accounting Officer should have prevented the unlawful act.
The Chairperson thanked AGSA for assisting Members in their understanding of the audit report. He highlighted that in particular Members had been alerted to the risks inherent in a lack of cooperation between internal auditors and audit committee and confirmed that the two presentations by AGSA had been enlightening.
The meeting was adjourned.
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