Department of Arts & Culture Audit Outcomes 2010/11: Auditor-General briefing

Meeting report

Ms Corne Myburgh, Business Executive, Office of the Auditor General, presented an overview of the Arts and Culture portfolio’s performance for the financial year 2010/11.

Overview of the Arts and Culture portfolio’s performance for the financial year 2010/11
The Arts and Culture portfolio was divided into the Department and its 26 entities. The Department for 20009/10 received an unqualified opinion with other matters; it received compliance findings as well as predetermined objectives findings. Its status remained unchanged for 2010/11. In 2009/10 six public entities received clean audit opinions. In 2010/11 seven of the 26 entities received clean audit opinions. In 2009/10 sixteen public entities received financially unqualified opinions with other matters, as well as sixteen in the current financial year. The portfolio did fairly well with 16 unqualified, almost progressing to clean. There was also an improvement in the number of qualified opinions; in 2009/10 there were four qualifications and 2010/11 only two. The one sad and regressive opinion was for the National Arts Council, which was directly linked to the Downtown Studio and the fact that it was not properly accounted by the National Arts Council; although it was offered an opportunity to include it in its reports it took a decision not to include it, and, as a result, the auditors disagreed with information because they were aware that information was excluded from the financial statements.

Ms Myburgh explained movement in audit outcomes from 2009/10 to 2010/11. There were no new public entities. There were four improvements, moving from unqualified with findings to clean: Freedom Park, Luthuli House, National Museum, and the Playhouse. They managed to resolve the findings they had last year in not complying with predetermined objectives, and were now on the clean audit opinion status. The Performing Arts Company of the Free State (Pacofs) and Robben Island managed to improve from qualification to unqualified with other matters.

In terms of unchanged entities, the three entities that remained and maintained clean audit status were the National Museum, Voortrekker Museum, and the William Humphreys Museum. Eleven were unchanged: Ditsong, Iziko, Libraries for the Blind, National English Literacy, National Heritage Council, National Library, Nelson Mandela Museum, State Theatre, War Museum, Windybrow and Pan South African Languages Board (PanSALB); they all stayed unqualified with other matters. There was a lot of year-end effort to assist these entities to make adjustments, if they had not made those adjustments it would have ended in a qualification. One was unchanged in terms of the qualification, being the Afrikaans Language Museum / die Afrikaanse Taalmuseum,. It had inadequate controls to assure the auditors that the donor funding was complete.

There were three regressions from clean status to financially unqualified with findings: Artscape, Market Theatre, and National Film and Video. The regressions were all in terms of non-compliance. SAHRA regressed from unqualified with findings to a qualification. SAHRA did not have a person to manage the supply chain, the supply chain manager was only appointed in March 2011. It did not have supply chain procedures so a lot of irregular expenditure was identified. The National Arts Council went from a qualification last year to a disclaimer.

Only three entities received a qualification – the Afrikaans Language Museum / die Afrikaanse Taalmuseum, the National Arts Council and the South African Heritage Resources Agency (SAHRA). The Arts Council had qualifications on capital assets, current assets, liabilities, capital and reserves, other disclosure items and revenue. The majority of those related to the Downtown Studio. SAHRA also had a qualification on unauthorised, irregular, and fruitless and wasteful expenditure, as a result of not having a staff member who should have monitored and controlled and detected irregular expenditure.

The AG was pleased that Robben Island had now appointed a chief financial officer (CFO), although it still made use of consultants. It should be able to maintain what was in place.

The Performing Arts Council moved from a qualification to an unqualified audit opinion and the situation there was also fairly under control with the necessary people being appointed, all in acting positions, so that the Council would not regress back to a qualification.

Ms Myburgh turned to unauthorised, irregular, fruitless and wasteful expenditure. Looking at the national audit outcome for the year, an overall increase in irregular expenditure was disclosed, and the trend was also disclosed in the Arts and Culture portfolio. Unauthorised expenditure was not related to public entities, only to the Department. R42 million was disclosed by the Department, directly as a result of the Special Investigating Unit (SIU) investigation, as monies not used for their intended purpose and at the outcome of its investigation the SIU recommended that it be disclosed as unauthorised expenditure. In terms of irregular expenditure, the Department was at R3 million; for public entities R33 million was disclosed, but in the audit process corrections were made and an additional R53 million was identified. In 2009/10 a total of R20 million irregular expenditure was disclosed; for 2010/11 it increased  to R90 million - a total increase of R70 million.

Fruitless and wasteful expenditure was R7.6 million in 2010/11 compared to R8 million in 2009/10.  It could have been prevented if due care was taken.

In terms of the entities where the most irregular expenditure incurred, the National Arts Council incurred R10 million, once again related to Downtown and the way in which it dealt with the disclosure. The National Heritage Council had R5.7 million related to supply chain procedures not being adhered to. Robben Island had irregular expenditure of R27 million as a result of entering into agreements without having signed contracts between Robben Island and the service providers. SAHRA had R13 million as a result of not having policies and not having a person to manage control.

In terms of fruitless and wasteful expenditure, the National Heritage Council incurred one of the larger amounts, the biggest portion of which was R1.8 million for retainer fees. It was not normal to have retainer fees as part of a contract entered into with a person. Robben Island incurred R2.2 million fruitless expenditure.

There was a general increase in unauthorised, irregular, fruitless and wasteful expenditure within the portfolio. Unauthorised expenditure was not in accordance with the vote; under irregular expenditure supply chain processes were not followed; and there was irregular expenditure in terms of compensation of employees where there were incorrect appointment procedures and other non-compliance. There was also an increase in fruitless and wasteful expenditure disclosed and reported on.

Corrections of material misstatements identified by auditors, compared better with last year. The Department had one area where it had to make adjustments, which was in the disclosure notes. The provision notes included had to be corrected, all the irregular expenditure was not included and that had to be adjusted. The records and financial statements were of a fair quality; the Department needed to focus on the disclosure note portion.

Ms Myburgh turned to predetermined objectives for the Department and public entities. Non-compliance improved compared to last year; with only 7% findings raised compared to 23% last year. That 7% referred to Robben Island.

On non-compliance with laws and regulations, for the Department the main non-compliance was for expenditure management, irregular expenditure through the supply chain and for the corrections that had to be made in the annual financial statements and annual report. For the public entities the main areas of non-compliance were in terms of expenditure management and procurement contract management, and that directly linked to the irregular expenditure in supply procedures. The entities did not follow competitive and fair procurement process, they did not get three quotations, they did not go out to tender and always went back to the same suppliers; which was the cause in 58%.

Another focus area was findings on human resources management. For the Department, the CFO position being vacant for some time impacted on  managing the financial position, and the DG was only appointed after the financial year end. The AG raised vacancies as a complaint about  the Department. Annual performance agreements for the year were not always signed, which had a direct impact on performance information. The number of acting positions improved since the prior year, and the AG raised management of leave, overtime and suspensions, mostly in relation to the process of approving overtime; maintaining overtime agreement contracts were not in place as they should have been.

The main findings on HR management for the entities were management of leave, overtime and suspension.

Generally in governance there was insufficient control over the IT environment. For the Department, in all areas there was need to intervene and to improve. As to IT governance, policy procedures were not in place. Security management and user access controls were not in place, and for IT service continuity the Department still needed to intervene in back-up and disaster recovery procedures. IT in the public entities looked better with 65% of those areas under control, implemented and effective. 15% intervention was required.

Ms Myburgh concluded that the Arts and Culture portfolio had in general improved with only two qualified opinions, with the majority of other findings being compliance findings, specifically in terms of supply chain management and making sure that there were processes in place to prevent issues in the first place. However, these could be detected and dealt with.

The Department needed to play a role with assistance in terms of monitoring to help the portfolio to move forward to a clean status.

Internal audit could play a bigger role in both the Department and the entities to assist management in identifying control measures so that control issues could be addressed.

Discussion
The Acting Chairperson thanked Ms Myburgh for the constructive presentation that would assist the Committee in its oversight role, especially on the entities – SAHRA came up regularly.

Dr A Lotriet (DA) was interested in the Downtown Studios that had been present in the audit reports for some years. What was the problem, and what had to be done to solve it? She had noted in the National Arts Council report that the authorisation for the transaction had still not been given.

Ms Myburgh explained that the process had started incorrectly with the approval process not being in place and as a result there was non-compliance. With the change of ministers, the new Minister indicated that he felt personally involved and needed to decide the future of Downtown. The decision in terms of how Downtown should be constituted lay with the Minister, and once that was clarified the correct accounting could occur.

Mr S Ntapane (UDM) asked what were the reasons for the unchanged regression?

Ms Myburgh responded that the Department was accountable and in its oversight needed to make enquiries and look at the reasons.

Mr Ntapane asked what the implications were for failure to disclose.

Ms Myburgh responded that the process allowed for material corrections to be made, as long as it was within the time frames to allow the AG to report by 31 July and as long as the AG could still do the audit to verify those corrections.

Mr Ntapane did not understand slide 9 on predetermined objectives findings.

Ms Myburgh clarified that that was the information on objectives approved in the strategic plan and delivered on those strategic plans; in the annual report one reported on actual achievements. The information was then traced back to supportive documentation to verify that information was accurate. It was looked at in terms of compliance, the requirements adhered to, and whether there was a strategic plan, and quarterly reports in the prescribed format. This year only two entities were non-compliant, the Pan South African Languages Board (PanSALB) and Robben Island.

In terms of usefulness, the objectives of the strategic plan needed the SMART material. It had to be specific, it had to be measurable, and it had to be time bound. The AG did not look at relevance; it looked at whether it was measurable. For 2010/11 it was reported that in 37% of the entities the objectives approved at the beginning of the year did not meet those criteria.

Presentation was also in terms of the format, how the department or entity concerned should report, explain material differences and actual achievement, as was initially approved. The AG reported on 15% of the entities that the format of presentation deviated from what Treasury prescribed. (Robben Island and Windybrow).

Reliability: the information was taken back to the supporting documentation. If the department or entity concerned entered into an agreement or had specific deliverables the audit took it back to the supporting documentation and also annexed the supporting documentation to the annual report to say that in the annual report could the reader rely on that information.

Ms F Mushwana (ANC) asked for an explanation of an unqualified report.

Ms Myburgh explained that an unqualified audit opinion was given when the AG was satisfied that the financial statements in all material respects were reliable and accurate and sound decisions could be taken on the basis of them. Unqualified with other matters meant the financial statements were a fair presentation, but there were still compliance issues; irregular expenditure was not presented; or the performance information was not accurate: as a result one could not say that the department or entity concerned had clean administration, in contrast to unqualified which meant that the financial statements were a fair presentation of the activities and spending for the year under review.

Ms Mushwana asked why the management posts were not filled, and what were the time frames to fill those vacant posts? They were the people needed to drive the strategic plan.

Ms Myburgh responded that that question should be referred to the Department. Those vacant positions would have an impact on the mandate. When there were a lot of vacancies the AG referred the matter to leadership; it was within the ambit of leadership to make the decision to advertise the positions and make plans to get those positions filled.

Ms Mushwana said it seemed that SAHRA was everywhere; she would like to see PanSALB getting the same recognition as SAHRA, it was important because it was about languages, and languages could either divide or unite the people of the country.

Ms Myburgh responded that the AG referred a lot to SAHRA because it was the first time that SAHRA received a qualification; SAHRA regressed from what it had last year. The regression was mainly in terms of the irregular expenditure, no supporting documentation, and non-compliance.

Ms Myburgh agreed that languages were important. PanSALB maintained their status of unqualified with findings for last year; it was better this year. The AG was concerned that the chief executive officer (CEO) position must be filled as a matter of urgency. There was a lot of tension within PanSALB between the Deputy CEO and the CFO.

The Acting Chairperson said the Committee had recently raised the issue of the high rate of vacancies with the Department. With the billions of rands that Government worked with it was important to have supply chain management in place.

In terms of unqualified reports; what of entities or departments that had underspent amounts from year to year? The same applied to reports of fruitless and wasteful expenditure that went on year after year. Most of the entities did not have supply chain management systems in place.

Ms Myburgh responded on the repetitive findings. The cause was usually that nobody was held accountable, so there were no consequences for non-compliance, or non-adherence. The CFO was accountable, the next level was the CEO and the DG, and then it went to the leadership. Three layers were needed for clean administration, the first was leadership, the tone that leadership set, the urgency to adhere to rules and regulations. The culture started with the leadership. The next layer was financial management,  legal continuation, cash accounts, asset accounts, and doing everything every day to ensure quality financial statements. The last layer that contributed to clean administration was governance, which was interim audits and the role they played, and the audit committee in assisting leadership and identifying control weaknesses so that the leadership could act. To stop repeating findings there should be a process of holding people accountable. It was important that performance contracts were always signed, so that people could be held accountable.

The Acting Chairperson said that a CFO had been appointed for Robben Island. Were the consultants still there, and for how long was the contract? Consultants were expensive.

Ms Myburgh said that  Robben Island got in consultants just to assist with the last qualification; it was not a permanent arrangement. Investigations were still going on. The new CFO was aware of what was going on, was confident and would maintain what was in place.

Dr Lotriet followed up on the Downtown Studios. She asked if the Minister had decided to go the route of a special purpose entity with separate accounting. Would Downtown Studios no longer be involved with the Arts Council?

Ms Myburgh responded 'yes'.

Dr Lotriet referred to slide 11. In terms of supply chain management with the public entities, was she correct in assuming that there was uncompetitiveness in 58% of the entities. What would be the monetary value of those problematic processes? Did it constitute large amounts?

Ms Myburgh responded that the 58% bidding was out of the 19 entities. For example, in the National Arts Council the figure was R13 million, of which R10 million was other non-compliance related to the Downtown Studios figure. Robben Island Museum was at R27.6 million for supply chain management.

The Chairperson asked whether it would be better to appoint CFOs on a permanent basis instead of always acting, because they accounted for the taxpayers’ money. What was the AG’s advice to those entities and departments? Who would be accounting for those millions of Rands?

Ms Myburgh replied that the AG's recommendation would be to move away from Acting CFOs and fill those posts with permanent CFOs so that they could be held accountable.

Ms Mushwana referred to the future of Downtown Studios; Parliament could not allow that an entity could not move.

Mr Marius Erasmus, Manager: Regulatory Audit, Auditor-General of South Africa, noted that the Committee was very concerned about Downtown; the whole issue of Downtown had many challenges for the future. The agreement was R15 to R20 million, and it would still cost  a large amount to get it ready to have a proper studio in operation. The Department’s responsibility was to set up the Special Purpose Entity (SPE) for which there was a  finding for not getting approval from National Treasury according to the Public Finance Management Act (PFMA) and Treasury Regulations, and therefore non-compliance. Initial calculations were R3 million for set up costs, which was also included in the irregular expenditure as part of the amount corrected before the report was issued. Future challenges would be in the hands of the National Arts Council that would then be responsible for the entity, like a Section 21. It did not have the name of Downtown Studio any more. The auditors for the National Arts Council would have a huge task in the next financial year because of that set up. There was a need to be concerned about the future there.

The Acting Chairperson asked whether the Department had anything to say.

Mr Lordwick Ralebipi, Parliamentary Liaison Officer, Department of Arts and Culture, replied that he did not have powers; he only attended to take the message through to the Department for it to respond.

Ms Mushwana said the Department needed to send officials with powers to respond; the Department was not taking the entities seriously. The Committee needed to move and the Department should be driving.

The Acting Chairperson expressed disappointment. Normally the DG attended or sent officials with authority to give clarity to issues. It was a waste of time and money to send someone who could not do that. The Committee’s concerns would be raised with the Department when it met with it in two weeks time.

Ms P Duncan (DA) sought clarity on the new Minister’s personal involvement with the Downtown Studios. Was he personally involved? Did he have a financial interest, or was it a matter of decision-making around what needed to be done with the Studios?

Ms Myburgh responded that the Minister had no personal interest; in discussions he mentioned that the concern was escalated to his level so that he could assist and be part of the final decision on Downtown Studios.

The Acting Chairperson thanked the Auditor-General of South Africa for the presentation and responses.

Arts and Culture Budget Review and Recommendation Report: briefing by researcher
The Acting Chairperson asked the Auditor-General of South Africa whether it wished to give responses to the Budget Review.

The Auditor-General of South Africa had given all its responses earlier.

The Chairperson thanked the Auditor-General of South Africa for attending and for their advice; the Committee could see improvement in some of the entities. When the Committee went to Robben Island in June it was very worried, but from the presentation last week could see progress. That willingness to move forward must also be brought into the other entities.

The Chairperson also asked Mr Ralebipi to leave as the Committee was not at all happy with the Department’s disclosed budget and wished to discuss it in a closed meeting.

The Chairperson indicated that the Committee would be meeting to discuss the Budgetary Review again the following day and on Thursday

Dr Lotriet said Members had just received a very handy booklet on how to approach the whole process. She proposed that Members go and study the booklet, together with the draft report, and function at an optimum level the following day.

Mr Ntapane supported the proposal.

Ms Duncan also supported the recommendation and suggested the Committee adopt the minutes.

It was resolved that Members were to study the documents received and produce constructive recommendations for the meeting to be held on 19 October. No apologies would be accepted: there must be a quorum.

The Chairperson closed the meeting.