Audit findings: Minister's briefing on resolution of issues

Meeting report

Audit findings: Minister’s briefing on progress with resolving issues
Hon Lindiwe Sisulu, Minister of Defence, reported that the Department of Defence (DOD) had received an audit qualification from the Auditor-General (AG), in respect of the last year, on tangible and intangible assets. The DOD had failed to reach the high standards set by the AG, but great progress had been made, reducing the number of qualifications from 16 in 2006/7 to a single qualification in the last financial year. The Minister had “argued and pleaded” with the AG, for the preceding two years, that the unique circumstances of this Department be taken into account, as it was particularly difficult for it to comply with the high standards of the AG. International visits undertaken by the Defence Secretariat and the AG had revealed that defence departments worldwide had similar problems. Ideally, a unique report format had to be developed, as the current report format for auditing did not take DOD’s unique circumstances into account. DOD was looking at international best practice. DOD was still largely reliant on manual systems, but IT systems would be improved.

One finding was that the DOD asset register did not properly disclose assets. There had been a modification of findings, and the DOD currently had a proper asset register. The DOD was not yet fully up to AG standards, but it had been conceded that the DOD had moved from a worst offender to a department that had made great progress. The AG had been persuaded to add a column for progress, and the DOD was listed on this. It was recognised that Heads of Services and Divisions had to accept full responsibility for the correctness of information, and a compliance function was established in the Ministry. A capable internal auditor had been appointed. Information Technology (IT) systems also had to be made more accurate, and the information between finance management systems had to be matched.

The initial findings, from an interim audit since performed by the AG, looked promising. The Emphases of Matter had gone down from three in the previous year, to two now. The Emphases were related to lease agreements, and did not affect the audit qualification. Lease information was kept by the Department of Public Works (DPW) and was not readily available. The DOD’s information had been based on the DPW register but was found to be inaccurate, and the DOD had to go back and rectify the matter. There had been discussions with the DPW, who was asked to produce the original lease agreements. The DOD was now looking at an IT solution for a centralised electronic lease management system.

In respect of irregular expenditure, the Minister noted that there had been procurements to the amount of R799 million that were not made in accordance with National Treasury regulations. She insisted that the procurement method was unique, and that the nature of Defence activities had to be taken into account. There had been procurements without a government order. There were originally 129 cases reported, and 123 had been finalised. The amount of R303 million still had to be dealt with. The Chief Financial Officer had formulated a financial misconduct strategy, with measures to discourage unauthorised, fruitless or irregular expenditure. This financial misconduct policy looked at the cause, the transgressor and the circumstances. The HR unit would supply staff for a compliance unit. She reiterated that the internal audit structure had been developed and approved.

In respect of procurement, the AG had found that R500 000 worth of goods and services had not been obtained through a competitive bidding process, as required by the Public Finance Management Act (PFMA). The supply chain management system would be reviewed, and there would be a procurement road show.

Discussion
Mr A Mlangeni (ANC) asked what form financial misconduct took, and whether this amounted to officials stealing money from the Department of Defence.

The Minister replied that she had problems with the language used by the Auditor-General. It was not of a descriptive nature, and “misconduct” did not imply that there was stealing. The oversight that the AG exercised meant that anything that was contrary to National Treasury requirements must be investigated. If the investigation revealed any breach, action was taken. Actual theft would be viewed as a legal matter, and would be taken very seriously. “Misconduct” usually had to do with a failure to adhere to Treasury regulations. She had asked Mr Barry Wheeler, Audit Executive of Auditor-General South Africa, if more user-friendly language could be used.

Mr L Mpahlele (PAC) referred to Slide 4, point 2, which noted that R10 million that had gone missing, and which also noted that offenders faced criminal charges. He asked how many offenders had been found, and at what levels they were employed, also asking if they had included anyone at the level of a General. He also asked if the referral to the criminal courts was established practice, or was a recent development.

The Minister said that she would cite examples. At Potchefstroom, R4 million had been used to construct a fence around the base, but this was reported as possible fruitless and wasteful expenditure. The due process had not been followed, and this case had been submitted to the Commercial Crime unit. Included in that R10 million were 24 cases, all of which had been dealt with.

Mr Mpahlele asked about the R303 million still to be finalised. He asked how that was to be done, and how soon.

The Minister responded that, of the 129 cases related to the R303 million, 123 had been finalised. An understanding had been gained, through that process, of why and how things had been done. There would be a report to the Portfolio Committee as soon as the AG’s report had been released. There were historical reasons linked to this that related to contracts entered into before the PFMA was in force.

Dr Sam Gulube, Secretary of Defence, added that the bulk of that amount, R275 million, was related to the AMG account. That contract was with a subsidiary of Denel Systems. It had been entered into before the advent of the PFMA, and provided, for the most part, for engineering services. The investigations into this had not yet been concluded. DOD would be seeking the National Treasury’s approval to condone the R275 million expenditure that did not comply with the PFMA regime. Subsequent investigations had revealed that there was an amount of R101 million which had not been spent irregularly, because this particular spending was in line with Treasury regulations. The response by the DOD was found not to be adequate, because not all information had been provided.

Mr D Maynier (DA) remarked that he wished there could have been such an extended brief on Defence Force preparedness. He felt that things were moving in the right direction, since the 16 qualifications were now reduced to only one. This showed that tangible and intangible assets were being taken seriously. He asked if the fact that there would only be integrated management systems to deal with that  by 2015 meant that the DOD could not achieve a clean audit until 2016/17.

Mr Justice Nkonyane, Chief of Logistics, South African National Defence Force, replied that 2015 was the deadline for rollout of a single information system, and that did not have to do with Treasury requirements. It would be possible for the DOD to achieve a clean audit earlier than that, with the help of a framework developed together with the AG. An asset management plan had been developed, and there were effective internal controls. In regard to the assessment of valuation, he noted that values had been disclosed, but the AG could not find proper evidence for them. Treasury valuation guidelines had not been sufficiently utilised. As for assets procured before 2002, he noted that disclosed values would be restated, in terms of the new guidelines. Control measures were in place, and there was a Committee at the public level.

The Minister responded to Mr Maynier that she had heard enough questions about the state of Defence readiness, and such questions had to be left to the Joint Standing Committee on Defence. The Constitution required a Joint Standing Committee for Defence, and there must be adherence to due process.

Mr Maynier told the Minister that he was also tired of the issue. As far as he was concerned, Parliament had indeed complied, as there was a Joint Standing Committee, but the Minister had said that certain information would not be supplied in detail until the Portfolio Committee had been briefed. The information that he required was related to 2010/11, and had been reported on in September 2011. He asked if she could reply, and if she could also disclose more detail about not complying with Treasury regulations. DOD had paid out R500 000 without engaging in a process of competitive bidding.

The Minister protested that Mr Maynier had deliberately misinterpreted her. The first protocol was the Portfolio Committee on Defence, to whom the DOD answered, and that Portfolio Committee then answered to society. The Joint Standing Committee would operate in terms of Parliamentary rules, and she would be prepared to attend before that Committee if it chose to call her.

Mr Maynier continued that it had been frustrating, in the previous year, that information about financial misconduct, procurement and contract management could not be obtained. He asked which officials in the DOD were in business. The Minister had given detail about 23 cases of misconduct. More detail was needed on these.

Mr Maynier remarked that, unlike in the apartheid years, the AG was looking at the Special Defence Account. This amounted to millions of rands, and there were policy questions around it, with policy also needing to be revised. The scope of the Special Defence Account should either be limited to secret procurements only, or steps had to be taken to get rid of it.

The Minister responded that questions about a separate Special Defence Account also had to be left to the Joint Standing Committee.

The Chairperson reminded all concerned that the focus of this meeting was on the progress made in responding to the adverse audit findings by the Auditor General.

Ms H Mgabadeli (ANC) appreciated efforts made thus far. She asked about the lease error that was referred to on slide 3, point 1.

The Minister replied that all leases were handled by the Department of Public Works (DPW), and this was problematic. Other departments also had problems with DPW, but they had kept their own provincial records, whereas DOD relied on information held by DPW. DOD had overstated leases by R10 million.

Ms Mgabadeli asked what was holding back the finalisation of the remaining six cases out of the 129 reported.  She remarked that the Portfolio Committee had to respond to the PFMA, and the departments must be aware of the definitions in this Act.

Ms P Daniels (ANC) congratulated the Minister on progress made. She referred to the language used, and stressed that those found guilty of misconduct must be taken to task. She asked if the DOD referred to “corruption”, and, if not, when it would look at this. She also stressed that whilst the Committee took some comfort in progress made, the extent of this progress had to be measurable.

The Minister responded that the DOD did regard financial mismanagement as including corruption, and that the general societal understanding was followed. There was a strong anti-corruption strategy, residing in the Office of the Inspector General. Performance agreements with Heads of Services had been amended, to hold them responsible for corruption that occurred. She noted that at the moment, there could be no reports on corruption, but it would be reported if it was found.

The Minister asked Mr Wheeler to state the position of the Auditor General South Africa (AGSA) on the use of terms like “misconduct”.

Mr Barry Wheeler, Audit Executive, AGSA, stated that the AG’s reports followed the language used in the PFMA. The term “misconduct” included fraud, corruption and theft. The AG used language common to the finance profession.

Ms Daniels asked about remunerative work outside of an employment contract, and said that some officials were allegedly performing other work, whilst still employed by the DOD. If there was a policy that enabled them to do so, she wanted to know what had informed it, and also asked why it was taking so long to review that policy.

Mr Shahid Esau (DA) also asked if it was permitted that officials take on remunerative work outside of the Ministry and the Department. If DOD was the only department where that was allowed, it had to stop.

The Minister replied that DOD employees were in a unique position, because the defence structure used to have a core force and reserves. Reservists were not employed by DOD, in the sense of receiving permanent pay. DOD could either use them or release them, as the need demanded. They were, however, still regarded as part of the Defence Force.

Dr Gulube added that there were certain appointments where people were allowed to do other work, but due process had to be followed. Each manager had to evaluate, with equal care, if the taking on of extra work was likely to affect productivity. There were cases where it was not known if the other work had been authorised, but all of them would be investigated. The AG had found insufficient information to formulate some findings. He cited the example of one woman who had an interest in a company controlled by her husband, but the fact that they had divorced had not been updated in the records.

Mr M Nhanha (COPE) said that the Secretary of Defence, his team and the Minister were steering the Department in the right direction. It had been mentioned, in the previous week, that almost R2 billion had been budgeted for accommodation. There had been statements by the Minister of Public Works that billions of rands were lost in agreements. Lease agreements discussed under slide 3, at point 2, only mentioned vehicles and he also asked about office equipment.

Dr Gulube answered that R939 million had been budgeted for accommodation, and R227 million for leases. Both were being dealt with by the DPW. DOD wanted to move to the situation where it would perform the current DPW functions itself, but that would not happen overnight.

Mr Nkonyane added that 95% of leases related to state owned property, and 5% to private property. The DOD had tried to establish a Service Level Agreement with the DPW, but agreement could not be reached. In business, the first allocations were made to accommodation. However, there was not proper maintenance provided in return for the amount that DOD had paid to the DPW, and for this reason DOD had begun, over the last two years, to migrate away from using the DPW. The overstatement of the operating leases had to do with incorrect recording of contract periods by DPW. Understatement of finance leases in the financial statements had occurred because the equipment register did not completely record what was leased from the private sector.

Mr Nhanha referred to the fact that the Minister had pleaded, several times, that the DOD should be treated differently, because its circumstances were unique. He trusted that the Minister knew the PFMA, and asked what kind of guarantees she could give that state resources would not be abused, if her pleas were acceded to by the AG.

The Minister replied that DOD was not unwilling to adhere to the PFMA, but it must be recognised that this Act did not fully take account of the unique nature of this Department. DOD, for instance, needed ten months to report on what took place outside the country’s borders. The Secretary of Defence was well qualified to deal with such difficulties, as he was well versed in the defence sector and understood its peculiarities. DOD wanted permission to be exempt from certain sections of the PFMA, or to recognise that these sections had to be “tweaked” to support specific defence requirements.

Mr Esau remarked that the internal audit unit had not been populated since 2008. National Treasury guidelines called for the filling of posts within six months. It seemed that consultants would be used for advertising posts meaning that money would go away from the Department, and he asked for more detail on this point.

Mr Esau continued that assets of R76 billion had been stated at purchase prices, and not at depreciated prices, and he asked if this was now being rectified. He also pointed out that most departments had accurate asset registers, and asked why it had taken the DOD three years to achieve this, pointing out that if the systems were properly matched, a clean audit could be achieved.

Mr Esau asked if Service Level Agreements between the Department of Public Works and DOD had been effective in regulating leases and contracts.

Mr Esau noted that the Castle Control Board was located in Armscor, and had no Chief Financial Officer. There was always an emphasis of matter in respect of this, and entities like that were not functioning optimally.

The Minister replied that Castle Control Board legislation had come into effect prior to 1994. There was a need to check whether the legislation was compatible with current requirements, as the Board had to be appointed in line with new legislation.

Ms N Mabedla (ANC) was pleased with the fact that the Chief of Internal Audit was a woman. She said that the Portfolio Committee could assist and guide the DOD, but in term it had to be assisted in understanding the finance terminology.

The Chairperson suggested that, to avoid ambiguity, financial misconduct be defined as non-adherence to finance legislation. That would include wasteful, fruitless and irregular expenditure.

The Chairperson conceded that details on defence procurement were not for public consumption, but said that it was still necessary to account properly for every cent. The DOD had to explain the reasons for irregular expenditure, and the Committee would monitor that. The Committee also needed to know what actions were taken to address adverse findings, and what structures had been created, and it would help the DOD to keep its finger on the pulse.

The Minister agreed that it was precisely for this reason that DOD had attended this meeting. It was desperate to convince society about proper use of its budget, and to show that it was capable of looking after public finances. The second step would be to lobby for a greater budget, by setting out the specific budgetary problems. DO would go through each of the AG’s findings, as was stated in Cabinet, because the DOD was equally concerned about irregular expenditure. It took time to produce findings, as there were legal processes involved, but DOD would be reporting back when the reports were available.

The meeting was adjourned.