Department of Defence 2011/12 audit outcomes: briefing by Auditor-General

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Defence and Military Veterans

09 October 2012
Chairperson: Mr M Motimele (ANC)
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Meeting Summary

The Auditor-General South Africa briefed the Committee on the audit outcomes of the Department of Defence (DOD) and its entities for the 2011/12 financial year.

The briefing disclosed that the Department had achieved an unqualified audit opinion due to the hard work by management and the active involvement of the former Minister to ensure compliance with the reporting requirements. A departure in terms of sec 79 of the Public Finance Management Act was granted by the Accountant General in terms of which the Department only had to disclose transport, specialised military and immovable assets.

Committee members asked questions about the irregular expenditure, fruitless and wasteful expenditure, details on specific contracts, investigations for misconduct in the Department of Defence and its entities, underperformance by all entities and the authority for the grant of departure to the DOD by the National Treasury.

It was proposed that the Annual Report of the Department of Defence be dealt with thoroughly and in phases and if need be officials such as the Secretary of Defence be called upon to explain some items. 

Meeting report

Department of Defence 2011/12 audit outcomes: briefing by Auditor-General
Mr Musa Hlongwa, Business Executive: Auditor-General South Africa, explained the Defence portfolio included the Department of Defence (DOD) and its entities: Armaments Corporation of South Africa (Armscor) Group, South African National Defence Force Fund (SANDF Fund), Special Defence Account (SDA) and Castle Control Board (CCB).

Mr Hlongwa said that according to the audit findings for 2011/12, the Department of Defence had an unqualified audit opinion for the first time in 12 years or so. The DOD had been granted a departure from the National Treasury to only disclose certain categories of the capital assets (in this case immoveable assets, specialised military assets and transport assets). The departure served in helping the DOD making progress in bringing about an unqualified audit opinion. Due to the Department’s complex system, it was given a head start to present the first three categories of assets which would be subjected to audit by the Auditor-General for 2011/12 and the other classes would be presented by way of annexure and would thus not be subject to audit in a similar way as the first three categories. The implication would be that if the Department did a good job on the first three categories, then the exemption would be taken away in the following years and the other categories would be considered for purposes of giving full accountability. The exemption would enable them to meet the requirement of the reporting standard and resulted in an unqualified opinion. 

Mr Hlongwa, looking at the audit opinion history, said that four years had been considered (2008/09, 2009/10, 2010/11, 2011/12) and that the DOD had had a qualified opinion for the periods 2008/09, 2009/10, 2010/11 unlike 2011/12 which had an unqualified opinion with other findings. Armscor was the only entity that had had a clean audit opinion for the years 2008/09, 2009/10, 2010/11 and in the 2011/12 year, it had an unqualified opinion with other findings which arose from compliance with laws and regulations.

Mr Hlongwa said that SANDF Fund for the past three years had an unqualified audit opinion with other findings but for the year 2011/12 it had clean audit opinion (with no findings). The Special Defence Account (SDA) was a division of DOD accounted for separately. It had a consistent unqualified opinion for the last four years with other findings. Referring to the CCB, he said that this entity also had an unqualified opinion with other findings.  

Mr Hlongwa focused on the areas of qualification for the various entities, saying that the DOD was qualified in the area of tangible and intangible assets for the years 2008/09, 2009/10, 2010/11 but in 2011/12 there was no qualification. In 2008/09 and before, the DOD was qualified in all areas – tangible and intangible capital assets, accruals, lease commitments, irregular expenditure and department revenue. The exemption that brought about the unqualified audit opinion was for the year 2011/12 and would be removed next year, leaving the DOD to work hard to make a good job of work in as far as the capital assets are concerned. 

On predetermined objectives (performance information which is all about service delivery), Mr Hlongwa said that the DOD had other findings in this area in the years 2008/09, 2009/10 but there had been progress in the years 2010/11 and 2011/12. CCB had findings in predetermined objectives in all the audited years 2008/09, 2009/10, 2010/11, 2011/12. Similarly for SANDF Fund, there were findings in predetermined objectives for the years 2008/09, 2009/10 and 2010/11.

In terms of compliance and regulations, Mr Hlongwa said that there were findings relating to the DOD in the four years in the areas of treasury regulations on supply chain management. There were no findings for Armscor in the years 2008/09, 2009/10, 2010/11 - save for the year 2011/12 where the finding had been in the signing of the shareholder’s compact for the financial year. CCB had findings about compliance with laws and regulations for the four reported years and the SDA had similar findings.

Mr Hlongwa said the audit had focused on six key areas - supply chain management, predetermined objectives, human resource management, IT controls, material errors in the annual financial statements and financial health.

With regard to human resource management, IT controls and material errors in the annual financial statements submitted for audit, he said that there had been no improvements for DOD save for supply change management.

There were weaknesses for Armscor in the areas of human resource management and IT controls – for instance some of the programs were written only in Afrikaans and some had been around for a long time and were somewhat outdated

In response to the Chairperson asking what was wrong with Afrikaans considering that it was one of the official languages, Mr Jan Steenkamp from the Office of the Auditor General said that there would a challenge with upgrading because of the language and the adequacy of house-keeping since there had been no proper documentation.

Mr Hlongwa said that out of the five entities, it was only the SANDF Fund that had a clean record under the six key focus areas. SDA was improving in supply chain management and had a clean record in the other areas.

Mr Hlongwa said that CCB had shown no improvement in the areas of supply chain management (such as uncompetitive procurement processes, non-compliance with chain management supply policies), predetermined objectives (no performance information report had not been prepared for the year), IT controls and there had also been regression in material errors in the financials submitted for audit (employee costs, assets and irregular expenditure had to be changed materially in order to avoid audit qualification).

In giving details of what had actually gone wrong in the focus areas and starting with supply chain management, Mr Hlongwa said that in some instances some goods and services of a transaction value above R 500 000 had been procured in the DOD without inviting competitive bidding and that employees of the DOD had performed or engaged in remunerative work outside their employment without necessary approval from the DOD to perform such work.

Mr Steenkamp noting on the CCB said that goods and services with a transaction value below R500 000 had been procured without obtaining the required price quotations and contracts had been awarded to bidders that had not obtained the highest points in terms of the evaluation process. This had been mainly because of a lack of proper policies and procedures and monitoring by the Board in place to avoid the irregular expenditures. It was thus left to Management to design and implement policies and procedures to ensure adherence to the Treasury Regulations.

On the predetermined objectives, Mr Steenkamp noted that there had been no material findings on the annual performance report concerning the usefulness and reliability of the information. However, the DOD did not achieve 43% of the total planned targets during the year under review due to a lack of clarity for performance indicators. This was something that the DOD was working on. 

Mr Steenkamp said that CCB did not prepare the annual performance report in terms of section 55(2)(a) of the Public Finance Management Act (PFMA) and so the Auditor-General’s Office could not report findings on the usefulness and reliability of the report. The Board had to ensure that quarterly reporting and final reporting was done.

Reporting on Armscor, Mr Steenkamp said that there were no material findings on the annual performance report pertaining to the usefulness and reliability of the information. However, 27.9% of total planned targets had not been achieved during the year of review.

In terms of human resources, Mr Steenkamp said that the problem in the DOD was as last year – not all senior managers had had performance agreements signed for the current year. This was due to insufficient review and monitoring of compliance with applicable laws and regulations. Some employees received overtime compensation in excess of 30% of their basic salary (this related mostly to medical doctors) in the absence of special approval from the executive authority. Necessary controls had however been implemented to prevent re-occurrence of this problem. The other finding was that some employees had been appointed without following a process to verify the claims made in their applications.

Mr Steenkamp reporting on information technology controls said that in the DOD, there had not been an adequate configuration of system security controls which had resulted in non-compliance with the IT security policy of the department. The rights of privileged users had not adequately been controlled resulting in people getting control of access to the systems. There had been non approval of change management policy and non-compliance with the change control policy in the Logistic Information Management System. Further, there had also been a lack of policy for the secure transfer of data between different locations; a lack of segregation of duties between the financial and logistic systems; non compliance in terms of the Information Systems Business Continuity Management Charter; a lack of capacity and infrastructure to test the Department’s Disaster Recovery Plan; and ineffective operation of the patch management program.

In terms of the material errors and omissions in the financials submitted for audit and specifically in regard to the Asset Register, Mr Steenkamp said that there were material misstatements of capital assets that had been identified by the auditors. This had been as a result of a lack of proper monitoring and review in addition to inadequate record keeping that would have ensured complete and accurate records for various categories of assets.

Mr Steenkamp reporting on CCB said that the financial statements submitted for audit were not in accordance with section 40(1)(a) of the PFMA due to insufficient monitoring and control by the Castle Manager. Intervention had been made by way of material changes to employee costs, fixed assets and irregular expenditure to avoid a qualified opinion.

Mr Steenkamp in commending the DOD said that it had not exceeded the budget for the year in review.

Mr Steenkamp, reporting on other compliance matters, said that in terms of the strategic plan for the Defence Force (one for the Secretariat and one for the Chief) there was a delay in submitting these to Parliament before the budget vote in contravention of Treasury Regulation 5.2.2. He added that the internal audit was still not fully operational, presenting a challenge for the Department.

Mr Steenkamp said the CCB audit committee was not fully operational throughout the year because the members had not been appointed by the accounting authority for the period 1 November 2011 to 31 March 2012 as required by Treasury Regulation 27.1.4 and the Board had not followed up on this. The entity accumulated surpluses (R800 000) without the approval of the National Treasury in terms of section 53(3) of the PFMA.

Mr Steenkamp told the Committee that the accounting authority of CCB had not taken effective steps to prevent irregular expenditure as required by section 51(1)(b)(ii) of the PFMA.  The accounting authority had also not finalised and submitted strategic plan for approval to the relevant executive authority before 1 April 2011 as required by Treasury Regulations 30.1.1 and 30.1.2. There was in addition a lack of procedures for quarterly reporting to the executive authority to facilitate effective performance monitoring, evaluation and corrective action as per Treasury Regulation 30.2.1. Also there had been the inability by the accounting authority to ensure that the public entity had and maintained an effective, efficient and transparent system of internal control regarding performance management.

Reporting on Armscor, Mr Steenkamp said that the accounting authority had not signed the shareholder’s compact which was relevant for documenting the mandated key performance measures and indicators to be attained by the entity as required by Treasury Regulations 29.2.

The Committee was informed that in terms of financial misconduct in the SDA, investigations had not been conducted into allegations of financial misconduct committed by officials as required by Treasury Regulation 4.1.1. Investigations into allegations had not been carried out within 30 days of discovery as required by Treasury Regulation 4.1.2. Further, the Executive Authority had not conducted investigations into allegations of financial misconduct committed by a previous accounting officer as required by Treasury Regulation 4.1.3.

Mr Steenkamp said that the Auditor-General’s Office had an engagement with the Minister of Defence on 11 July 2012 and that commitments were made to follow up quarterly on the key control assessment and related matters as well as the action plans pertaining to capital assets and predetermined objectives. In terms of other matters of interest, there had been no unauthorised expenditure incurred by any of the entities in the portfolio.

Fruitless and wasteful expenditure in the DOD amounted to R800 000 (related mainly to a work session that was cancelled) in 2011/12 and in the previous year it was R500 000. Irregular expenditure amounted to R414.7 million in 2011/12 and R688,7 million for the previous year. The improvement had been as a result of an update of the policies and procedures by the Department for tender requirements, practice notes, and latest policy requirements – these were rolled out in November last year. CCB incurred R1,185 million and this related to an uncompetitive bidding process and award of contracts to bidders that had not scored the highest points on the scoring system.

Mr Steenkamp noted that there were currently no investigations nor performance audits underway by AGSA. However, a performance audit on the use of consultants would be reported on by the AGSA shortly but this was not only for the DOD and included various other departments.

Mr Steenkamp, reporting on the Annexure, said that it dealt with the audit outcomes and the areas of qualification which had been addressed extensively earlier on in the briefing.

Ms P Daniels (ANC) asked if there was any recourse the Auditor-General could take if there was a continuation of qualified reports from a department of government.

Mr Steenkamp replied that the Auditor General’s role in this case was to audit, report and make recommendations only.

Ms Daniels asked if there was anything on companies that had been awarded contracts by the entities including the DOD to enable the Committee to monitor closely where procedures had not been followed and to find out whether the people responsible for oversight were doing their duty.

Mr Steenkamp said that a detailed list would be compiled of these companies.

Ms Daniels asked if the AGSA had details of how many people had been appointed without proper contracts and procedures being followed – this would relate to positions and financial implications.

Mr Steenkamp in response said that the audit was not of the entire population of the department and the entities but nevertheless added that a list of positions and levels would be obtained if required.

Ms Daniels asked if before 1994 there was an Asset Register and if not whether it was the basis for the granting of the exemption to the DOD.

Mr Steenkamp replied that for the past eight years, departments had been required to compile registers and disclose assets. 2010/11 had been the first year that the DOD had compiled an Asset Register but in 2011/12 an exemption was granted. Although there was a system in place, the DOD was still awaiting the Integrated Financial Management System (IFMS) which would be very efficient in the management of assets.

Mr D Maynier (DA) asked if the exemption for capital assets was granted by the National Treasury and the legal authority for it. He asked for the details on the value of the assets that had not been disclosed or reported on by the Auditor-General and also whether any other department had ever been granted a similar exemption.

Mr Hlongwa pointed out that the fact that the opinion was unqualified did not mean that it was a clean audit because there had been other findings on compliance and regulations as well as predetermined objectives.

Mr Steenkamp added that this was not an exemption per se but a departure in terms of section 79 of the PFMA under which the Accountant General may grant a departure from the reporting criteria and there was no requirement for gazetting unlike under section 92. Concerning the assets in the annexure, he noted that they could be grossly misstated and that they needed to be dealt with in terms of chapter nine of the Reporting Guide and that it was possible to apply the R1 principle for assets acquired prior to April 2002. He further pointed that the annexure had not been subjected to audit because there was no requirement to do so.

Mr Steenkamp said that he was not aware of any departure previously granted to any other entity.

Mr Maynier asked for specifics of the contract on pages 251 and 252, paragraph 27.2 in relation to R271 million and the R52 million relating to sourcing of aircraft (what kind of aircraft?).

Mr Steenkamp said that the majority of the R271 million was with respect to a contract that the DOD could only get out of in 2013. The R52 million and R 109 million related to procurement of executive aircraft via the reserve force component of the DOD – this practice had been stopped and there was an ongoing investigation.

Mr Maynier asked for details about the Special Defence Account in terms of the alleged misconduct in the year 2012 and fruitless and wasteful expenditure in the year 2011 for a R110 million procurement process (major capital process) which went wrong?

Mr Steenkamp in response said that he did not have the details of the contract and value for the Special Defence Account misconduct but he said that the ASGSA would supply the information to the Committee in writing.

Mr Maynier asked for the status on the investigation involving R109 million for the sourcing of aircraft and the outcome of the investigation specifically requested from the AGSA in the matter of backup aircraft ‘shadow planes’.

Mr Steenkamp said that the shadow planes had been looked at in terms of the Defence Act and there were justifications in terms of the security requirements and the supply chain processes had been followed. In terms of the squadron, Mr Steenkamp said that the DOD was investigating the matter.

Ms H Mgabadeli (ANC) sought clarification on the nature of compliance and regulation that Armscor has failed to meet. She commended the AGSA for the good work. This information would give the Committee the basis for asking more questions.

Mr Steenkamp said that nature of compliance and regulation was in regard to the share compact that had not been signed for the year under review.

Mr S Esau (DA) noted that there was a need for details from the National Treasury in relation to some of the capital assets that had been valued at R1 which was not their true value. Although irregular expenditure was high this was not reflected in 2011/12 financial year for some entities. In terms of the predetermined objectives, the interpretation of the audit was not accurate because it reflected that only CCB had underperformed while all the other entities had underperformed according to the set predetermined objectives. 

Mr Hlongwa replied that the Auditor-General’s role was to validate the report from the entity – from which measures could be taken by the relevant oversight departments to correct the deficiencies – and to ensure that the reporting format was as prescribed by the National Treasury. 

Mr Esau also noted that CCB’s audit committee had not been functioning for the period 1 November 2011 to 31 March 2012 and this would be a source of problems as it indicated lack of sound management.

Mr Hlongwa replied on the non reporting by CCB, saying the entity had an obligation to handle this problem and that the Auditor-General’s role was confined to looking at the report, making findings and recommendations.

Mr D Maynier (DA) proposed that while dealing with the Annual Report, specific areas should be handled separately and if need be some officials of the DOD should be called up to be present such as the Secretary of Defence. The Chairperson noted the proposal.

The meeting was adjourned.


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