Audit outcomes for National Youth Development Agency & Department for Performance Monitoring and Evaluation: 2013

Meeting report

Department of Performance Monitoring and Evaluation (DPME)
Ms Trudie Botha, Senior Manager, Auditor General South Africa, began by explaining that the Department of Performance Monitoring and Evaluation (DPME) was mainly funded by funds appropriated in terms of the Annual Appropriation Act, and the final appropriation for 2012/13 amounted to R174 159 000 and 2011/12 amounted to R96 202 000. The Auditor General South Africa’s key focus areas for both DPME and NYDA were: predetermined objectives, supply chain management (SCM), human resources (HR) management, Information Technology (IT) control, material errors/omissions in Annual Financial Statements (AFS) submitted for auditing, and financial health status.
The Auditor General South Africa (AGSA) found that the predetermined objectives of DPME showed that material adjustments in the annual performance report were identified during the audit and all adjustments were corrected by management, and the root cause was lack of proper record management system and verification of supporting documents. AGSA recommended that information supporting the quarterly report should be centrally filed and reviewed by the programme manager for completeness, accuracy and validity, and the internal audit should audit the quarterly performance report against supporting documents to confirm the completeness, accuracy and validity. The DPME’s supply chain management had no findings. The DPME’s Human Resource management had no findings.

The DPME’s Information Technology management had not formally approved and documented: the user access controls (policies, procedures, guidelines) to reduce the risk of unauthorized access to the information system; the change management policy, to reduce the risk of unauthorized changes being implemented on the production environment of the systems; or the recovery plan to reduce the risk of the Presidency not being able to fully recover, should a disaster occur at its current location. The root cause of these problems was that the Department shared the Presidency’s Information Technology environment while they were setting up their own Information Technology (IT) environment. Therefore, AGSA recommended that the Department should finalise its IT, and IT policies and procedures should be developed, approved and implemented. The DPME’s material errors/omissions in submitted Annual Financial Statement (AFS) had no material adjustments made to financial statements and the DPME’s financial health status had no findings. The DPME had no unauthorised expenditure. The fruitless and wasteful expenditure by DPME amounted to R68 000 in 2013, and R6 000 in 2012. The irregular expenditure by DPME amounted to R455 000 in 2013 and R1.451 million.

National Youth Development Agency (NYDA)
The final appropriation for 2012/13 amounted to R376 million and for 2011/12 amounted to R384 million. Material impairments to the amount of R31 million were incurred as a result of the impairment of loans advanced by the NYDA. At 31 March 2013, of the total gross loans receivable of R212 million, the amount of R192 894 000 had been impaired as the recoverability of those loans was doubtful. The NYDA’s predetermined objectives had no material findings.

When it came to SCM, AGSA had the following findings: goods and services of the transaction value above R500 000 were procured without inviting competitive bids as required by the Treasury Regulations and deviations were approved by the accounting authority even though it was not impractical to invite competitive bids in contravention of Treasury. The root cause of this was inadequate oversight by the NYDA board to ensure that personnel complied with PFMA and Treasury Regulations, as well as lack of accountability of management responsible for SCM. Therefore, AGSA recommended that there should be proper oversight and monitoring functions in respect of SCM, zero tolerance towards non-compliance, the SCM policy and procedures should be updated in line with latest laws, and staff should be trained in order to improve understanding of principles.

Contractors and quotations were awarded to bidders based on points given for criteria that differed from those stipulated in the original invitation for bidding and quotations. Contracts were awarded to bidders who did not submit a declaration of supply chain practices such as fraud, abuse of SCM system and non-performance as prescribed. This was a result of a lack of understanding of laws and regulations, resulting in incorrect interpretations, and inadequate procurement planning and contract management, resulting in unjustified deviations from SCM laws and regulations. Therefore, AGSA recommended that adequate planning and contract management should be enforced by the management to ensure compliance in the SCM unit, an irregular expenditure report should be compiled monthly by the unit heads, the unit head should declare irregular expenditure incurred, and the internal audit should validate these reports and the Chief Financial Officer (CFO) should report monthly to the accounting officer/authority and the audit Committee.

The accounting authority did not take effective steps to prevent irregular expenditure and fruitless and wasteful expenditure as required by section 51(1) (b) (ii) of the Public Finance Management Act (PFMA), and appropriate and effective disciplinary steps were not taken against officials who incurred and or permitted irregular expenditure and fruitless and wasteful expenditure. Therefore, the AGSA recommended that the audit Committee and the accounting authority should report quarterly to the executive authority, and actions should be taken against officials that transgressed the SCM requirements. The NYDA’s human resource management had no findings.

The NYDA’s Information Technology (IT) management had not been formally designed the IT governance framework, the IT management had not designed formally user access controls to reduce the risk of unauthorised access to network and information systems, the IT management had not formally approved the change management control policy to reduce the risk of unauthorised changes being implemented to the production systems, and lastly, the IT management had not formally designed, approved and documented IT service continuity controls such as the backup policies and procedures. This was because of a failure by the management to address prior findings in the action plan. Therefore, the AGSA recommended that management should ensure that prior year matters were implemented as contained in its action plan, and management should develop and implement an IT governance framework as well as user access control, change management controls and service continuity controls.

The NYDA’s material errors/omissions in submitted annual financial statements showed that the financial statements submitted for auditing were not fully prepared in all material respects in accordance with the prescribed financial reporting framework, and there were material misstatements of non-current assets, current, assets, liabilities, revenue, expenditure and irregular expenditure identified by auditors in the submitted financial statement. These were subsequently corrected, resulting in the financial statements receiving an unqualified audit opinion. The root cause was that the NYDA had not established the daily and monthly controls to ensure complete and accurate financial statements. Therefore, the AGSA recommended that management ensure that annual financial statements were prepared regularly as it was important that a full and proper set of financial statements (including all disclosure notes) were prepared on a monthly basis; the annual financial statements should be reviewed by the governance structures (accounting authority, internal audit and audit Committee); and the prepared annual financial statements should be adequately supported by substantiating evidence to corroborate validity, accuracy and completeness thereof. 

NYDA’s financial health status indicated that the accounting authority did not take effective and appropriate steps to collect all money due as required by the PFMA and Treasury Regulations. The processes and controls implemented to ensure recovery of loans provided were not effectively monitored. Therefore, the AGSA recommended that a loan/debt management report should be compiled monthly by the CFO regarding the measures implemented to recover all outstanding loan instalments, and the CFO should report monthly to the accounting authority and the audit Committee. The audit Committee and the accounting authority should then report quarterly to the executive authority, and the internal audit should validate these reports. It was reported that there was no unauthorised expenditure by NYDA. The fruitless and wasteful expenditure by NYDA amounted to R538 in 2013 and 1.5 million in 2012. The irregular expenditure by NYDA amounted to R62.1 million in 2013 and R133.2 million in 2012.

AGSA had issued a factual findings report on 12 October 2012, following an agreed-upon procedures engagement. AGSA were engaged by the NYDA to conduct procedures relating to their compliance with regulation 68 of the regulations to the National Credit Act, 2006. AGSA’s report covered the period 1 April 2011 to 31 March 2012 and was issued to the NYDA and the National Credit Regulator. AGSA conducted investigations into the awarding of loans in the previous Umsobomvu Youth Fund loan book. The investigation focused on potential fraud with regards to the employments of funds by the loan recipient. The investigation had been conducted internally and had been handed over to the relevant law enforcement agencies.

The public protector continued with an investigation to probe whether hosting the World Festival of Youth and Students in December 2010 was within the mandate of the NYDA, if the allocated funds were misappropriated, and whether the relevant supply chain management prescripts were followed. The initial scope of the investigation had been extended during to conclude queries regarding salary structures and travel and subsistence allowances, as well as the execution of the legislative mandate by the NYDA, including objectives, duties and functions. A review was conducted with regards to the awarding of contracts related to significant projects of the entity. The review aimed to establish whether the awarding of the contracts was within the relevant supply chain management prescripts and whether there might have been irregularities in respect of such awards.

In concluding, Ms Botha said that in the previous year the Committee had committed to: requiring DPME and NYDA to compile monthly financial statements; requesting entities to have action plans to address external and internal audit findings on which feedback should be presented quarterly; obtaining representations from the accounting officer on the status of compliance with SCM prescripts and action taken against transgressors; reviewing quarterly reports on performance information  and reviewing implementation and assessment of key controls. Most importantly, the Committee should reinforce those commitments to ensure progression towards clean administration by the entities in the portfolio.

Discussion
Mr P Gelderblom (ANC) said that NYDA had performed poorly. He wanted clarity on appointment of auditors and the audit Committee.

Mr M Swart (DA) said that it was very important for DPME and NYDA to strengthen internal auditing.

Ms A Mfulo (ANC) said that things did not go right for NYDA. She asked for clarity on material adjustments in the annual performance report that were identified during the audit and all adjustments that were corrected by management and IT policies and procedures that should be developed.

Mr G Snell (ANC) said that the report was very useful and it was structured very well. He wanted clarity on pre-determined objectives.

Mr S Van Dyk (DA) noted that the Committee had been sitting and discussing issues with departments and making recommendations. He then asked what had been achieved and what the responsibility of AGSA was.

Ms Botha replied that AGSA should do more than just auditing and giving recommendations. AGSA had visited government departments and it had assessments and discussions with departments. However, it was up to departments to act on the AGSA’s recommendations. The Public Finance Management Act (PFMA) was very clear on the responsibility of management and the CFO. AGSA had given good information to government departments and the departments should use the information to improve. There should be a quarterly report to the executive management. DPME and NYDA had to set up their Information Technology environment. The DPME’s fruitless expenditure came as a result of spending on travelling and other expenses. AGSA had no mandate to set targets for departments, but audited the targets set out. In general, NYDA should be assisted to avoid too much fruitless and wasteful expenditure. Management and other department officials should know laws and regulations.

The Chairperson suggested that NYDA needed serious assistance, and he thanked the AGSA for comprehensive report. It was agreed that the Committee would not adopt the report on the Study Tour to Uganda and Kenya from 29 June to 6 July 2013, but the report would be adopted next week Wednesday, 16 October 2013.

Meeting was adjourned