Audit outcomes of Department of Basic Education for 2013

Basic Education

07 October 2013
Chairperson: Ms H Malgas (ANC)
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Meeting Summary

Auditor-General South Africa provided background on audit opinions. An 'unqualified opinion' meant it was a clean audit with no non-compliance with laws and regulations or pre-determined objectives. An 'unqualified audit with findings' meant there were matters significant enough to be elevated for inclusion in the audit report. The audit outcomes for the Department of Basic Education (DBE) were unqualified with findings related to pre-determined objectives, expenditure management, procurement, financial and performance management. Umalusi received a clean audit and the South African Council for Educators (SACE) received an 'unqualified audit with findings' on its pre-determined objectives. The Education Labour Relations Council (ELRC) received an unqualified audit with findings related to expenditure management, procurement and contract management, revenue management, strategic planning and performance management and governance issues on the audit committee. The DBE audit found, with regard to the fundamentals of internal control, that the nature of the findings were a concern from an audit perspective and needed to be addressed. SACE and ELRC had no change from the previous year while Umalusi showed improvement.

DBE recorded irregular expenditure of R82 million which were mainly due to procurement processes and infrastructure related projects such as the Accelerated Schools Infrastructure Development Initiative (ASIDI). ELRC showed irregular expenditure of R1.5 million.

The sector outcomes indicated only two sectors showed improvements. These two sectors were the Eastern Cape which moved from a disclaimer opinion to a qualified opinion and the Western Cape that moved from a qualified to an unqualified with findings opinion.

Discussion included the following:
▪ The R82 million irregular expenditure due to violations of ASIDI's supply chain management .
▪ Umalusi's clean audit and what other entities needed to do to achieve the same
▪ Whose responsibility it was to ensure the pre-determined objectives were clear and measurable;
▪ The role of the internal audit committees;
▪ The DBE's unqualified with findings audit opinion;
▪ The Eastern Cape move from a disclaimer to a qualified audit report.
 

Meeting report

The Chairperson welcomed the Office of the Auditor-General and said that both the Committee and the Auditor-General played an oversight role over the Department of Basic Education (DBE).

Mr Godfrey Diale, Senior Manager: Office of the Auditor-General, provided some background and explained the audit opinions. An unqualified opinion meant it was a clean audit with no non-compliance with laws and regulations or pre-determined objectives. An unqualified audit opinion with findings meant there were matters significant enough to be elevated to the audit report and a qualified opinion meant it was a financial report not free from specific material misstatements. An adverse opinion is expressed when there is disagreement between the auditor and the entity about the treatment or disclosure of a matter in the financial report and, in the auditor's judgement, the treatment or disclosure is so material or pervasive that the report is seriously misleading. A disclaimer opinion meant that the AG distanced himself from the financial statements as he has not been able to obtain sufficient evidence to support, and accordingly is unable to express, an opinion on the financial report. All entities were required to report against pre-determined objectives i.e. service delivery, but these findings were reported in a management letter and did not form part of the audit opinion. It was based on pre-determined criteria as presented in the Annual Performance Plan or strategic objectives.

The audit outcome for the Department of Basic Education were unqualified with findings related to pre-determined objectives, expenditure management, procurement, financial and performance management. Umalusi received a clean audit and the South African Council for Educators (SACE) received an unqualified audit opinion with findings related to pre-determined objectives. The Education Labour Relations Council (ELRC) received an unqualified audit opinion with findings related to expenditure management, procurement and contract management, revenue management, strategic planning and performance management and governance issues on the audit committee (see document).

On Slide 6 the fundamentals of internal control for the DBE entities were illustrated with regress (red arrow), no change (yellow arrow) and improvement (green arrow) from the previous year. The red arrows for DBE showed the nature of the findings were a concern from an audit perspective and needed to be addressed. SACE and ELRC indicated no changes from the previous year while Umalusi showed improvement.

Slide 7 and 8 showed the commitments made from the previous year and Mr Diale emphasised that the Department had made progress, but there was still room for improvement.

Slide 9 showed AGSA's recommendations in order for the Department to achieve a clean administration.

Slide 10 illustrated recommended key focus areas for each entity to achieve a clean administration. These focus areas were supply chain management, audit of pre-determined objectives, human resources management, information technology controls and material errors in the financial statements. Umalusi achieved all these key areas and if these areas were not addressed by the other entities, a clean administration would not be achieved.

Slide 11 showed expenditure management with the focus on irregular expenditure. DBE recorded irregular expenditure of R82 million which was mainly incorrect procurement processes and infrastructure related projects such as the Accelerated Schools Infrastructure Development Initiative (ASIDI) while ELRC showed irregular expenditure of R1.5 million.

Slide 12 showed the sector audit outcomes and only two sectors showed improvements. These two sectors were the Eastern Cape which moved from a disclaimer opinion to a qualified opinion and the Western Cape that moved from a qualified to an unqualified with findings opinion.

Slide 13 illustrated recommendations, focus areas, leadership and skills needed to achieve an accountable and transparent government and slide 14 showed an assurance model that summarised what was needed to achieve audit assurance.

Discussion
The Chairperson said the briefing notes corresponded with the slides of the presentation and asked the Committee to ask question related to the audit report and not to direct questions to the DBE officials present.

Mr D Smiles (DA) asked that the R82 billion in the Annual Report on page 239 be clarified. He noted the audit opinion on page 236 and the compliance framework vs. fair financial statements on page 237 of the Annual Report which was illustrated in yellow. He asked why the DBE received an unqualified opinion but on slide 10 it showed they received 3 out of 5 red areas (key focus areas) and red arrows on slide 6 (audit outcomes). R1.2 million in the ASIDI project had been underspent and that was 7% of the budget and the amount may not be significant but ASIDI was connected to the children who suffered and did not have classrooms so that was a big failure.

Mr Diale replied that the amount in the Annual Report should be R82 million and not R82 billion. The 82 million was as a result of non-compliance with the Preferential Procurement Policy Framework Act (PPPFA) as a result of violations of supply chain management procurement processes related to ASIDI. Multiple issues had been raised about procurement relating to ASIDI.

With regard to the unqualified with finding opinion, Mr Diale explained that DBE management get afforded an opportunity to take corrective action. The AG sat down with DBE management and engaged throughout the audit process. For example, it looked at the material adjustments in the financial statements of ELRC and DBE. If management refused to make those corrective adjustments, it would have affected the audit opinion negatively. In taking corrective action, management looked into the internal control processes to address the root problem to ensure the finding did not re-occur, but this would be up to the entity.

Mr Z Makhubele (ANC) referred to the assurance model on slide 13 and asked when the AG engaged with regard to the causes, did they find issues such as appointment of inadequate people, or people with a lack of skills or leadership.

Mr Diale explained that the Department did not have issues of unskilled or incompetent personnel as they had the right qualifications. The audit findings that led to material adjustments related to disclosure notes and government had no system that governed disclosure notes. The AG advised the department to collect disclosure notes monthly and to report on them quarterly, and to produce interim financial statements. It was not a question of skills but of processes. The Assurance Model in the slide did not speak to the Department but to government as a whole. Mr Diale explained it was a process issue that required management's attention so that whatever was reported was credible.

Ms F Mushwana (ANC) referred to slide 5 and said the presenter mentioned governance as an issue with regard to compliance but it was not explained, as well as the predominant red colour for the entities. In connection with the key focus areas, she asked what was Umalusi doing to assist the other entities to achieve these. She referred to the assurance model and said that the challenges in management seemed to be the basis for the difficulties.

Mr Diale replied that the audit committee was a governance issue and a concern was raised about the effectiveness of the ELRC audit committee. Corrective action was taken and a new audit committee had been elected. The red colour dominated because the issues were not detected and prevented by internal systems of control, they were identified through the audit effort. Although corrective action was taken, they did not present financial statements that were free from misstatements and it took effort from the audit to identify these errors.

Umalusi and SACE were section 43 audits where they appointed their own auditors. Umalusi had audit follow-up policies in place as well as management effort and accountability. Last year they had a finding on pre-determined objectives and rectified it immediately prior to the following audit. Mr Diale said that he did not know of inter-entity collaboration but it should not be difficult for the other entities to achieve the same status if there were corrective action plans in place. In most cases the challenges were with the implementation of the recommendations.

Ms A Lovemore (DA) asked when would pre-determined objectives start to form part of the audit opinion. Last year the Committee was presented with a powerpoint slide that showed the oversight role of the Committee was in jeopardy because of the quality of information and monitoring emanating from the Department. Did the AG look at that slide because it seemed as if the Committee was being audited? It showed that 64% of the DBE’s pre-determined objectives were such that they could not be measured by DBE. ELRC’s pre-determined objectives were so vague that they could not be measured and these objectives were outlined in the Annual Performance Plan (APP) which should be based on Treasury guidelines. Why were the pre-determined objectives even accepted and not assessed upfront? She asked for clarity on the table on prior year commitments (slide 8) and asked if the other entities had not made the same commitments as DBE.

Mr Diale replied that he did not know when the AG would start reporting on pre-determined objectives. An audit was performed to assess the government’s readiness to assess performance and the report was in the finalisation stages and would be made public. This report was red-flagged however with the view that the processes were such that most entities would receive negative opinions.

Three of DBE programmes were selected on a sample basis and their indicators looked at. The audit concern emanated from the quality of the supporting documents. The 64% did not mean that nothing was achieved, and the DBE now understood that authentic verifiable documentation needed to be presented.

The other entities had made commitments but those were all achieved. Only the commitments in progress were tabled. Mr Diale said this was an oversight and would be included in future.

Mr G Radebe, ANC member of the Portfolio Committee on Higher Education, asked if the assurances were not supposed to be aligned to policies and then be compliant in terms of risk management. Section 51(a) and (b) of the Public Finance and Management Act (PFMA) stated that they either did not submit receipts and could not account for expenditure or they submitted late and sections 84 and 85 gave the accounting authority the responsibility to ensure compliance. Since the AG liaised with the internal auditor, what advice did the AG give to the Minister in terms of expected timeframes to ensure compliance?

Mr Diale replied that risk management was done slightly different because the Department did perform a risk assessment, but it did not cover all activities, referring specifically to ASIDI. It was discussed with the Department that when a project exceeded R2 billion a risk assessment could not omit that project. The risk assessment was concluded before the Department was charged with the mandate of ASIDI, but it should have been revised and perhaps if the risk assessment had been properly done, things could have turned out differently. ASIDI was a new mandate challenge where the Department was expected to execute the responsibilities of infrastructure. This was not an excuse, but if the management action plan would be executed, this finding should not occur again.

Mr Diale  said that the AG assisted the Minister with quarterly engagements where recommendations were made that was also shared with management and the internal auditor. There was monthly or when the need arose meetings to discuss audit findings. Practical recommendations were issued that did not only address findings, but also the root causes so that the findings would not recur.

Mr K Dikobo (AZAPO) referred to the audit opinion history of ELRC that showed an unqualified with findings opinion for five years in succession and DBE showed no improvements in the key focus areas. Did the Office of the Auditor-General view it as unreasonable to share with the Committee the management letters issued to the entities to assist its oversight capacity.

Mr Diale replied that in terms of audit engagement and processes, the management letter was addressed to the Executive Authority, the Director-General and the audit committee. This report could be requested from the Department and not from the Office of the Auditor-General.

Ms J Ngubeni-Maluleka (ANC) referred to slide 6 and DBE’s regression under the key areas and asked if it meant that leadership could not govern properly. She noted that the briefing notes on page 13 did not clarify.

Mr Diale replied that the sector outcomes tied with the briefing notes was a summary of what went wrong in the internal control processes, leadership, financial and performance management and governance as a whole. An in-depth analysis would be covered in the sector report.

Ms N Gina (ANC) referred to the sector audit outcomes and noted that some provinces have showed no improvement and asked what happened to the recommendations made in the previous years and the commitments made by the sectors. The Eastern Cape’s qualified opinion should be applauded but the successive disclaimer opinions for Limpopo was a worry, especially in light of the various interventions implemented in the province.

Mr Diale explained the Department got audited as a whole and most of the audit findings of the previous year had been actioned. Most of the audit findings of this year related to ASIDI, and although it emanated from compliance, there were different issues with it, thus DBE got three red arrows facing down. In Limpopo’s audit opinion the qualification paragraphs had reduced and there had been an improvement, however not enough to exempt it from a disclaimer opinion.

The Chairperson asked if it could be called an “improved disclaimer” and Mr Diale agreed.

The Chairperson said during a session with the AG, reference was made to the Mvula Trust and asked if the trust was part of the irregular expenditure since it was part of ASIDI. On page 237 of the Annual Report it spoke about late finalisation of the audit. According the PFMA, reports had to be handed in within two months, but it noted that there was a request for extension and the request was granted. So why was the late finalisation still included in the report?

Mr Diale explained the Mvula Trust was not included in the R82 million irregular expenditure. The AG engaged with National Treasury and the matter was only resolved on 31 July on the day the audit report was signed off and "the interpretation by the Auditor-General as an irregular expenditure was incorrect". The audit report was presented for audit on 31 May and the AG was expected to issue the report on 31 July. There was a request for an extension from the Department that was granted. Because the audit report was legislated and the extension was to make the material adjustments on the financial statements, it was mentioned in the Annual Report according to PFMA regulations.

Mr Dikobe (AZAPO) asked should the Office of the AG not sit in on the audit committees of these entities because most of the problems emanate from the lack of proper internal controls.

Mr Diale replied that the Office of the AG formed part of the audit and was invited to the audit committee meetings where findings and recommendations were discussed. He referred to prior year commitments by entities where the first point was to effectively utilise and align the scope of the internal audit.

Ms Ngubeni-Maluleka said although Mr Diale explained that the Department should act on the findings when they were discovered, there was an internal audit team that should pick up on these issues beforehand.

The Chairperson asked if the question could be tabled so that the internal audit committee of the Department could answer when they came before the Committee. He said that some of the questions raised at this meeting would be put to the Department the following day's meeting.

Mr Smiles (DA) questioned whether the DBE financial statements were in fact a fair representation based on evidence that the usefulness and reliability of the information were a concern and highly questionable. This was especially concerning curriculum delivery, as well as issues with compliance with laws and regulations, internal controls, which expressed serious concerns about leadership and governance and late submission of the audit report.

Ms Lovemore (DA) said the ELRC documents were so poor that it was almost impossible to measure and their APP was rejected twice by the Committee and should in fact have been rejected a third time. She asked whose responsibility it was to make sure that the APP contained clear and measurable objectives that would satisfy the Auditor-General.

The Chairperson said ELRC would come before the Committee on Thursday and these question should be put to ELRC, because it was harsh to expect the Office of the Auditor-General to answer when the Committee had oversight over ELRC.

Ms Lovemore (DA) and Mr Smiles (DA) disagreed and the Chairperson said that she was not taking any more questions.

Mr Smiles (DA) called a point of order.

The Chairperson said the integrity of the Auditor-General was called into question because the entities were awarded an unqualified opinion and it seemed that members felt these should not have been awarded.

Mr Smiles (DA) said that they respected the Chairperson’s ruling but when a point of order was raised, she needed to listen. He said that Ms Lovemore had asked a fair question.

Ms Gina called a point of order and said Mr Smiles had raised a point of order and had not yet spoken on the point of order, but instead was giving a lecture to the Committee.

Mr Smiles (DA) said his point of order was that this Committee was right at the top of the pyramid and what they were doing was not casting suspicion on the AG, but doing oversight and accountability as expected.

Mr Diale responded and said those responsible for clear and measurable pre-determined objectives in the APP of the ELRC were all those engaged in the process starting with management, the department the entity reported to and all those who played an oversight role, including the Committee. All the findings raised were identified through the audit process and the same process provided an opportunity for management to take corrective action, but all these things happened after year end and the books had been closed and financial statements submitted. It could not be said that the control deficiencies did not exist during the financial year on which the audit was based, thus the findings were highlighted and these deficiencies would have influenced the audit opinion if corrective action had not been taken. He said they were confident that the audit was accurate and fair.

The Chairperson said that before the meeting the following day everyone should read Section 63 of the PFMA, she thanked the Office of the Auditor-General. It worried her about "the insistence that something was wrong with the audit opinion". She said however that she was happy that the Eastern Cape received a qualified opinion, and Limpopo an improved disclaimer.

The meeting was closed.
 

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