Unauthorised, irregular and fruitless expenditure and supply chain issues: National Treasury briefing

Public Accounts (SCOPA)

26 August 2014
Chairperson: Mr T Godi (ANC)
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Meeting Summary

The Accountant General and National Treasury briefed the Committee on the definitions of spending that was unauthorised, irregular, fruitless or wasteful, giving, in each case, examples to illustrate how this spending would be found, how it would be regarded, and how it could be regularised. The Accountant-General made the point that Members of this Committee should not be worried about the accuracy of figures presented, as these would have been checked by the Auditor-General and that instances of whether the spending was regarded as falling into any of these categories would have been highlighted also in the audit report. Supply chain management was the area in which the most instances of irregular expenditure occurred. The main focus of SCOPA would be to elicit from the department how and why such expenditure had occurred, and to consider the reasonableness of the explanations and take whatever steps were deemed necessary to ensure that the problems would not recur.
Members asked questions on what the experience of National Treasury were on the types of poor spending that were most common, how they happened, and whether this was related more to lack of planning or to any deliberate actions. They wondered whether it would be apposite to take civil or criminal steps to recover such money, and whether it was possible also to take steps against suppliers who may have been overpaid. They pointed out that neither the Auditor-General nor the Committee would have time to go through every transaction, line by line and therefore asked how such instances could be found. Because of the ex post facto nature of accounting, the problems would not manifest themselves until after they had occurred. Members felt that there were not enough sanctions being applied at present and the National Treasury suggested that instead of departments merely being warned that they had acted incorrectly, further actions, particularly follow ups and checks, needed to be taken. The Accountant General highlighted, in answer to some of the questions, that fruitless or wasteful spending did not necessarily involve any element of fraud or deliberate wrongdoing and that each case must be carefully considered by the Committee on its merits and careful explanations sought to determine what the main cause had been.

Meeting report

Unauthorised, Fruitless and Irregular Expenditure: Accountant-General briefing
Mr Michael Sass, Accountant General, heading a delegation from the National Treasury, firstly apologised to the Committee for the fact that Mr Kenneth Brown, who was to brief the Committee on supply chain issues, was not able to be present, and asked that the Committee perhaps schedule another time for his briefing.

Mr Sass reminded Members that unauthorised, fruitless and wasteful expenditure were the areas in which National Treasury (NT) dealt with the most number of queries, and represented also the areas where departments tried to “duck and dive” and produce a variety of excuses for their non-compliance. However, it was important to remember that all of unauthorised, fruitless and wasteful expenditure were important because they affected the use of public fund. However, he emphasised that the fact that there was unauthorised or fruitless expenditure did not necessarily mean that there was any ulterior motive and that sometimes these matters could occur for reasons that were explainable. He said, however, that this briefing would draw the attention of Members to matters to focus upon when departments appeared before them, to assist in determining whether the reasons advanced by the departments were acceptable.

He noted that Mr Jayce Nair, Chief Director:  Governance & Monitoring, and Ms Lindy Bodewig, Chief Director: Technical Support Services, from National Treasury, would give the presentations.

Unauthorised Expenditure
Ms Lindy Bodewig took Members through the accounting principles in the slide presentation (see attached documentation) and said that it was important to understand how unauthorised expenditure would be reflected in the books of departments, and its cash flow implications. She highlighted that the way unauthorised expenditure was defined in the legislation related it back specifically to a budget vote, so it was found in relation to departments rather than public entities. She read through the attached  presentation, which outlined the meaning of unauthorised expenditure, how this expenditure could be manifested, and the procedure to be followed by departments, National Treasury and SCOPA when it was discovered. She also touched on the accounting implications when it was discovered, how it could be approved, and how authorised expenditure was to be calculated. She emphasised that it is was not only the fact that a department had had to take out a bank overdraft that was indicative of unauthorised expenditure, as this could also arise when a department is in debt to suppliers and other departments.

Mr Sass informed the Members that they should not be over-concerned with the accuracy of the figures in the financial statements presented by departments, as it was another body (the Auditor-General) who certified these as correct, and the figures themselves could therefore be trusted. However, it was important that the Committee address the principles behind the calculations. One of the principles to take note of, when analysing unauthorised expenditure, was that the department should be asked to explain why it had not spent the money for the purposes for which it was allocated. If the reasons put forward by the department were considered acceptable, then no further action would be required. However if not, the department should be questioned further, on the basis that this was unacceptable behaviour.

Ms K Litchfield-Tshabalala, (EFF) wanted more clarity on slide 21. She also inquired what National Treasury, from its experience, had isolated as the major causes of unauthorised expenditure. She wondered if the reasons could be said to be the result of lack of planning.

Mr A Shaik Emam (NFP) wanted to find out what the concepts of “project”, “contract” and “budget authority”meant. He was asking this question against the background of the practices used by some contractors who, in their bids, incurred unauthorised expenditure to try to justify the bid process. He wanted clarity whether these concepts could be used as a justification on unauthorised expenditure.

Mr R Lees (DA) asked who was the entity who was ultimately authorised to approve “”unauthorised expenditure”, and suggested that SCOPA needed to debate this issue. He wanted to respond to the suggestion that unfunded authorisation would not be a good idea. He cited the example of Limpopo where there was an intervention, during which it had been found that a budget had actually been created to cover “unauthorised expenditure” and this obviously had severe consequences. He also expressed concern at the notion that Parliament could rely completely on the Auditor-General to spot all instances of unauthorised and irregular expenditure, pointing out that it was impossible as it would be impossible for him to go line by line through every transaction, as shown. If the programmes isolated did not show that there was unauthorised expenditure that led to the budget being over-stepped, he asked how SCOPA would be able to isolate that it had occurred, and whether it was expected to go through every line item.

Mr Lees made reference to the conditional grant system and particularly cited the Kimberley Mental Hospital scenario, where the MEC of the Northern Cape refused to accept that there had been any irregular or unauthorised expenditure on the conditional grant allocated to the De Aar hospital, or that there had been wastage of funds on the Kimberley Hospital. He asked how SCOPA should deal with such a situation. He noted that any unspent portion of the conditional grants should be surrendered immediately and that they could not be held back pending any authorisation from SCOPA. He asked if National Treasury was in fact insisting that unspent amounts be surrendered. He expressed the view that by the time matters reached SCOPA, it was almost “too late” and that the situation in Limpopo and the Northern Cape in previous years were classic examples.

Mr T Brauteseth (DA) asked what type of actions would be taken, against suppliers or others, in situations where authorised expenditure was not approved, and whether criminal or civil actions, or both, could be contemplated.

Ms K Tseke (ANC) required that the explanation of Type 1 and Type 2 of unauthorised expenditure be simplified, so that it would be easier for departments to identify whether this was in fact occurring. She asked if National Treasury had, in the past, made any intervention to help any department that had had irregular expenditure, to regularise the position.

Mr Sass acknowledged that it would be impossible for both the Auditor-General and for SCOPA to go through items line by line, as there would be insufficient time. The Committee  had no choice but to rely on the figures as audited by the Auditor General. The best the Committee could do was to look at the reports on material amounts as shown in the audit report. He also agreed that by the time SCOPA was made aware of the situation, it was almost “too late” to right it, but the way the accounting sector worked was that it was reactive rather than proactive. Financial statements were drawn up after the event and there would always been situations where the damage had already happened. It would, however, be impossible to act before the event, because at that stage the spending had not actually been crystallised as unauthorised expenditure. The most important thing for this Committee to do would be to follow up on such issues, once they had been identified, to prevent future occurrence.

Mr Sass said that whether criminal or civil action would be instituted would depend on the intention  behind the unauthorised, irregular or fruitless expenditure. He gave the example of a person entering into a contract with a relative and exceeding the budget, or spending the money on something that was not necessary, and said that these were actions that could be regarded as having a criminal intent. However, where there was administrative oversight, the focus would rather be on the recovery of the money, and this would be done through civil action. He emphasised that the mere fact that expenditure had been unauthorised did not necessarily mean that it had involved a criminal action. Each case would be looked at on its own facts. He confirmed that in the case of the conditional grants, National Treasury did insist that the money be paid back.

Ms Bodewig stated that the boundary for unauthorised expenditure would be the over spending per programme. From this general perspective, it was possible to then take it down to a more detailed level, of looking at individual contracts and transactions where, for example, a person might have been given money to buy cars, but the money was instead used to pay salaries. However, this approach took away from the discretion given to the Accounting Officer. Unauthorised expenditure really pointed to whether there were good controls within the department, and proper planning should be done for all programme so that money spent on those programmes did not exceed the budgeted amount.

Ms Bodewig said that the main cause of unauthorised expenditure boiled down to the fact that departments did not properly cost their activities, and this often led to under-estimations, which then led to spending that was unauthorised. She noted that the individual activities within a programme were not primarily considered as the determinants for unauthorised expenditure, but the collective total of all activities would rather be considered.

Ms Bodewig added to comments on the conditional grant, saying that there were instructions that unspent money must be surrendered as soon as possible, and that departments should maintain accurate figures because this had an effect on consolidation of accounts, and other spheres of government. She also highlighted that it was not possible to have irregular and unauthorised expenditure at the same time. At certain times, where there was an overlap, it would for the most part be regarded as falling into the unauthorised expenditure category.

She added that unauthorised expenditure could also be recovered through getting a refund from the supplier, and there must be care taken to ensure that any unauthorised spending was not being funded by future budget allocations. She acknowledged that is common to give approval for projects without checking on the funding, or because there was not money lying around to cover all projects, and this was something that the Committee would be likely to see. However, when analysing unauthorised expenditure, the Committee should take all activities of the department as a whole into account, as there would invariably be some instances where the department was over spending, and others where it was under spending. The Parliamentary committees should try to find a way, with the departments concerned, to balance these out, in future budgets. The committees would also need to analyse issues where it had not been possible to shift money around within the departments because of lack of funds, and make a recommendation whether the department would be entitled to call for additional funding.

Mr Jayce Nair answered Mr Lees’ question by saying that the regularisation or acceptance of unauthorised expenditure could be given by the Executive directive to the Accounting Officer of the relevant department. However, in such instances, it was incumbent on the Accounting Authority to indicate to the Executive that certain actions, if taken, would result in unauthorised expenditure, If the Executive still insisted that the actions be taken, then the Accounting Officer was mandated to inform the National Treasury and the Auditor General. However, SCOPA has the basic authority to condone unauthorised expenditure, taking into consideration recommendations from National Treasury Public Finance division.

The Chairperson wanted to find out how South Africa was faring, from the practical viewpoint, in respect of unauthorised expenditure over the last three to four years, and what challenges had been encountered or were still to be faced. He also highlighted that it was the role of SCOPA to identify unauthorised expenditure and come to a decision whether it should be condoned, or whether the department should be given more funding. He warned that the approach of SCOPA in this regard should be cautious, as there was not enough money “lying around” and available for this purpose.

Mr Sass said that an indication of how South Africa was faring could be available when the financial statements were finalised, in the next couple of weeks, and said that the Committee should rather not place too much reliance on the last year’s figures, as these could be misleading. The exact (audited) amounts would be sent to the Committee in due course.

Mr Nair also made the point that in situations where money had been awarded, to be spent on one hospital, but this was spent on another hospital, that would not qualify as unauthorised expenditure, as the spending would still fall within the purpose of the vote and mandate for that department. This could, however, be seen as an instance of poor planning. However, it would amount to unauthorised expenditure if the department were to take the money intended for hospitals and use it for roads, as this would fall outside the mandate.

Mr Nair said that over the years, the trend was apparent that over 90% of unauthorised expenditure resulted from over-spending of the amounts voted.

The Chairperson noted that sometimes it could also be seen that some departments had less than 1% of the budget still remaining in credit in their accounts, yet their commitments that they had already made far outweighed the amounts available to service those commitments. He asked if this was not a way of creating unauthorised expenditure, although it may not be recorded as such. Furthermore, he wondered if it was possible to determine the age of such accruals to the department, to give an idea of when the expenditure was incurred.

Mr Sass agreed with the point made by the Chairperson and stated that it was the mandate of SCOPA to identify such trends and be vigilant. He added that when SCOPA intended to meet with a department, it should notify the department what information would be required, and particularly ask it how long these accruals had been ongoing. Every department should be able to provide that information.

Mr Lees enquired about fiscal dumping, which he said was retaining money in the provincial or national account, not spending it for the purpose it was allocated for, until very late in the year. He asked whether this would also qualify as unauthorised expenditure, against the background that the spending might be within the budget.

The Chairperson indicated that the question of fiscal dumping would be dealt with in the next presentation.

Irregular Expenditure
Mr Nair ran through his presentation on irregular expenditure. This presentation, amongst others (see attached presentation for full details) set out the definition of irregular expenditure, the principles that governed it, sanctions that should be applied where it had occurred. principles to be followed when it was discovered and how it was to be reported, as well as how it was to be condoned, and the relevant authority for various departments that might have been responsible for the irregular expenditure. He then set out some examples of categories of irregular expenditure and the relevant authority that governed the situation. He concluded by giving over 26 examples to help Members understand and have a full picture of such irregular expenditure.

Mr Lees asked how National Treasury regulated departments who spent money allocated for a specific project instead on another project falling within their mandate.

Mr Brauteseth wanted to know if there was any study on the examples, and if they were sufficiently ranked. He raised the question of transparency in the non-competitive bid (NCB)  process, if there was transparency in the terms of the evaluation and adjudication stage, and how this Committee could help in cutting down irregular expenditure. He noted that the context must be borne in mind, and that it was generally at the procurement and evaluation stage where collusion on such contracts was seen.

Ms Tshabalala asked to receive any “real-life” examples of irregular expenditure that had been recovered after being found irregular. She asked what would happen when it ran into millions of rands and whether it would be regarded merely as a loss to the state.

Mr Sass responded to the earlier question of Mr Lees, that it could be seen that fiscal dumping was not unauthorised expenditure. However, it was a very serious offence and National Treasury was looking into it and how to curb it. He commented that the spending of money allocated to one hospital for the purposes of another hospital was also wrong and further action should be taken. This did not fall within the definition of unauthorised expenditure, but it could be regarded as irregular expenditure, relating to the incorrect entity.

Mr Nair answered the question on ranking of irregular expenditure and said that supply chain management transgression was regarded as being at the apex as it accounted for the majority of irregular expenditure. He said that although the tendering and evaluation process had been opened up to the public, the institutions were not originally designed to cater for or accommodate this process, but the procedures of the department would be recorded, and they could be scrutinised.

The Chairperson mentioned that the major problem was seen as lack of consequences. Given that irregular expenditure ranked the highest of the transgressions, he asked for suggestions on measures that could be taken to deal with it. Supply chain management was a serious issue, and he asked what that would say about the audit controls that were in place in the departments. Furthermore, he pointed out that there had been recurrent problems around the leases, and the classification, and this was an ongoing battle with departments and National Treasury and he wanted to know why this was so.

Mr Sass responded, on the issue of consequences, that SCOPA needed to do more than simply issuing warnings when irregular expenditure was discovered. Stronger consequences were needed. On the issue of internal audits, he said that the departments were now taking this more seriously, and that that they were working with the Auditor-General. There were recommendations that the procurement order should be a standard order that should be done every year by internal audits, regardless of the size of the department. Recovery of money could still be pursued even after a person who was responsible had resigned or left the departments, especially when there was already a civil or criminal case noted. However, it would be difficult in a situation where a person might have resigned and there was no record that the person had transgressed. He expressed concern that a permanent solution on this issue was still being sought. National Treasury have no intention of punishing departments, or putting leases in a different way, and that was common for departments to classify leases in whatever way suited them.

Ms Bodewig added to the question of leases, saying that by legislation departments were not supposed to borrow. Most of the leases that departments sought were financial leases. Auditors would therefore classify these as a transgression against the Public Finance Management Act (PFMA), because they essentially amounted to borrowings, and this was compounded by the classification of such leases and the principles around their classification by the National Treasury, which did not issue strict rules on such classification, giving departments room to make their own decisions. The problems related to the interpretation of the provisions.

Fruitless and Wasteful expenditure
Ms Bodewig summarised the presentation on fruitless and wasteful expenditure (see attached documentation. She highlighting its definition, how it could be discovered and what the Accounting Officer must do on discovery of such spending. She gave the Committee eight examples of fruitless and wasteful expenditure to help them understand it.

Mr Brauteseth highlighted that the scenarios given seemed to be entirely subjective, and thus such expenditure has the likelihood of falling under the radar. He wondered if there were any ways to ensure that this kind of expenditure could be viewed objectively, so that the accounts of the department could then be subjected to further analysis.

Mr E Kekana (ANC) enquired about the scenario 4 presented, and wanted to know what the time lapse could be for a department failing to take up a discount, before that would be classified as fruitless and wasteful expenditure.

Ms Bodewig answered that such discount could be offered and would apply to goods or services that could have been obtained for a lower price, had the department planned adequately. Where it delayed and the result of that was that it paid more for the goods or services, this would amount to fruitless and wasteful expenditure.

Ms Tshabalala enquired how SCOPA determined the issue presented in scenario 10 of the presentation which highlighted bid specifications that were drafted in a biased manner. She also expressed concern that there might be always some reason given for fruitless expenditure, and that this was the trickiest concept to deal with.

The Chairperson reminded Members that in any case, before the departments appear before the Committee, the determination of what spending had amounted to fruitless, wasteful or irregular expenditure would have been made for the Committee, isolated in the audit report, so that the Committee would not be concerned with identifying that expenditure, but with what measures were appropriate against erring officers.

Mr Sass agreed that fruitless expenditure was difficult to pick up because it had to do with professional judgments that were mostly carried out with good intentions, so it was indeed not a clear cut area. However, the reasons why the money had been spent, and the result of the spending must be cogent and reasonable, otherwise it would be deemed to have been spent fruitlessly.

Mr Michael emphasised that when the Committee questioned members on these issues Members should pay close attention to the planning of the departments and question the departments on why there was not adequate planning that led to the fruitless expenditure.

The Chairperson informed Members that another day would be scheduled to deal with supply chain management. He also reminded Members of the meeting on the following day, and asked Members to check the recommendations of the National Treasury prior to that meeting.

The meeting was adjourned.

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