Department International Relations & Cooperation & African Renaissance Fund: Interrogation of Annual Report 2013/14

Meeting report

Department of International Relations & Cooperation & African Renaissance Fund: Interrogation of Annual Report 2013/14
The Chairperson noted that the purpose of this meeting was to analyse the audit outcomes and other findings in respect of the Department of International Relations and Cooperation (DIRCO) for the financial year 2013/14. The Department had 125 missions abroad, and 20 were visited during the audit. The Department is primarily funded through funds appropriated in terms of the annual Appropriation Act (and the adjustments). The final appropriation for the financial year 2013/14 amounted to R5.754 billion.

The Auditor-General (AG) commented, in his report, on the lack of a proper review of the Department’s financial reporting processes, resulting in a number of errors which had remained undetected in the financial statements issued in March 2014 due to a lack of discipline by all involved in the process. Process implementation in the Department to address these issues was inadequate and was found to have limited or no impact. The entire oversight over the compilation and review of the financial reporting process required substantial improvement.

It was also discovered that there were material misstatements in the annual performance reports submitted for auditing of the Department’s performance. The Department had failed to comply with National Treasury Regulation 30.1.1 which prescribes that the accounting authority for a public entity listed in Schedule 3A of the Public Finance Management Act (PFMA) must annually submit a proposed strategic plan for approval by the relevant executive authority. Such a plan had to be submitted at least six months before the start of the financial year for the designated department. or another time period as agreed between the executive authority and the public entity. The proposed strategic plan for 2013/14 was not submitted to the executive authority for approval, as required by the Treasury Regulation.

The accounting authority submitted financial statements for auditing that were not prepared, in all material aspects, in accordance with section 55(1) (a) and (b) of the PFMA. The Department had failed to report timeously on its quarterly performance to the executive authority as required by Treasury Regulation 30.2.1. Financial systems senior management did not take full responsibility for ensuring that the prior year's audit recommendations were implemented by the due date.

The Committee Members noted that management had not implemented a consequence management process to address the issues of continuous non-performance by staff and that there were notable gaps in terms of the skills, competencies and knowledge in the Department.

Mr M Hlengwa (IFP) was of the opinion that the Department did not have the capacity to execute the tasks allocated to it, and pointed out that the financial statements submitted for auditing were not prepared in accordance with the prescribed financial reporting framework as required by section 40(1)(b) of the Public Finance Management Act

Mr Hlengwa and Mr R Lees (DA) noted the lack of ICT management oversight in ensuring that the active directory system administrators amended the active directory settings in accordance with the recently approved policy and procedures. Deficiencies had been noted in the ICT control environment in the areas of security management. User access management controls were not effective and the disaster recovery plan was inadequate. Policies and procedures governing how the relevant password settings should be configured had not been communicated to the application system administrators. The system had been inadequately configured and developed to meet the Department’s needs and the system administrators were not knowledgeable about the purpose of the system.

Mr Hlengwa pointed out that the Committee also noted that there was an inadequate review and monitoring of compliance with the supply chain management prescripts, due to lack of accountability. Management did not take effective steps to prevent irregular expenditure as per the requirements of section (1)(c)(ii) of the PFMA and the Treasury regulations. Contracts and quotations were awarded to bidders who did not submit a declaration on whether they were connected to the state or individuals, thus failing to comply with Treasury Regulation 16a and 8.3

Mr M Hlengwa noted that medical certificates were not provided for the sick leave of absence in the public service, and certification of employees on the payroll was not performed before the payment date. In addition, there were instances where incapacity leave was conditionally granted that exceeded 30 days and that was not approved within 30 days, as required by determinations and directives on leave of absence in the public service.

The Chairperson added that there was evidence of inconsequential management. A person could rob from the government but the person would not be arrested, as no criminal charges were filed. He asked for a written breakdown of irregular expenditure, past and current, when it happened, who was involved, how much was involved, if it had been analysed, condoned or normalised. He wanted to know what the DIRCO was doing to correct this as it moved forward. He wanted also to hear comment on fruitless and wasteful expenditure.

Discussion
Mr M Hlengwa(IFP) started his queries with the African Renaissance and International Fund (ARF or the Fund). He referred the Committee to page 34 of the Annual Report, item 19 which read: “ The accounting authority submitted financial statements for auditing that were not prepared, in all material aspects, in accordance with the prescribed financial reporting framework, as required by section 55(1)(a) and (b) of the PFMA...Material misstatements identified during the audit in regard to irregular expenditure, receivables, payables and related parties, were subsequently corrected.

Mr Hlengwa then referred to item 18, which stipulated the noncompliance with quarterly reporting requirements. It read that : "Treasury Regulation 30.2.1 prescribes that the accounting authority must establish procedures for quarterly reporting to the executive authority, in order to facilitate effective performance monitoring, evaluating and corrective action. The entity failed to report timeously on its quarterly performance to the executive authority, as required by Treasury Regulation 30.2.1”

Mr Hlengwa also noted that the Auditor-General had also referred to section 17, which stipulated that the proposed strategic plan had not been submitted in time. Altogether, many things were not being done, due process was not being followed and that this was evidence of dereliction of duty. He asked Ambassador Jerry Matjila, Director-General, DIRCO, to comment why the Department had performed poorly on its strategic planning and performance management, and why the Department had not acted in accordance with the relevant statute, the PFMA.

Amb Matjila reminded the Committee of the history of the African Renaissance Fund. When it was first established there was no legislation to support it. In 2000 the African Renaissance and International Cooperation Fund was converted into funding being managed by the (currently named) DIRCO. There was no system in place to guide its management. When he was given the responsibility of leading the Department, he decided to make sure that the relevant policies and systems were in place. Initially, the Fund was being run like a slush fund and his role was to make sure that the Fund, as it stood at the moment, adhered to all the relevant legislation.

Mr Hlengwa noted that the ARF fund was promulgated in 2002 but the main issue at hand was the financial statements for 2013.2014. There were three areas of concern: the duties of fund managers and accountants to ensure that financial statements had been submitted for auditing, that the proposed strategic plan was submitted for approval and that quarterly reports were submitted. None of these had been complied with. He asked why, in particular, the financial statements were not prepared.

Amb Matjila said that this was a shortcoming indeed which the Chief Financial Officer would explain.

Mr Hlengwa noted that the management of the Fund had been neglected. There was "unacceptable and gross neglect". Item 28 highlighted that the DIRCO had failed to develop a framework of acceptable levels of materiality and significance, in agreement with the relevant executive authority. Internal audits, as highlighted in item 29, had not been conducted. The procedures for supply chain and receipting, as item 30 showed, had not been followed and deviations were not properly motivated. He asked whether the DIRCO in fact had the capacity to ensure that the Fund was being managed in accordance with the relevant legislation, and that due process was being followed.

Amb Matjila noted that the ARF was in the nature of "a slush fund". A country could say it had an emergency in Mali, Cameroon and request R10 million, which would be granted after signing the relevant agreement. It was the kind of fund where, originally, a person in a foreign country would ask for assistance and the money would be given to him. He had decided to change this and run the Fund in a manner that enabled it to comply with the law. He noted that the Fund and its management needed to discuss the risk issues highlighted in items 21 to 26 of the AG's report. The problems of the Fund started when it decided to procure locally, from emerging South African farmers and logistics people, and then give food instead of money to the country in need of a grant. Part-time officials were used to do this work. This eventually created a problem with supply chain management

Mr Caphus Ramashau, Chief Financial Officer, DIRCO, noted that the issues raised in the report arose prior to the current corrective measures being established. Currently, the Fund focused on controlling grants that had been issued to countries with whom South Africa had existing agreements in place. Initially, the Fund did not have the capacity, or an independent Secretariat that could focus on the management and monitoring of the , but these have since been established

Mr Hlengwa asked for a commitment and re assurance from the Fund that it would implement corrective steps to deal with the matters mentioned in a speedy manner, and that it would provide feedback.

Amb Matjila replied that DIRCO now had a risk strategy, full time staff, polices and systems in place to correct all the issues raised. He said he would provide the Committee with relevant updates.

Mr Hlengwa noted that the Department did not have an updated assets register, in compliance with accounting standard practices, and that tangible assets and minor capital assets were understated by R24.9 million in the financial year statements. Assets to the value of R83.8 million could not be traced which are in the asset register, and R175 million rand that were not In the asset register were traced. This, together with the ineffective system of control over assets, had an impact on the amounts recognized as tangible assets and minor assets, which were consequently understated. He asked why an asset register was not updated

Amb Matjila replied that this register was a big challenge in the Department but a viable register had since been developed. Part of the problem was the assets abroad and assets from their government departments. Assets registration commenced in 2002/2003 including unused assets. He cited the example of 300 unused mattresses in store rooms, and items that could have been commissioned in the 1960s were still found in buildings abroad. DIRCO decided to scan the assets and bar code each and every asset. Currently more of South Africa’s assets were bar coded.

Mr Hlengwa asked why the AG was able to trace the inconsistencies within the Department's financial systems which the Department was not able to do. He asked whether the process of bar coding, which could be a work in progress, should run parallel with the process of probing internal capacity so that such inconsistencies were not left to the AG to identify in the future. He asked whether any internal controls were in place for of self identification of these inconsistencies

Mr Ramashau said that the bar coding was indeed work in progress. There was an audit planned for those coded items so that the asset registry could be seen to be accurate prior to the next audit. The heads of mission were also accountable. They needed to ensure that the assets at their disposal were accounted for.

Mr Hlengwa noted that according to the report, consequence management was not strong and that staff could fail to adequately perform their duties yet would not be brought to book for their actions. There was therefore failure to punish offenders in the Department.

The Chairperson noted that the Department appeared to be lawless; people were simply doing as they pleased, and going unsanctioned, so there was no incentive for them to do the right thing. He asked if any discipline was being observed or enforced.

Amb Matjila replied that it had been decided to retrain all the operative managers in the missions, give them the equipment to do their work, and ensure that both the headquarters and missions had an open communicating system so that after skilling the employees, consequence management could be implemented for offending employees.

Mr Hlengwa noted that internal control deficiencies were noted by the AG also in human resource management. Certificates were not provided for sick leave as required, leave extending 30 days was granted, and there was inadequate follow up on human resource policies. Deficiencies were noted in the ICT control environment, security management was not effective, significant back up failures were experienced. The root cause of that was lack of ICT management oversight. He asked what was being done about all this, and whether it was being corrected.

Mr Francis Makgakge, Chief Information Officer, DIRCO, replied that the ICT department had since developed a user accounting management system. Prior to this each system control was operating an independent process, an procedure that was approved in 2011. This had since been changed.

Mr R Lees (DA) also commented on several instances of non-compliance with legislation, assets registry, unprepared financial statements, irregular expenditure, wasteful expenditure and other instances. The errors raised were all areas that could be dealt with if basic accounting principles were applied consistently. He asked how it was possible that such errors could go undetected and whether the culprits had been brought to book. He suggested that if staff members had not been disciplined for "sleeping on the job", then it followed that the Director-General also should be disciplined for the non compliance of his subordinates, over whom he was supposed to exercise control. He could not merely claim that the subordinates were ignorant of their responsibilities. Ignorance was not an excuse.

Mr Lees added that the AG had mentioned that in relation to the ARF, the DIRCO had apparently proposed that it should be liquidated and replaced with a new Fund. However, the presenters today were speaking of new policies in place that seemed to indicate it was being re-vamped. He wanted to know the real status, whether they were speaking of two different Funds, whether there were attempts to fix the prior situation.

Mr Lees was also concerned that the Director General had spoken of this being a "slush fund", and he was worried about that description, saying that such funds were often seen as support for those acting incorrectly, and it was not always about giving food support. This Fund had been in existence for a long time, but Members had been given no indication of where it is going

Amb Matjila responded that some of the AG's findings were repeat findings. The DIRCO was now adopting the approach that overall it must deal with the matters effectively. Normally, a system for responding to the AG's findings was followed, with a team being assembled to look into these recommendations. Heads of missions were also involved and encouraged to comply with the recommendations. Audit Committees also assisted the Department with adhering to the recommendations.

He said that the ARF and DIRCO were no longer operating a "slush fund". That was the original history behind the ARF. Initially, there were no management systems, but they had since been established.

He assured the Committee that DIRCO was following consequence management. For example, the Head of Mission in Ghana was allocated money to pay her monthly rental, over a two-year lease, but it was found that she re-allocated that and hired a contractor to construct a house for her to occupy in two months. That contract was set aside when it came to the attention of DIRCO, and she was currently under investigation, although that had been delayed since she was taken ill and had not appeared on the due dates of the meetings.

Mr V Smith (ANC) wanted to know how much money was reallocated in that Ghana mission. This Committee would not accept any arrangement that the money might be refunded only after several months, would want to see interest added, failing which this Committee would be recommending strongly that the money should be deducted from the DIRCO's next budget.

Mr Smith referred to page 183 of the Annual Report, dealing with performance bonuses of R83 000, for senior managers. He asked how many managers this related to, and the amounts for each.

Mr Smith then referred to pages 193 and 250 of the Annual Report which stipulated that there had been mismanagement of state funds to the tune of R454 000. He wanted to know where, in the financial statements that amount was reflected and what was being done about mismanagement of funds.

Amb Matjila made a comment that the amount was around R7 million.

Mr T Brauteseth (ANC) asked when was the decision was made to convert this Fund from a slush fund to a properly managed fund with controls? He wanted to know whether the grants were made only in relation to local produce, and if any cash was paid out of this Fund.

Ms N Mandela (ANC) was very critical of the fact that there appeared to be no disciplinary action taken, in the DIRCO for essentially "robbing the country of funds". The internal audit system was not working, and nor was the Office of the Director General. She insisted that the Head of Mission in Ghana must be told to pay back the money immediately, irrespective of her health.

Another ANC Committee Member asked whether there were current systems in place to monitor how the Heads of Mission were using the funds allocated to them. It seemed that the R7 million was able to be stolen without any transparency being exercised, and nobody had been monitoring.

Amb Matjila replied, in relation to the bonus that the Chief Financial Officer had not received a bonus. The detailed figures would be made available to the Committee.

He noted that there was a training programme for all ICT officials. The ARF had been used for many programmes, not just straight assistance. He cited some examples - some people had been given funding for studies and observations done in other countries, the Public Protector had been granted However, some funding to conduct training, funding had been given to conduct censuses in other different countries. Some had been cash payments. Explaining the history, he noted that in 2011, it was discovered that the ARF was not aligned with systems of government and it also needed to be aligned with National Treasury regulations and relevant legislation, and there had been a continuous process of improvement since then. Part of the challenge with the Fund had been its inability to have a proper response system for emergencies. In 2012, it was decided that the ARF needed to commence local procurement.

Amb Matjila noted that the R7 million was not actually stolen "behind closed doors" but it was a case of diverting the funding from one programme to another. The procurement management system was decentralised, which explained why such diversion was not noticed immediately. The accountants in Ghana were able to access cheques that were posted to Ghana and they had colluded with the Head of Mission. The Department did, however, have internal controls in place. Funds would be released only on request. However, another challenge the Department faced was in regard to the reporting systems. It did not have online systems such as a fully up-to-date organisation should have.

Mr Kgabo Mahoai, Deputy Director General: Human Resources, DIRCO, said that vacancies in the department were classified as critical and normal. Critical finance and ICT posts were filled as and when they became vacant. The vacancy rat

Mr Smith reiterated that the money that the Head of Mission in Ghana stole must be reclaimed from her. It was taxpayers' money, and must be refunded.

The Chairperson noted that this Department was a classic example of one where no consequence management was applied. He reiterated that a person had robbed from the government, yet was not even arrested, and therefore no criminal charges appeared to have been filed.

The Chairperson asked the DIRCO to submit a written breakdown of irregular expenditure, past and current, when it happened, who was involved, how much was involved, if it had been analysed, whether there was any application for condonation done. The same should be done for fruitless and wasteful expenditure. He also wanted the DIRCO to set out what it proposed for the way forward. Overall, he summarised that the impression was given that the Department had only just started to wake up to what was in the Auditor-General's reports, and it appeared that overall it had been very lax.

The meeting was adjourned.