2013/2014 audit outcomes: Departments of Energy, Science & Technology, Health, Water & Sanitation, Cooperative Governance & Traditional Affairs, and National Treasury: Auditor-General South Africa briefings

Standing Committee on Appropriations

14 April 2015
Chairperson: Mr N Gcwabaza (ANC) (Acting)
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Meeting Summary

The Standing Committee on Appropriations was briefed by the Auditor-General of South Africa (AGSA) on the 2013/14 audit outcomes, for the Departments of Energy, Science and Technology, Health, Water and Sanitation, Cooperative Governance and Traditional Affairs, and National Treasury. The reports also indicated where there had been problems in performance management, spending, specific points and summarised briefly any recommendations made in the recent preliminary investigations that AGSA had instituted for departments, to comment on their Annual Performance Plans.

A long list of findings was reported for each of the departments in turn, with an indication from AGSA as to what had been done. Typically, each of the reports noted whether the departments had clean or qualified findings, whether there were findings on the predetermined objectives, whether they had complied with law and regulations, including National Treasury regulations and the Public Finance Management Act. In the case of the DWS, there was an extensive explanation of problems in the Eastern Cape around bids and tenders. The AGSA also commented on whether targets were formulated in a SMART way, and whether risk assessments were done. In-year changes for the DWS suggested lack of proper planning. There were for all departments indications that supply chain management was not up to scratch, and the main cause was cited most often as lack of regular review and monitoring to ensure compliance with National Treasury frameworks. The recommendations of AGSA were that management must address certain issues, and enforce regular review and monitoring, that targets must be realistic and independently measured against SMART criteria, whilst corporate planning must be done to ensure documented policies and procedures in line with Public Finance Management Act requirements for the Framework for Managing Programme Performance Information (FMPPI).

In respect of the Department of Health, Department of Science and Technology and Department of Water and Sanitation, it was noted that the bulk of funding was transferred out immediately to entities. In several departments there were misstatements needing to be corrected; with some departments this did not affect the ultimate audit finding, but where supporting records could not be provided the financial statements would get a qualified audit opinion.

The Committee noted that supply chain management was a common challenge to all the different departments, and this was something particularly worrisome which needed urgent attention. The fact that there were few stringent findings was also a concern for the Committee, and a few questioned if making recommendations to management on correcting the issues was really sufficient. However, other Members and the AGSA clarified that this was really as far as its mandate went, and emphasised that AGSA was now giving quarterly reports to portfolio committees who would be able to take matters further. One Member suggested that the main problem with the Department of Water and Sanitation was that its mission statement was not clear nor well defined. Several Members were concerned that the situation in Eastern Cape DWS seemed to indicate clear corruption, but AGSA pointed out that whilst it could indicate the facts it could not express an opinion on any corrupt intent. Members questioned what "lack of capacity" meant and whether it was correct for a department to hire in consultants to take over work that was not being properly done by own staff. Members asked what "no findings were recorded" meant and suggested that the report would be clearer if it specified exactly what was found. Several Members expressed the view that the most common problem was lack of proper attention to supply chain management. They asked if there were proper performance contracts to which people would be held in all departments, and why they did not specify what must be done in exact terms. They were concerned that the DWS did not appear to be spending in key areas. In the cases where the targets were not in line with the strategic plan, or budget and strategic plan were not aligned, effective spending was not happening. Members wondered if the new interim reviews might lead to better spending. Several expressed their support for far stronger penalties against defaulting officials. In respect of the Department of Health,they asked if underspending on capital budgets was due to poor planning. One Member was particularly concerned that non-compliance with legislation seemed to be being shrugged off, and recommended far more stringent recommendations. Members discussed the necessity, within the Department of Cooperative Governance, to ensure that not only the national, but also the provincial sphere was involved in assisting municipalities, and asked for reports on district municipalities in particular. The question was asked - but not answered - whether there were successes or challenges to report on the implementation of cost containment strategies. 

Meeting report

Audit outcomes of various departments for the 2013/14 financial year
Mr Andries Sekgetho, Chief Director, Auditor-General South Africa, said that the document he would be presenting contained a brief summary of the audit outcomes for the 2013-14 financial year for six departments. The Auditor-General of South Africa (AGSA) had a constitutional mandate and, as the Supreme Audit Institution (SAI) of South Africa, it existed to strengthen the country’s democracy by enabling oversight, accountability and governance in the public sector through auditing, thereby building public confidence.
 

The document was separated into six sections dealing with the audit outcomes of the 2013/14 financial year for the Department of Water and Sanitation, Department of Energy, Department of Science and Technology, Department of Health, National Treasury, and the Department of Cooperative Governance. Each section contained an overview, audit opinion history, key focus areas, drivers of internal control, current challenges, and the feedback on interim review of 2015/16 annual performance plans.

Department of Water and Sanitation briefing
Mr Tshepo Shabangu: Senior Audit Manager, AGSA (dealing with Department of Water and Sanitation) said that in terms of the legislative mandate the work of the Department of Water and Sanitation (DWS or the Department) is informed by the Water Services Act, 1997 (Act No. 108 of 1997) (WSA), National Water Act, 1998 (Act No. 36 of 1998) (NWA) and Water Research Act, 1971 (Act No. 34 of 1971) (WRA).

The purpose of DWS is to lead the effective management of the nation’s water resources, to meet the needs of the current and future generations. It meets its mandate by providing for the rights of access to basic water supply and basic sanitation by setting national standards and norms (WSA), ensuring that South Africa’s water resources are protected, used, developed, conserved, managed and controlled in a sustainable and equitable manner for the benefit of all persons (NWA), and promoting research in connection with water issues (WRA).

The vision of DWS is to have a dynamic, people-centred Department, leading the effective management of the nation’s water resources, to meet the needs of current and future generations.

The Department aimed to make a positive impact on the country and its people as custodians of our water resources, and to be an innovative and committed partner in the drive for sustainable development.

 

The Department is primarily funded through funds appropriated in terms of the annual Appropriation Act (and the Adjustments Appropriation Act), and the final appropriation for the 2013/14 amounted to R10.4bn  (compared to the 2012/13 appropriation of R8.9bn).

 

Mr Shabangu said that, in terms of the audit opinion history, the Department received a clean audit opinion from 2009/10 to 2013/14 financial years. There were no findings on predetermined objectives and it had complied with laws and regulations. In terms of the key focus areas, there was, however, no improvement on supply chain management. In terms of findings, the following were cited:
- he non-existence of the bid specification committee at the Eastern Cape Regional Office
- The Department did not publish the names of the bidders on the website for tenders above the threshold of R500  000
- Quotations sourced from suppliers were not listed on the suppliers’ database
- There was lack of rotation of prospective suppliers on database
- No declaration of interest by Departmental Bid Evaluation Committee members was completed
- The Tender/Quotation had been evaluated using incorrect preference point system
- There had been awards to close family members of persons in service of the institution without submission of a declaration
- The supplier with lowest price quotation was not always selected for goods and services and no approved motivation was attached to justify it
- Tenders were awarded to the bidders who quoted the highest price with the lowest points
- There was non-adherence to requirements specified in the tender to ensure that the evaluation process was fair and transparent
- In one case, the winning bidder did not satisfy all the requirements stated in terms of reference in the bid documentation.
- Three quotations were not always obtained for procurement and reasons for deviation were not documented/ approved by the Accounting Officer or delegated official
- No evidence was produced to confirm that the tender was advertised in the Government Tender Bulletin and that it was advertised for 21 days.

Mr Shabangu said that the root cause of this was that the vacancy for the Chief Director: Supply Chain Management position was filled only at year end. There was a lack of consequence for poor performance and transgressions. Compliance with the requirements of procurement laws and regulations was not enforced through regular review and monitoring. There was a lack of training of SCM personnel. Finally, there were also inadequate controls in contract management.

The recommendations of the AGSA were that the Department should:

- take necessary action against employees who incurred irregular expenditure
- provide training to all SCM personnel to create awareness about SCM laws and regulations
- enforce compliance with the requirements of procurement laws and regulations through regular review and monitoring
- use the Financial Misconduct Committee to deal with the transgressors
- capacitate the contract management unit
- establish adequate controls over contract management and enforce implementation of this, through regular review and monitoring
- use the internal audit unit to identify gaps in the internal controls.

Mr Shabangu moved on to describe the findings on the predetermined objectives. Here, the findings were that there was lack of evidence that risk assessment was performed for predetermined objectives. In-year changes were made to the APP for 2013/14 which suggested that there was a lack of proper planning. Some indicators were not well defined and some targets were not specific and measurable (SMART). There was inconsistency in the Acid Mine Drainage (AMD) reports. Rain water harvesting tanks to support communities could not be physically verified, and nor could the jobs created for individuals in the RBIG and rain-water harvesting tank projects.

The root cause was that compliance with the requirements of the National Treasury’s framework was not enforced through regular review and monitoring. Realistic targets were not set during planning stage. The targets were not verified against the SMART criteria. Proper assessments were not performed on targets and indicators and approval was not documented. There were no evaluations to reduce the use of targets that did not express the specific nature and level of performance. Adequate policies and procedures had not yet been developed to clearly articulate how management would ensure that complete, accurate and valid information was reported. Requested information was not submitted in time for audit purposes. There would be clearer accountability once policies and procedures had been developed and implemented. Finally, management was not knowledgeable on the requirements of the Framework for Managing Programme Performance Information (FMPPI) under the Public Finance Management Act.

 

The recommendations stated that the Department should establish adequate mechanisms to enforce regular review and monitoring. Targets, at the planning stage, should be realistic to avoid amendments. The targets and indicators set must also be independently examined against the SMART criteria, to ensure that targets expressed the specific nature and level of performance the Department aimed to achieve, within the predetermined period. Corporate planning must ensure that there were documented policies and procedures for performance management to ensure compliance with the PFMA and Framework for Managing Programme Performance Information (FMPPI). Management also needed to be trained on the requirements of the FMPPI. Clear accountability needed to be assigned to staff and built into their performance agreements. The indicators must be well-defined in the technical indicator descriptions. Training should be provided to management to ensure they understand and can apply the FMPPI in relation to setting of indicators and targets. Proper record keeping should be implemented to ensure that all supporting documents are complete, relevant, accurate and available.

 

Mr Shabangu moved on to describe the findings on human resource management. Here, there had been instance when the payroll certificate was signed after payment was made, and was not returned to the Chief Financial Officer (CFO) within ten days of certifying it, in contravention of Treasury Regulations 8.3.4. Background checks were not performed on appointed employees. Approval for staff members to do remunerative work outside DWA’s employment was not obtained. Vacant posts were not advertised within six months after becoming vacant, nor filled within twelve months, in contravention of Public Service Regulations. One employee was acting in a higher position for more than six months.

 

The root cause was that the Regional Payroll Manager did not ensure that the policies and procedures regarding payroll certification were implemented and monitored for compliance. The Department did not ensure that background checks were performed before appointment was finalised. The Department did not ensure that all the employees adhered to the Public Service Act. There were inadequate controls to ensure that vacant posts were filled within twelve months. The new organisational structure had been reviewed but not yet implemented, resulting in key posts still being vacant.

 

The recommendations were that the Regional Payroll manager should ensure that the payroll report was certified on or before the payment date, in order to identify any possible error in the report. The Regional Payroll manager should exercise oversight responsibility over the returning and certifying of payroll reports, to ensure compliance with Treasury Regulation 8.3.5. The Department must provide training to all HR personnel to create awareness about HR laws and regulations. It would have to enforce compliance with the requirement of laws and regulations, through regular review and monitoring. It must also establish adequate controls over human resource issues, and enforce implementation of these, through regular review and monitoring. Adequate controls should be put in place to ensure compliance. Leadership needed to implement the new organisational structure to ensure that key posts were filled on a timely basis.

 

Mr Shabangu said that in terms of information technology controls, findings were predominantly made in the areas of information technology governance, security management and user access control, with the root causes being the inadequate design and implementation of controls. Material misstatements identified by the auditors in the submitted financial statements were not adequately corrected, and the supporting records could not be provided, with the result that the financial statements received a qualified audit opinion. There were no matters to report on the financial health status.

Mr Shabangu said that the following root causes resulted in weaknesses in internal control:
- The oversight processes implemented by management in respect of the annual financial statements and performance information were inadequate
- The Department developed a plan to address audit findings, but the appropriate level of management did not timeously monitor adherence to the plan.

Mr Shabangu then outlined some of the current challenges facing the DWS. It had spent 85% of its vote as at 31 March 2015. This was due to a number of factors. The majority of the unspent portion of the allocation for 2014/15 was related to grants: namely, the Regional Bulk Infrastructure Grant (RBIG), Rural Housing Infrastructure Grant (RHIG), Bucket Eradication Project (BEP) .DWS was still busy with the verification of projects that were done by implementing agents, which it had to do before funds can be transferred. These invoices were part of the accruals at year end. The sanitation function was transferred to DWS in October 2014 (the third quarter). Most vacancies could not be filled due to the moratorium issued by the Minister.

AGSA had also given feedback on the interim review of the draft 2015-16 Annual Performance Plan, which had focused on the process followed for the preparation, submission and approval of the APP and then made an assessment of the measurability and relevance of the indicators and targets planned for each selected programme. The review indicated that the Performance indicators for Programmes 3 and 4 were not well defined. The root cause of this was that management did not review the performance indicators to ensure that they were well defined. The recommendation was that reviews of indicators should be performed before they are finalised, and sources of supporting data should be established.

Department of Energy findings

Mr Sekgetho said that the Department of Energy (DOE) is mandated to ensure secure and sustainable provision of energy for socio-economic development. It aims to formulate energy policies, regulatory frameworks and legislation, oversee their implementation to ensure energy security, promotion of environmentally-friendly energy carriers and access to affordable and reliable energy for all South Africans. This Department aims to have created a transformed a sustainable energy sector, with universal access to modern energy carriers for all, by 2014 and in the long run, to improve South Africa's energy mix by having 30% of energy provided by clean sources by 2025. The Department thus continued to regulate and transform the sector for the provision of secure, sustainable and affordable energy. The Department was primarily funded through funds appropriated in terms of the annual Appropriation Act and the Adjustment Appropriation Act. The final appropriation for the 2013 -14 financial year amounted to R6.5bn (compared to the 2012-13 allocation of R6.7bn). As at 31 March 2014, the DoE disbursed transfer payments to the value of R6.02 billion, which represented 92.5% of the total budget allocation for the year to public entities, municipalities and implementing agencies.

Mr Sekgetho said that, for the 2013/14 year, there were no findings in respect of key areas of supply chain management, and the same applied in respect of the predetermined objectives, human resources (HR) management, and IT controls. However, 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 (PFMA) and a material misstatement of the commitments disclosure note was identified by the auditors in the financial statement submitted for audit. This was subsequently corrected, resulting in the financial statements receiving an unqualified audit opinion. The recommendation was that management should ensure that appropriate review and reconciliation procedures were performed prior to submission of the financial statements for audit. There were also no financial health findings reported for Department of Energy in 2013/14

Mr Sekgetho outlined that there were some weaknesses in internal controls. This was because the DOE did not ensure that sufficient controls were developed to ensure the accuracy of the reported commitments disclosure note. The Department did not ensure that sufficient actions were implemented to confirm compliance with relevant laws and regulations as they pertained to transfers made to municipalities. In terms of current challenges / concerns identified the Department was commended for presenting all requested information for audit purposes during the interim stage of the audit. No limitations in scope were imposed by departmental management, and no significant internal control deficiencies nor non-compliance with laws and regulations, were identified during the first nine months of the financial year.

AGSA had completed its interim review of the draft 2015-16 annual performance plan (APP), which focused on the process followed for the preparation, submission and approval of the APP, and made an assessment of the measurability and relevance of the indicators and targets planned for each selected programme. The review found that not all performance targets /indicators had technical indicator descriptions associated with them, and for certain technical indicator descriptions, the ‘short definition’ of the target was not consistent with the title of the related target. However, this was the only finding.

Department of Science and Technology findings
Mr Sekgetho said that the legislative mandate of the Department of Science and Technology (DST) was to develop, coordinate and manage a National System of Innovation (NSI) that will bring about maximum human capital, sustainable economic growth and improved quality of life for all. Its vision was increased well-being and prosperity through science, technology and innovation. The mission was to provide leadership, an enabling environment and resources for science, technology and innovation in support of South Africa's development. In terms of funding the DST, under Vote 34, received a final annual appropriation of R6.2 billion and had spent 99.54% of its allocation in the 2013/14 financial year. The under-spending had decreased, for it was 0.53% in 2012/13 but 0.46% in 2013/14, and the underspending was attributed to vacant positions, reduced administrative costs and delays in contracts. The largest portion, being 92.03% of the annual appropriation, was transferred to the portfolio entities, other institutes and projects.

Mr Sekgetho said that in terms of key focus areas, no significant findings on predetermined objectives were identified. On supply chain management there were some findings, namely:
- Uncompetitive or unfair procurement processes
- Contracts and quotations were awarded to suppliers whose tax matters had not been declared by the South African Revenue Services to be in order, as required by the Treasury Regulation 16A.9.1(d) and the Preferential Procurement Regulations
- Irregular expenditure was incurred as a result of the contravention of supply chain management legislation

The root cause was that there was a lack of proper review and monitoring by management to ensure compliance with supply chain management policies, procedures and legislation. The recommendation was that management should regularly evaluate and monitor implementation of supply chain management policies, procedures and legislation.

There were no significant matters to report on the information technology controls. In terms of financial health none of the audited entities in the portfolio had findings or displayed signs of any matters which could affect the financial sustainability of the portfolio.

Department of Health findings
Mr Sekgetho said that the Department of Health (DOH) acted in terms of the negotiated service delivery agreement (NSDA) concluded between the President and the Minister of Health for 2010-2014. The mandate was that the Department should improve the health status of the entire population and contribute to government’s vision of a long and healthy life for all South Africans. The NSDA had identified four strategic outputs which the health sector must achieve. These were: Output 1: Increasing Life Expectancy, Output 2: Decreasing Maternal and Child mortality, Output 3: Combating HIV and AIDS and decreasing the burden of disease from Tuberculosis, and Output 4: Strengthening Health System Effectiveness. The vision of the Department is to contribute to a long and healthy life for all South Africans. The mission was to improve health status through the prevention of illness, disease and the promotion of healthy lifestyles, and to consistently improve the health care delivery system by focusing on access, equity, efficiency, quality and sustainability. The Department is primarily funded through funds appropriated in terms of the annual Appropriation Act (and the Adjustments Appropriation Act). The final appropriation for the 2013/14 financial year amounted to R30  528 181 000 (compared to the 2012/13 allocation of R28 057 203 000).

The National Department of Health made the following transfer payments to the entities included in the health portfolio during the 2013/14 financial year:
- Compensation Commissioner for Occupational Diseases – R3 062  000 (2012/13: R2  916  000).
- Council for Medical Schemes – R4  525  000 (2012/13: R4  310  000).
- South African Medical Research Council - R419 460  000 (2012/13: R288  863 000).
- National Health Laboratory Services – R105 536  000 (2012/13: R85  102  000).
- The Department also transferred an amount of R27 686 378 000 as conditional grants to the provincial departments of health.

The remaining amount of R2 841 803 000 related to funding for the core functions of the Department.

Mr Sekgetho said that in terms of key focus areas on predetermined objectives, the finding of AGSA was that reported indicators were not supported by sufficient appropriate evidence. There was lack of consequences (in the provinces) for not reviewing performance information. The recommendation was that management must ensure that the figures produced by the Department of Health Information System (DHIS) must agree to the figures obtained from the facility’s routine monthly data input forms, to ensure that reported performance was valid. On supply chain management it was found that employees of the Department performed remunerative work outside their employment in the Department without written permission. The recommendations noted that management must ensure that interests had been declared by all employees of the DOH before entering into business with a supplier. Greater awareness of this internal control must be created through appropriate training of staff members and encouraging staff to declare the interest when the conflict arose. The HR unit must enforce compliance through regular checking and follow-ups to ensure that annual declarations were made and updated as necessary, and staff should be hold accountable for non-compliance. On HR management, there were no significant findings for the Department.

 

Mr Sekgetho noted that the DOH had effective leadership and was in the process of addressing its oversight responsibility, and policies and procedures relating to the reporting on its performance, based on information originating at a provincial level. This was primarily due to the manual systems and processes in place at facilities across the country prior to inputting into the system now in place. He noted that the DOH had continued to engage with provinces to support them in improving internal controls.
 

The DOH was financially unqualified in respect of its financial statements, but material corrections were made to the financial statements. This Department did face challenges in reporting reliable information on its performance, especially as it related to reporting that originated in the provinces. This had impacted on the processing and reconciling of controls and the accuracy of its reporting overall.

The internal audit unit was not effective, primarily due to late reporting.

In relation to the interim audit, there was nothing significant that needed to be reported to this Committee.

National Treasury findings
Mr Sekgetho said that the legislative mandate of the National Treasury (NT) and finance portfolio entities was to promote the national government’s fiscal policy, coordinate macro-economic policy, intergovernmental financial and fiscal relations, manage the preparation of the budget and ensure that revenue and expenditure, assets and liabilities, public entities and constitutional institutions are managed in a transparent and effective manner. The vision is that it should be the custodian of the nation’s financial resources. The mission and objectives state that National Treasury that the aims to promote economic development, good governance, social progress and rising living standards. The NT is primarily funded through funds appropriated in terms of the annual Appropriation Act and the Adjustments Appropriation Act. The final appropriation for the 2013-14 financial year amounted to R25.2 billion (compared to the figures, for 2012-13: of R21.2 billion).

Mr Sekgetho said that in terms of the key focus areas on supply chain management there were various inefficiencies in the management of transversal contracts. The root cause was the inadequate review and monitoring of compliance. The recommendation was that management should enforce compliance with supply chain management (SCM) prescripts. On predetermined objectives, AGSA had reported that the published annual performance report included some information on performance against predetermined objectives which AGSA had not been able to determine as useful and reliable. The recommendation noted that management should adhere to prescripts of the framework for managing programme performance information.

On information technology controls, the findings were predominantly in the areas of information technology governance, security management and user access control, with the root causes being the inadequate design and implementation of controls.

On financial health status there were no matters to report. No challenges had been identified in respect of spending performance.

Department of Cooperative Governance findings
Mr Sekgetho said that the Department of Cooperative Governance and Traditional Affairs (CoGTA) mandate is derived from Chapters 3, 7 and 12 of the Constitution of the Republic of South Africa, 1996 (Act No. 108 of 1996). CoGTA is mandated to: develop, monitor and support the implementation of national policy and legislation, seeking to transform and strengthen key institutions and mechanisms of governance to fulfill their development role; develop, promote and monitor mechanisms, systems and structures to enable integrated service delivery and implementation within government; and promote sustainable development by providing support to and exercising oversight over provincial and local government. This mandate is derived from the following legislation: the Intergovernmental Relations Framework Act (2005), the Municipal Property Rates Act (2004), the Municipal Systems Act (2000), and the Municipal Structures Act (1998).

 

The aim of the Department of Cooperative Governance and Traditional Affairs is to improve cooperative governance across the three spheres of government in partnership with institutions of traditional leadership to ensure that provinces and municipalities carry out their service delivery and development functions effectively. Its vision is an integrated, responsive and highly effective governance system, working with communities, to achieve sustainable development and improved service delivery. The Department aims to facilitate cooperative governance and support all spheres of government, the institution of traditional leadership and associated institutions through:
- Development and implementation of appropriate policies and regulatory mechanisms to promote integration of government development programmes
- Achievements of social cohesion through the creation of enabling mechanisms for communities to participate in governance
- Monitoring and evaluation of cooperation amongst government stakeholders to achieve improved service delivery.

The Department is primarily funded through funds appropriated in terms of the annual Appropriation Act (and the Adjustments Appropriation Act). The final appropriation for 2013-14 amounted to R58  458  907  000 (compared to 2012-13, when it was R54  855  178  000).

 

Mr Sekgetho said that in terms of key focus areas on predetermined objectives there was usefulness of reported performance information. In terms of the measurability of targets, he noted comment on Programme 5: Provincial and Municipal Government Support (PMGS). The Framework for Managing Programme Performance Information, under the Public Finance Management Act requires that performance targets must be specific in clearly identifying the nature and required level of performance. Here, important targets in relation to the overall mandate of the entity were not specific. Performance targets must be measurable, but AGSA was unable to measure the required performance because significantly important targets in relation to the overall mandate of the entity were not indicated. The recommendation noted that the CoGTA should ensure that progress against its audit action plan is monitored regularly and feedback is provided to the Audit Committee on a quarterly basis. Internal audit should verify any significant progress documented in the progress reports to ensure that appropriate action is taken with a reasonable time frame to address issues noted.

There were discrepancies noted in relation to supply chain management, since goods and services with a transaction value below R500 000 were procured without obtaining the required price quotations, as required by Treasury Regulation 16A6.1. The recommendation was that a report on irregular expenditure must be compiled monthly by the unit heads, noting whether or not there had been any irregular expenditure, and signing off the reports. Internal audit must then validate these reports, and the Chief Financial Officer must report monthly to the Accounting Officer and the Audit Committee. The Audit Committee and the Accounting Officer must then report quarterly to the Executive Authority.

Mr Sekgetho concluded that although this Department encountered challenges with regard to the submission of requested audit documentation at times, this was something that was now being managed by management and the audit team.

The interim audit had highlighted that full sets of financial statements with supporting schedules have not been prepared and reviewed on a monthly basis, but the review of the financial statements was being performed on a quarterly basis. The Department is still incurring irregular expenditure and thus there is a finding of non-compliance with supply chain management laws and regulations. The majority of this irregular expenditure relates to the Community Works Programme (CWP). The Department's performance information policy was only approved on 21  November 2014. Internal audit had only conducted eight of the 23 planned audits for the current year, due to capacity constraints.

Mr Sekgetho finally addressed the feedback on the interim review of the draft 2015-16 Annual Performance Plan, and explained that the APP for the 2015/16 had been examined with a view to communicating this for approval by the Portfolio Committee. No significant matters were noted for the APP of the Department of Traditional Affairs.

Discussion

Mr A McLaughlin (DA) said that the mission statement and the objectives of the Department of Water and Sanitation (DWS) did not really say what it was there for, and he believed that part of the problem was that the mission statement was not defined correctly.

 

He further pointed out that, on page 5 of the presentation, every single one of the findings stated that there was possible corruption. He understood that it was the job of the AGSA to point out such issues, but in those findings there was lack of consequence. This Committee should follow up with the DWS on that matter, because this appeared to be a very big problem. It seemed there was lot of non-compliance in the DWS, which seemed to be carrying on as it pleased. It did appear that in the current financial year there had been improvements, going by the report tabled to the Committee, but it had certainly not been as significant an improvement as it would have liked, and that was a point to be addressed. There should be consequences flowing from the non-compliance with legislation, especially when it came to public funds.

 

Mr McLaughlin thanked AGSA for pointing out the challenges faced by the departments. Generally, the report seemed to indicate that there was lack of capacity in the departments, and there was a huge problem with people being employed in the departments who simply did not have the capacity to do the job for which they were employed. This was a huge concern and the Committee needed to address those challenges.

 

Mr McLaughlin said that fairly often information from the departments was not provided on time, either being hidden, or simply from lack of capacity, and he suggested that AGSA needed to go back and check on all those things that were not provided.

 

Mr McLaughlin noted that on page 11 of the report, there was a note that no findings were recorded on supply chain management, predetermined objectives, human resource management and asked why no findings were recorded and wondered if this should not be more clearly specified to indicate whether or not there were problems or good things found.
 

Mr McLaughlin said that it seemed the common problem when it came to spending was the supply chain management.

 

Ms C Madlopha (ANC) appreciated the presentation because it would assist the Committee when it engaged with departments. The issue of no consequences for wrong doing was a concern for the Committee and it was something Members needed to look closely. It could be seen that the common problem in all the departments was the issue of supply chain management. Lack of supply chain management may open a space for corruption, and something had to be done to strengthen that.

Ms Madlopha asked in terms of the findings whether all the departments had real performance contracts that people would be held to, if something was supposed to be done but had not been done because there were no clear predetermined objectives. Furthermore, the fact that proper control measures were not being adhered to was a problem.

 

Ms Madlopha noted that on page 9 there was an indication for current challenges, but was not sure whether it was in the previous years that the DWS had a challenge, having spent 85% of its budget. It could be seen that it was not spending in the key areas where it should be. This was why service delivery was a problem. Areas such as the grants for Regional Infrastructure Grant, Rural Housing Infrastructure Grant and the bucket eradication projects were all key programmes for rural development, but seemingly the DWS was not spending properly in those areas.

 

Ms Madlopha agreed with other Members that the Committee would need all the departments and the Minister to come before the Committee to account. Severe action needed to be taken in respect of officials who failed to spend, because this affected service delivery and people on the ground were getting upset.

Ms Madlopha said that the report indicated that the targets were not in line with the objectives, and that meant that effective spending was not happening in line with the strategic plan, and those were some of the things that concerned the Committee, because the money that had been spent was not being spent on what was previously presented to the Committee.

She asked for an assurance from the AGSA on whether the spending trends in the departments were going to increase because of the initiative that AGSA had now taken in terms of doing an interim reviews. She asked whether AGSA was confident that there would now be improvements in predetermined objectives, as well as compliance, because if people did not comply with legislation they should not simply be allowed to get away without any sanction.

Mr N Kwankwa (UDM) agreed with Mr McLaughlin that the findings should be written down. He said that there was no other way to say it - but some officials were thieves - and these issues had to be addressed.

Mr Kwankwa said that on page 9 of the report it was indicated that 45% of the budget was spent for a period of 9 months, and made an example of delayed payment and the validation process of the work being put forward as reasons for slow expenditure. He asked if that situation should not be reflected as accrued expenses of the Department; if it was, it would at least give the Committee a full picture of how much had been spent over the nine-month period, to enable the Committee to keep track of whether the Department would be at the right level of spending in the financial year. The concern was that if the committees in Parliament did not keep track of that, there were high chances of fiscal dumping at the end of the financial year.

 

Mr Kwankwa noted that page 22 of the report, dealing with the Department of Health, indicated the financial health status and the fact that the capital budget was under spent by 55%. He asked whether that was due to capacity constraints problems, or poor planning by the Department.

 

Mr Kwankwa also noted that on page 26 of the report, in relation to point 3.6 on supply chain management, there was a finding that several inefficiencies had been found in the management of transversal contracts. He asked for more explanation on the main issues that were involved on that finding.

 

Mr Kwankwa said that, when comparing the presentations across departments, most of the challenges seemed to arise in relation to supply chain management and performance management. This was a concern for the Committee.

 

Mr M Figg (DA) asked whether there were any independent external auditors that were used by AGSA.

Mr Figg noted that in the report AGSA seemed to use one word to cover corruption, fraud, illegal acts, irregularities - that word was "challenges". He suggested that surely if there was fraud or corruption, it should be stated clearly as such, up front.

Mr Figg felt that, for want of a better word, this was a rather "damning" report, but he presenters seemed to indicate that the Committee should not be so concerned and that alone worried him. In addition, what he saw as quite serious tended to be brushed off with the indication that it could have been worse.
 

Mr Figg noted that on page 12, and in a few places there was a finding that legislation had not been complied with. If that was indeed the case, there should be consequences. The only consequence that seemed to be suggested by AGSA was that management must rectify the situation. He asked how management could rectify without knowing where the problem was. In some instances, information was presented for audit and the errors were identified by the auditors and sent back to the management of the Department to solve, but the next year exactly the same thing happened again. The real and root cause of the problem needed to be rectified, because, at the end of the day, the AGSA was doing the work of the management.

 

Mr Figg said that on page 15 there were also findings on non-compliance with legislation, which was a problem, and the implication that it would be solved merely by management correcting the steps as also a concern to him. There was no recommendation for the instances where Treasury regulations and legislation had been violated, and there were many instances involving supply chain management listed on page 15, under key focus areas, where there were violations and regression. These were serious issues that needed to be dealt with and he would like to see far more stringent recommendations in that regard.

 

Mr Figg said that on page 26, the presenter had said that the Members should not be concerned about the review and material errors. He asked why, in that case, the audit was done, and he felt that some form of recommendations should have been given. He asked what the cause was of the delay in submitting the Annual Financial Statements (AFS), which was mentioned on page 26 of the report.

 

Ms M Manana (ANC) welcomed the presentation from the AGSA but said that she was a little disappointed in the reports. The reason the Committee had requested the briefing was that these were the departments that were under spending, according to their last quarterly reports. On page 5, there seemed to be a clear indication of corruption. In most of the cases there were problems with supply chain management. A strong case must be made out that these matter must be fixed. She agreed with the concerns of other colleagues on why there were no findings - whether good or bad - specified. This was particularly the case for the Department of Energy.

 

Ms Manana said that with regard to the Department of Health there was 55% under spent, on top of the 75% underspending that happened in regard to the conditional grant. There had been emphasis on the issue of training management but it seemed that there were problems in appointing their own management team. She questioned the logic of appointing a person to a management position and then still complaining that this person was supposed to be trained. However, she thanked AGSA for producing information which this Committee could use in its interaction with different departments

Ms S Shope-Sithole (ANC) thanked the AGSA for a very clear presentation and said that it had given the Committee ammunition because it had highlighted the weaknesses and this would assist the Committee when doing oversight and making relevant recommendations to table in Parliament. She suggested that AGSA should, on an ongoing basis, provide the Committee with information on all the departments, in relation to their status in having internal audit and risk management committees, as well as a report on supply chain management. The structures had to be strong and functioning.

 

Ms Shope-Sithole said that with regard to the Department of Cooperative Government and Traditional Affairs (COGTA) the AGSA had indicated that the "back to basics" tool had to be used. It was generally believed that with COGTA the national Government was assisting the municipalities, but there was a section in the Municipal Finance Management Act that actually required that all other spheres should assist the local government municipalities. The provinces were not coming to the party, and she was worried about the functioning of district municipalities. She requested that the Committee should be provided with a report on the district municipalities, since they seemed to be having funds transferred to them, but not getting to their real destination.

Ms Shope-Sithole emphasised that it was the duty of the Committee to make the recommendations, and not the duty of the AG’s Office to do that.

 

Ms Shope-Sithole congratulated the AG’s Office for the monthly financial statements which were indicated in the presentation and suggested that it update the Committee regularly on whether monthly statements were being produced.
 

Ms R Nyalungu (ANC) also welcomed the presentation. She also noted that supply chain management was the common challenge of the departments. On page 15 of the report it was indicated that in supply chain management there was a lack of proper review and monitoring by management to ensure compliance with supply chain management policies, procedures and legislation. She too suggested that stern action should be taken against someone doing wrong, but against whom no action was being taken.

Ms Nyalungu asked what the AGSA was going to do to ensure that there was no repetition of the delays in providing information, which was due to the lack of supporting documents as indicated in the report.

 

Ms Nyalungu asked what they were doing in terms of the lack of engineers in some departments.

 

Mr McLaughlin asked whether the AGSA would check the synergy between the audits that were done at local government level as well as those that were done at provincial government level.

 

Mr Tshepo, Content Adviser to the Committee, asked whether there were successes or challenges to report in terms of the implementation of the Treasury strategy of cost containment.

He also asked, to give clarity on coordination of oversight roles, how the AG interacted with other institutions such as the Department of Performance Monitoring and Evaluation (DPME), specifically given the mandate of the Appropriations Committee to ensure that what was in the National Development Plan found expression in the APPs of departments.

The Chairperson said that from page 5 of the document the findings gave the impression that it was all about the Eastern Cape Province. He asked whether this meant that the national Department has those problems, but also the Eastern Cape, and whether other provinces were implicated - if so there could be a serious problem.

He also noted that virtually throughout the full report, the AGSA mentioned misrepresentation of information in the departments, and that in cases of misreporting the Department had been asked to go back and clarify. He wondered if AGSA had mechanisms to verify information submitted to it, and what would happen after alerting officials of the incorrect information. The concern of the Committee was that the same situation seemed to repeat itself, year after year.
 

The Chairperson said that most of the questions from the Members were really observations and comments but the AGSA officials should try to explain what they could. The Committee might still call for written responses.

Mr Sekgetho said that, as far as the AGSA style of reporting was concerned, "lack of capacity" meant that nobody was filling a vacancy, because it did not actually do a competency assessment. Where the Chief Financial Officer was in place, management essentially appointed the CFO, but might also acquire the services of a consultant to come and do the same job, paying both the CFO and the service provider. It was left up to management to decide how exactly to implement the recommendations.

The second issue was to clarify that the AGSA had a mandate of audit reporting. However, it would go into certain implementable recommendations, when it had alerted management about the root causes of the findings reported upon. Management was supposed to go back and follow up, and make sure they enforced consequence management. Section 38 of the PFMA clearly articulated the responsibilities of the accounting person, and somewhere in both the PFMA and MFMA it was stipulated that the accounting officer should enforce consequence management.

 

Mr Sekgetho said that with regard to fraud, there were set steps and key elements to be taken and checked, before an auditor could say that this behaviour actually amounted to fraud. These might, for example, be assessed from the nature and the extent and whether there appeared to be intention to defraud. The AGSA procedures were not geared to deal with fraud itself when it was auditing - for it could know the nature, amount and impact but was unable to asses intent, and say whether the mistake arose through human oversight or error, or misinterpretation of legislation, or poor memory. That was why it was left up to management to take the appropriate steps to check what the reasons were.
 

Mr Sekgetho said that AGSA had adopted the international standards of auditing which were also used by highly regarded auditing firms like KPMG. Those standards had certain requirements and duties cast upon the auditor. The audit firms should go and design their audit in such a way that the procedures could tap in various material frauds, but it was the responsibility of management to make sure that the department's internal controls were working in such a way that they prevented fraud. The audit procedures were designed in such a way that if there was something material, it would be picked up; if there was collusion it might not be able to do so.

Mr Sekgetho answered the question on performance contracting by indicating that there were some findings in other departments where no performance contracts were signed. The fact of signature or not did not really tell AGSA anything; all senior management might sign a standard form. It would be preferable to have a document that spoke directly to the strategic plan or at least linked to it. It should be remembered that each department had a set of strategic goals they should achieve, and this should cascade all the way down to performance agreements, because if the person signing the performance agreement did not know what to do, that specific target would not be reached, and if it had not been reached, there was no way to go back at the end of the cycle and say that something had or had not been done, if it was not explicit in the performance agreement. Performance contracts should be carefully crafted around the strategic plan.

 

Mr Sekgetho said that another thing that fed to the strategic plan process was the budgeting. Using COGTA as example, he said that if this department did not know what service it was to render upfront, it would find it difficult to ask for money, because the department would not have a clear picture of what it would be doing with it. Therefore all departments should link their budget to the strategic planning process, but because their strategic planning processes were not linked to the budget, the end result was that not all the delivery mandates were being achieved.

 

Mr Sekgetho dealt with the question of findings. The mandate of AGSA said that it must issue a report in certain way; more often that was geared towards saying what should happen if there was something wrong. A comment "no findings" and a green line in the report meant that the department's processes were working to an extent where AGSA had not been able to pick up anything else that the Department should have been reporting. A yellow indicator in the report meant that there were some problems with the internal controls but this was not significant or material enough for AGSA to specifically highlight as a huge concern; it would merely flag it so that the department would work on the issues before they became problematic.

He also explained that the audit team followed certain processes. It could go and look for alternative procedures before it reached some form of answer but if it had concluded that,in the circumstances, there was nothing more that it could do, then it would report a imitation when provided with that information. But ultimately, the AGSA reported to management, and it was up to management to go and implement those controls.

 

Mr Sekgetho said the same reasoning applied with regard to the reporting process in terms of repeat findings or the material adjustments, as to why the AGSA did not express audit opinions on predetermined objectives. That was not something that government as a whole was ready to implement yet. AGSA did already see some challenges with financial reporting. AGSA rather took the view that if the nature of the material findings showed that, whilst they were material, they could nonetheless be fixed, it would prefer to see that happening. The financial mistakes were still there as the basis for a finding, but departments would in the meantime have corrected the figures and resubmitted, with supporting evidence to satisfy the internal processes of the AG.
 

Mr Sekgetho said that, in terms of regular feedback with regard to risk management and key areas of internal audit, page 13 had indicated that there should be effective leadership culture, HR management, and good governance structures, which included risk management processes, internal audit and the audit committee. The AGSA would also give assessments to management on a quarterly basis in relation to risk management processes, the internal audit and how the audit committee was doing. This was also reported to the portfolio committees and executive authority (Minister) on a quarterly basis. The Committee can request the AGSA to send audited quarterly reports of the departments, because the first line of defence was management.

 

Mr Sekgetho agreed that in relation to COGTA, there was indeed an expectation that there should be correlation across the three spheres of government when delivering services. The national departments were tasked with the main mandates, but there were provincial departments, and the provincial COGTAs had a secondary role to play under their constitutional mandate. This department brought together the national and provincial departments to try to formulate their key objectives focusing on challenges in local government - bearing in mind, however, that what happened in the Free State might be quite different from what happened in the Eastern Cape.

The meeting was adjourned.

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