Department of Defence & Military Veterans 2014/15 audit outcomes and challenges requiring more vigilant scrutiny: briefing by Auditor-General

Meeting report

Briefing by Office of the Auditor-General of South Africa (AGSA)
Mr Solly Jiyane, Senior Manager, AGSA, indicated that the overall audit outcomes for the Defence portfolio 2013/14, showed that 67% of the Department of Defence (DoD) entities received unqualified audit with findings, meaning their financial statements were fairly presented but there might be findings on predetermined objectives and compliance with laws and regulations. It was also clear that 17% of the DoD entities in the 2013/14 financial year received qualified with findings and 17% of the entities of Department of Military Veterans (DMV) received disclaimer with findings. However, there was a general improvement in the 2014/15 financial year as Armscor received a clean audit and the DoD received an unqualified audit although with findings while DMV and Special Defence Account (SDA) received a qualified audit with findings, which is an improvement from the disclaimer audit opinion with findings in the 2013/14 financial year. The conclusion could be that there is a slight improvement from the Defence portfolio but more still needed to be done to drive towards a clean administration.

67% of the entities within the Defence portfolio received good results in terms of the quality of submitted financial statements and 33% required intervention from both DoD and DMV. 77% of the entities required intervention in the quality of submitted performance reports from the DoD, DMV and Castle Control Board (CCB) and 25% were in good state. The general conclusion reached was that there has been regress within the Defence portfolio in regard to quality of submitted performance report. 50% of the entities within the Defence portfolio complied with legislation; while 33% did good while there were concerns in 17% of the entities, particularly in Armscor. The conclusion reached was that there was general improvement in the Defence portfolio regarding compliance with legislation when compared to the previous financial year. A total of 83% of the entities received good financial health while 17% were still concerning, mainly the DMV. The conclusion reached is that there has been regress with the Defence portfolio in financial health.
Mr Jiyane added that a total of 66% of the entities received good in terms of Human Resource Management, 16.7% still required intervention (DMV) and 16.7% were concerning. The conclusion reached is that there has been improvement in the Human Resource Management within the portfolio. A total of 75% of entities within the portfolio were concerning in regard to Information Technology (IT) and 25% were good. The general conclusion reached was that there has been stagnation within the portfolio regarding IT. The AGSA noted that 50% of the entities would have been financially unqualified with/without findings and 50% would have been financially qualified/ disclaimer with findings in the quality of submitted financial statements, if they had not been afforded an opportunity to correct material misstatements during the audit process. The outcome after corrections showed that 67% of the entities received financially unqualified with/without findings.
 
With regard to quality of annual performance reports, 100% of the auditees that submitted information did so in time for audit of reports and 50% were reliable and useful compared with 50% in the previous year. A total of 67% entities did well and showed an overall improvement in terms of the quality of annual financial statements submitted and 33% still required intervention (DoD and DMV). A total of 67% of the entities did well in terms of prevention of unauthorised, irregular and/ or fruitless and wasteful expenditure and 33% still required intervention (DoD, DMV). The AG was pleased that 67% of the entities did well in terms of management of procurement and contracts, although 17% still required intervention and 16% (Armscor) was still concerning.

A total of 50% of the entities still required intervention in the management of strategic planning and performance (DMV and CCB) and 25% were still concerning and another 25% did good. The conclusion reached was that there has been stagnation or limited progress in the management of strategic planning and performance. A total of 67% of the entities did well in the human resource and consequence management, 17% still required intervention (DMV) and 16% were still concerning (DoD). 40% of the entities did good in terms of internal audit and Audit Committees, another 40% were still concerning and 20% required intervention.

Ms Mbali Dlamini, Senior Manager, AGSA, said no unauthorised expenditure was identified by the AGSA, but a total of R890 387 720 of irregular expenditure and R58 110 790 of fruitless and wasteful expenditure. There was a general improvement from the DoD, CCB and Armscor in terms of reducing irregular expenditure while there was an increase from the DMV and SDA and stagnation from the SANDF. In terms of driver of key controls for portfolio, the AG noted improvement in the effective leadership culture in Armscor, CCB and SDA while there has been regress in DoD and SANDF and then stagnation in the DMV. There was also an improvement in financial and performance management in Armscor and SANDF while there was a regress from DMV and CCB and stagnation from both DoD and SDA. In terms of governance, the AG noted an improvement from CCB and SDA and then stagnation from DoD, Armscor and SANDF while there was regress from DMV. There was a general concern in proper recording from DoD, DMV, and CBA and SDA and only Armscor and SANDF did well in this regard. The AG was pleased that almost all the entities did well in terms of having risk management and the concern was only on DMV.

Mr Jiyane said the top three root causes identified by the AG in the Department included slow response by management in addressing the root causes of poor audit outcomes. The recommendation was that management should respond timely to internal and external audit findings and develop and implement proper record keeping. There was also a problem of lack of consequence for poor performance and transgressions. The recommendation was that the accounting officer should implement consequence management to prevent non-compliance with laws and regulations. The AG also identified the issue of instability or vacancies in key positions and the recommendation was that the accounting officer should ensure stability in key positions to facilitate the adequate review of the annual financial statements for auditing.

Key commitments made by the Minister had not been implemented and the filling of vacant posts by the DoD internal audit was still in progress. A task-team would be established to assist DMV in addressing matters affecting performance of the Department. The Department had already implemented strategies to improve governance and set clear expectations and responsibilities and established a culture of respect and accountability.

Discussion
Mr S Marais (DA) indicated that slide 5 on overall audit outcomes for the Department painted a bleak picture as there was a huge downward spiral when compared with performance in 2012/13 and 2013/14 financial years. It was a major concern that the Department was nowhere near the overall audit outcomes that had been achieved in the previous financial years, especially the increase in the entities found qualified with findings from 17% 2013/14 financial year to 33% in the current financial year. There should be monitoring from the AGSA on the overall performance of the Defence portfolio, as it was unhelpful to wait until the end of the year in order to ensure that there is a general improvement and a drive to move towards a clean administration. It was also concerning that about 75% of the entities required intervention in the quality of submitted performance reports. The Committee needed to be made aware of the problems that were causing 75% of the entities to require intervention in the quality of submitted performance reports. Was there a direct correlation between poor performance in the quality of submitted performance report and IT? The ability to use the IT had a direct impact on the quality of the submitted performance reports.
 
Mr Marais said it was difficult to understand why in slide 6 about 75% of the entities required intervention in the quality of submitted performance reports and 25% were in good state in slide 6, while in slide 8 it was said only 50% of the entities were with findings. Why was there such contradiction? The overall performance in Human Resource and Consequence Management suggested that personnel were looking after themselves fairly well while the overall outcome of the Defence portfolio was particularly dismal. One needed to be cautious not to find a group of personnel praising and looking after themselves, while the job that needed to be executed was not being done.

Mr Marais added that it was difficult to understand how it was possible for the AG to say there was effective leadership culture in the DoD while the Department had performed poorly in governance, financial performance management and IT governance. The only conclusion that could be reached for poor performance in areas like financial management, IT governance and governance would be poor and ineffective leadership. It was confusing that the AG’s report said there was an effective leadership culture in SDA while the performance of the entity had stagnated or shown little progress in terms of compliance, IT systems controls and internal audit. Members needed to rely heavily on the AG’s report especially considering the confidentiality involved in the SDA. It was good to see that there had been general improvement at Armscor and this correlated with some of the performance in governance and financial and performance management.

Mr S Esau (DA) mentioned that the Department still needed to fill about 169 posts and it was unfortunate that this had not been reflected in the AG’s report. It had already been indicated that human resource was a high risk to the Department and this was the issue that should be addressed with urgency. There was a need to introduce the skills audit in order to determine the capability of people that had been hired by the DMV, and it was clear that what had been causing slow progress in the Department was having incompetent and unqualified personnel. The Committee welcomed the task team that would be established to assist DMV in addressing matters affecting the performance of the Department. The relationship of the DMV with State Information Technology Agency (SITA) was something that needed to be taken into consideration in the performance of the Department, especially lack of communication or cooperation.

Mr Esau expressed concern that the culture of consequence management within the Department had not been incorporated in the AG’s report as this was a matter to be prioritised. The Committee had not been briefed on people that had been fired or suspended within DMV, including the Chief Financial Officer (CFO) that had been fired. The Minister had indicated in her speech that investigations by the Special Investigating Unit (SIU) were still underway but this was long-time and the Committee should have been briefed on the findings of those investigations. It was concerning that there were causes where the expenditure had reached 96% but only achieved a third of the targets and this was once again a serious indication of lack of performance as money had been used for the wrong purposes.

Mr N Khoza (EFF) asked if there was a specific reason for the failure of many entities to comply with the legislation as shown in slide 9. It was important for the Committee to know about people to be included in the task team to be established to assist the DMV in addressing matters that are affecting its performance. Would this be the same people that were within the Department?

Mr D Gamede (ANC) indicated that the Office of the AG was one of those institutions that reported to Parliament and therefore, any information produced to the Committees needed to be credible. He asked if it were possible to assume that the Office of the AG would have been presented with incorrect financial statements, if the entities were not allowed to make corrections in material misstatements during audit process. It was clear that most of the entities had been performing poorly in terms of governance and compliance with legislation in annual reports and management of procurement and contracts. What was the way forward in order to move away from this bleak picture?

Mr Jiyane responded that the AG had picked up that there was lack of adequate review of the financial statements, as the prescripts say that the financial statements need to be reviewed before submission to the AG. There was also a general feeling of a dependency from the AG to come and make corrections for the entities. It was correct that the information initially produced to the AG by entities was below the standard, but entities were given an opportunity to correction those misrepresentations and the information was fairly improved.
 
Mr Jan Steenkamp, Senior Manager, AGSA, responded that perhaps the Minister or someone from the Department was in a better position to respond to the question on who was to be included in the task-team to be established.
 
Ms Dlamini responded that there was awareness that the task team had been established but the AG had not been given the name of the people to be included in the task-team.
 
Mr Jiyane responded to the question on compliance with legislation. The Public Finance Management Act (PFMA) requires that financial statements must be prepared in accordance with the prescribed reporting framework. The AG noted that the financial statements of some of the entities did not comply with the prescribed reporting framework, lack of compliance with the prescripts of procurement, where the Supply Chain Management (SCM) prescripts were not adhered. The AG picked up that there were cases where there was irregular and fruitless expenditure but no evidence of consequences taken against those individuals, as required by the PFMA. It was true that skills audit was required in order for the Department to have competent people to be able to execute their mandate. The Department needed to be mindful of the situation of filling the posts for the sake of compliance without taking due consideration of the people to be employed.

Mr Jiyane said the issue of consequence management was not indicated in the commitments that had been made by the Minister, and the AG would only present the outcomes of the audit to the Minister. The Minister made commitments to things where there was a belief that those commitments could be implemented. The Minister was required to provide feedback on a quarterly basis on the commitments that had been made, so as to track progress. The commitments presented were those where the AG had been provided responses by the Minister.
 
Mr Steenkamp responded to the question on the quality of the submitted financial statements. The AG had noted that the problem was mainly on capacitation and the knowledge on the basic accounting prescripts. The AG also noted that there was a lack of review of financial statements prior to submission, resulting in misrepresentations and inaccurate information and lack of monitoring and evaluation prior to submission of financial statements. There was no correlation between poor performance in the quality of submitted performance report and IT as most of the work that done was manual. There was a decline in leadership in the DoD because of the inability to get the approved IT system. It must be corrected that a move from, for example, good IT governance to concerning did not directly imply that there was a decline of leadership in that Department, meaning the relationship between the audit outcome and the leadership within a particular department was not always clear-cut. The Minister made the commitments and it was difficult for the AG to respond to questions based on those commitments than doing the monitoring and evaluation.

Mr Jiyane replied that on the issue of the quality of submitted financial statements, it was true that the Defence portfolio could not be seen as “arrived” as yet, as there was always room for improvement. However, the AG was just recognising that there has been general improvement in the performance of the Defence portfolio, but the general outcomes could not be taken as if the Department now needed to relax, as a lot still needs to be done.

Mr Steenkamp replied that SDA moved from a clean audit to qualifications because of the inherent risks within the entity, and this did not mean there was a decline in management and lack of controls.
 
Ms Dlamini responded that there was no contradiction between slide 6 and 8 as this showed the outcomes before and after corrections that had been made by the entities on their financial statements. The AG had also identified that the Department needed to fill vacant posts in critical areas in order to perform optimally. It had already been clarified that a decline from a clean audit to qualifications did not mean that there was no effective leadership in that particular entity. The DMV was currently reviewing its organogram structure, so as to improve the overall performance. The AG did not have any information regarding the firing of the CFO and the Department could only be in a better position to response on that regard.
 
Mr B Nesi (ANC) said it should be reiterated that the focus should be on clean administration and the AG office was playing an important role in pursuit of achieving this clean government. He asked if the Office of the AG was meeting with the internal audit committee of the Department, as this relationship was important in order for the entities to achieve a clean audit. Was it possible to pick up all the issues of irregular and fruitless expenditure from an early stage in order for entities to make corrections and comply with the regulations?
 
Mr Jiyane responded that there was “vision 2040” for clean administration and there was indeed a concern that the Office of the AG seemed to be only auditing the public sector, without providing assistance to the entities in order to achieve a clean audit. The AG engaged with the internal audit committee of the Department in the initial stages of planning for auditing, and the focus was on what was covered in terms of risks and compared that with that of AG. The Office of the AG also looked at risks relevant to the Department and at ways to address those risks. There were audit steering committee meetings happening either weekly or monthly, depending on the schedule with the Department or entities. There was a high level review on a quarterly basis to see what was happening in the system of control and give a warning on issues that may have an impact on final audit outcomes. The AG was meeting with the audit committee of the Department on a quarterly basis and the purpose of these meetings was once again to highlight issues that may have an impact on the final audit outcomes. The AG also performed the interim audit in order to collect all the available information from the Department and entities, and this was done from April to December.

The Chairperson thanked the Office of the AG for the presentation that and reiterated that indeed there had been general improvement in the performance of the Defence portfolio; however, there was always room for improvement. The Committee expected the Office of the AG not to wash its hands in the monitoring of commitments made by the Minister and gave assurance that Members supported the Office of the AG.
 
Committee Programme
The Committee programme was adopted.

The meeting was adjourned.