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PORTFOLIO COMMITTEE ON PUBLIC ACCOUNTS
19 March 2003
SOUTH AFRICAN REVENUE SERVICES 2001/2: HEARING
Chairperson: F Beukman (NNP)
Documents handed out:
SARS Annual Report and Financial Statements 2001/2
Auditor General Report for the year ended 31 March 2002 (see Appendix)
SARS Response Document to the Auditor General's report
The Commissioner of SARS and his team appeared before the Committee to establish what measures had been put in place to counter the problems picked up by the Auditor General in his Report of the 2001/2 SARS financial statements. Members asked questions covering all the weaknesses and problems identified by the Auditor General.
SARS is currently in a transformation period aimed at better management of manpower and information while much attention is given to combat tax avoidance and close the tax gap. SARS believes that the gaps identified by the Auditor General will be sorted out within eighteen months.
The Chairperson clarified that they had called SARS before the Committee because of the problems identified in Administrated Revenue by the Auditor General's Report. He emphasised that SARS Own Accounts are fine. The focus of the meeting was not policy matters but financial management.
Mr Gumede (ANC) expressed his appreciation for the good performance by SARS. However he referred to the gaps pointed out in the Auditor General's Report in 5.2 Matters not affecting the financial statements.
Mr P Gordhan (Commissioner, SARS) commented that SARS takes accountability very seriously. He had not appeared before the Committee in a long time and therefore there was an information gap. SARS's presentation and response document was meant to fill this gap. [Note: SARS did not present but used the documents to answer the Committee's questions]. Very significant business changes have been made in SARS regarding models, delivery, service etc. The Customs component was used as example. Five years ago less than 900 employees worked for Customs. Now there are more than 2 000 out of the 13 000 in SARS employ. Since 1998 SARS have given back R55 billion to taxpayers.
Mr L Chiba (ANC) referred to the problems in 3.1 Assurance process. He asked what the impact and effectiveness was of the new measures introduced this year.
Mr Gordhan stated that their responses dealing with Administrated Revenue measures was in the SARS Response document (pp 8-10). These measures are mechanisms aimed at blocking the leakage that leads to a tax gap. The real issue is how the tax system in South Africa works and not assurance processes. They work on a basis of risk. They cannot check every tax return just like they cannot check every container entering or leaving the country. They are busy transforming that process (p. 10). Electronic links to third party information sources are being forged. This will be stored in the Data Warehouse that has recently been established. The impact of these changes has already led to 60% of tax returns checked in comparison to 20% before and the error rate is less than 5%.
Mr Chiba referred to the reconciliation of IRP501forms in 3.1 Assurance process of the AG's Report. In their response document SARS refers to inadequate processes, what are they? Have corrective steps been taken to ensure that these problems do not occur in the future. He requested an explanation for the problems with Supporting Documentation.
Mr Gordhan replied that reconciliatory processes was built into the new process. There is significantly better control over this process now. Because of a special focus on reconciliation, the backlogs have been substantially reduced (see Checking of reconciliations in SARS Response document). On Supporting Documentation, he said that the problem was not the unwillingness to supply them, as the Auditor General would confirm. The problem was that they still use paper files that could be anywhere at different stages of the process in different departments. Therefore the availability of the documents was a problem. Everything in the working papers was in order.
Mr Gumede asked whether the intervention by SARS to solve the problems with supporting documents would be successful and deliver results.
Mr Gordhan replied that it is envisaged that the implementation of the Electronic Document Management System will greatly enhance SARS ability to manage the availability of documentation. They had to bring together a million files. From now on, any number of people can access the files simultaneously. Because of the sheer numbers they cannot implement immediately but hope to have it up and running in 18 to 24 months.
Mr Gumede enquired about the Penalties and Interest on Customs and Excise duties in the AG's Report. He was concerned about how SARS would ensure an acceptable level of consistency in discretion on these matters.
Mr Shabalala (General Manager, Customs) replied that there is a radical overhaul of the Customs division. They are changing the management and reorganising branches. They have put 1200 people through training courses. They have introduced an updated code of instructions. The previously incorrect calculation of interest was due to officials not having proper training. The management of risk is being integrated into the strategic management of the division. They have mapped all the current weaknesses and have started initiatives to address each one of them immediately and in the long term.
Mr Gordhan added that the organisation's decentralisation causes many problems. The different levels have different discretions. The issue here is one of integrity and the South African public's predisposition to offering bribes. There are also serious shortcomings with the integrity of companies and warned that some companies might be in for a shock and that members should watch the press over the next couple of weeks.
Mr Nair (ANC) asked what measures were taken to combat tax evasion and how effective they are.
Mr Gordhan replied that tax evasion is a permanent phenomenon in market economies. Their first task was to measure it and the internationally recognised tool is the tax gap which is currently somewhere around R30 billion. The Comprehensive Compliance Model is in the SARS Response document.
Mr Nair commented that it is typical for business to maximise profits and therefore they have moved money offshore previously. He asked whether there is a shortage of resources to combat tax avoidance.
Mr Gordhan replied that there is no shortage of resources but they are short of the ability to move at the speed of light. People who avoid tax are often very skilled individuals. One example is transfer pricing. SARS now employs ten experts for transfer pricing where they had only one before. These people will look at the tax South Africa is losing to other countries. He warned people to heed Section 31 of the Income Tax Act.
Mr Nair asked about Sureties in the AG's Report. He asked for information on SARS's VAT policy and controls to prevent losses when the taxpayer defaults or is liquidated.
Mr Gordhan referred him to 5.2.2 Sureties in the SARS Response document.
Mr Madikiza (UDM) asked about the number of bank reconciliations done at the time of the compilation of the report and how that figure has been used.
Mr Mangrey (General Manager, Finance) stated that at the time of the audit R110 million was outstanding. The balance remains at R28.7 million outstanding. In 2003 R24 million is being written off on the customs side. Good progress has been made with the reconciliations.
Mr Gordhan added that the Integrated Financial Management System would prevent these problems in the future.
Mr Madikiza asked whether SARS would have a clean bill of health if this Committee asked the Auditor General to audit them before September.
Mr Jarvis (General Manager) replied that they would not receive a clean bill of health. Control measures, security and consistent standards are still lacking.
Mr Madikiza asked when a reasonable time frame would be for a clean bill of health.
Mr Jarvis told him 18 months.
Mr Gerber (ANC) commented that SARS is one of the jewels in the government's crown and is doing good work. His question referred to theft and losses for administered revenue to the amount of R13 368 696, which is an increase of R10 million on the previous financial year. He asked for reasons for this amount, the involvement of officials, disciplinary measures taken and preventative measures taken for future monitoring.
Mr Mangrey replied that this is relative to administered revenue, which is mainly due to the cashing of fraudulent cheques. There has been an increase in this phenomenon. Mr Gordhan added that they are constantly upgrading monitoring processes. People caught cashing in fraudulent cheques will be severely dealt with.
Mr Gerber asked for an indication of the amount of stale cheques (that have not been cashed).
Mr Gordhan said that at the end of 2002 it was approximately R50 million.
Mr Gerber asked them to comment on the reasons for the R695 million irrecoverable debt, which is an increase of R200 million.
Mr Gordhan stated that half of that amount is due to objections and appeals. The second factor is that a large amount of outstanding money cannot be collected. This big amount constitutes a clearing of this uncollectable debt.
Mr Vezi (IFP) asked whether SARS could assure the committee that their Fixed Asset Register and General Ledger are reconciled.
Mr Mangrey replied that this is done monthly.
Mr Vezi commented that there was some doubt that SARS could migrate from a cash basis to the accrual accounting method before the April deadline. When is SARS required to implement GAAP?
Mr Mangrey replied that the target date is 31 March 2003 but that SARS has asked for a one-year exemption. The difficulty in quantifying debtors and creditors was one of the primary reasons for applying for exemption from GAAP. They will be compliant by March 2004.
Mr Vezi asked SARS to supply the committee with their migration plan from GRAP to GAAP and was assured the Committee would receive it.
Mr Gumede asked questions on the issue of general governance. He asked how specialist committees would add value to governance and what progress has been made regarding appointments.
Mr Gordhan explained that their executive authority is the Minister of Finance. They meet on a fortnightly basis to account to him. Comprehensive reports are sent to him every month. They submit all their business plans to him. The specialist committees will meet next month for the first time. There are two committees, one for human resources and one for information technology. These specialist committees function as arms-length bodies to advise on matters such as their remuneration policy. External input and oversight serve as important checks and balances.
Mr Chiba commented that the audit committee and internal audit function are important mechanisms created by the Public Finance Management Act. He wanted to know why there was no audit report in the annual report.
Mr Gordhan replied that the Acting Chairperson also served as the head of the audit committee and therefore the report is included in the Acting Chairperson's report.
Mr Gerber asked about the queries emerging from the Committee's Report of its study tour to Cape Town harbour and airport customs divisions.
Mr Gordhan told him that SARS had received the Committee's report and have replies for them in document form.
Mr Nair asked why SARS could not ask for sureties from exporters.
Mr Gordhan replied that it would create cash flow problems for some of the entities it would be required from.
Mr Mofokeng (ANC) commented that business has claimed SARS does not have the capacity to gather Capital Gains Tax as they lack the expertise and manpower.
Mr Gordhan replied that if they had had any doubts they would not have implemented it. The first phases are being dealt with successfully at the moment.
REPORT OF THE AUDITOR-GENERAL TO PARLIAMENT ON THE FINANCIAL STATEMENTS OF THE SOUTH AFRICAN REVENUE SERVICE: ADMINISTERED REVENUE for the year ended 31 March 2002
1. AUDIT ASSIGNMENT
The financial statements as set out on pages 48 to 56, for the year ended 31 March 2002, have been audited in terms of section 188 of the Constitution of the Republic of South Africa, 1996 (Act No. 108 of 1996), read with sections 3 and 5 of the Auditor-General Act, 1995 (Act No. 12 of 1995) and section 28 of the South African Revenue Service Act, 1997 (Act No. 34 of 1997). These financial statements, the maintenance of effective control measures and compliance with relevant laws and regulations are the responsibility of the accounting officer. My responsibility is to express an opinion on these financial statements, based on the audit.
2. NATURE AND SCOPE
The audit was conducted in accordance with Statements of South African Auditing Standards. Those standards require that I plan and perform the audit to obtain reasonable assurance that the financial statements are free of material misstatement.
An audit includes:
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation.
Furthermore, an audit includes an examination, on a test basis, of evidence supporting compliance in all material respects with the relevant laws and regulations which came to my attention and are applicable to financial matters.
I believe that the audit provides a reasonable basis for my opinion.
While this report has been aggregated to a level I believe to be appropriate in the annual report of the accounting officer, various other reports that address other aspects of my mandate are made public from time to time. This will continue to be the practice.
As a result of certain shortcomings in the internal control system in respect of revenue as set out below, it was not possible to fully satisfy myself with regard to the completeness, validity and accuracy of revenue.
3.1 Assurance process
Tax returns are processed via an automated process based on information supplied by the taxpayer. The accuracy and validity of this process are impacted by inaccuracies in the information supplied. Since many of the qualitative assurance measures aimed at ensuring higher compliance and accuracy within the assessment process were only introduced subsequent to year-end, these could not be evaluated during the year under review.
The major control ensuring that Pay-As-You-Earn (PAYE) deducted by employers is fully disclosed to, and received by, SARS is a performance of reconciliations of the IRP501 forms. Not all reconciliations had been performed for the year under review, however, steps had been taken to correct this.
Furthermore, I experienced difficulty in verifying the SARS audit process due to the lack of appropriate working papers.
SOUTH AFRICAN REVENUE SERVICE - ADMINISTERED REVENUE REPORT OF THE AUDITOR-GENERAL
3.2 Tax administration
SARS is charged with the administration and collection of taxation and is directed by a considerable volume of complex legislation. Not only is SARS required to achieve its mandate within the ambit of this legislation, but it should also enforce those measures necessary to ensure that taxpayers comply with tax legislation, whether voluntarily or otherwise. Certain inconsistencies in complying with income tax legislation have been identified. It is not possible to quantify the financial effect of the non-compliance due to the diversity thereof as well as a lack of information.
3.3 Supporting documentation
The availability of tax records and source documentation was once again problematic at various branch offices, as selected documents or tax records included in the audit samples were not made available in time or at all. SARS has indicated that one of the reasons would be that many of these documents are used in various interactions with the relevant taxpayer and in functions that are performed.
3.4 Penalties and interest on Customs and Excise duties
At various Customs and Excise offices, penalties and interest charged on certain outstanding duties have been calculated incorrectly or not at all.
4. QUALIFIED AUDIT OPINION
In my opinion, except for the effect on the financial statements of the matters referred to in paragraph 3, the financial statements fairly present, in all material respects, the financial position of SARS Administered Revenue at 31 March 2002 and the results of its operations and cash flows for the year then ended in accordance with prescribed accounting practice.
5. EMPHASIS OF MATTER
Without further qualifying the audit opinion expressed above, attention is drawn to the following matters:
5.1 Matters affecting the financial statements
5.1.1 Operational receivables and payables
The financial statements were prepared on the cash basis of accounting. In terms of section 91(1)(b) of the PFMA, the Minister of Finance prescribed the standards of generally recognised accounting practice (GRAP), as set by the National Treasury, for the annual financial statements of SARS.
In terms of the requirements of GRAP as promulgated on 30 October 2001, the annual financial statements must, by means of figures and a descriptive report, explain any other matter and information material to the affairs of the public entity. While the operational receivables and payables of SARS are regarded as material, outstanding balances were not disclosed in the annual financial statements due to various structural limitations. The information on collection and debt management presented on pages 20 to 31 of the annual report is presented as additional information and was not audited and no opinion is expressed thereon.
5.2 Matters not affecting the financial statements
5.2.1 Tax evasion
Attention is drawn to note 1.4 of the accounting policy, where SARS acknowledges that incidences of tax evasion and other breaches of taxation laws affect their fiduciary responsibilities. This report does not include a review of measures put in place by SARS to address this matter.
Guarantees and bonds are issued by financial institutions in favour of SARS for customs and excise duties payable. For some duties, the value of the bond to be held is prescribed. For other duties, the value of the bond has been determined based on operational needs and current or historic policies of SARS. For example, current SARS policy does not require surety in respect of the deferment of VAT. Sureties are not disclosed in the notes to the financial statements. Due to the material amounts involved SARS should holistically address the need for sureties as part of an overall credit risk management strategy.
5.2.3 Weaknesses in internal control - bank reconciliation
SARS has made significant progress in implementing proper reconciliation processes. In order to ensure that full benefit is derived from the reconciliation process, reconciling items should be cleared in a more timely manner. Some of the reconciling amounts on the bank reconciliation have been outstanding since 1998. One of the risks associated with long outstanding items is that funds could be misappropriated and the misappropriation might not be detected or corrected in time, negating the purpose of the bank reconciliation.
5.2.4 Computer audit
Computer audits were completed during the period September 2001 to February 2002 and recommendations were in each instance brought to the attention of the Commissioner. In his comments, the Commissioner referred to various corrective steps, the effectiveness of which will be evaluated in due course.
(i) General controls
The key findings arising from the follow-up audit of general controls within the Value-Added Tax, Pay-As-You-Earn and Income Tax systems indicated that although some controls were in place, adequate general control measures had not been implemented in the computer environment as a whole.
(ii) Application controls
The key findings arising from the follow-up audits of application controls within the Customs Automated Processing of Entries, Deferment and Passenger Systems indicated that some progress had been made in addressing the weaknesses identified during the previous audits. However, some additional weaknesses were also identified during the follow-up computer audits.
The assistance rendered by the management and staff of SARS during the audit is sincerely appreciated.
29 August 2002
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