Department of Public Enterprises and State-Owned Companies audits: Auditor-General briefing

Meeting report

Election of Acting Chairperson
Mr Disang Mocumi, Committee Secretary, informed the Committee that the Chairperson had tendered an apology as she was off on sick-leave. He called for nominations for an Acting Chairperson for that day’s proceedings.

Ms Z Rantho (ANC) was elected as the Acting-Chairperson.

Department’s presence at the meeting
Mr N Singh (IFP) reminded the Committee lamenting that he had understood that the meeting would be the Auditor-General South Africa briefing the Committee: He was surprised at the presence of the Department of Public Enterprises (DPE) as the Committee had agreed that it would meet with DPE on the 12 October 2016.

The Acting Chairperson asked the secretary to speak to Mr Singh’s concern.  

Mr Mocumi said the DPE’s Parliamentary Liaison Officer (PLO) had asked if the DPE could attend as observers. He had responded that the Committee had not barred the DPE from attending.

Dr Z Luyenge (ANC) suggested that the DPE be allowed to say why they were at the meeting.

Mr Mogokare Seleke, Director-General, DPE, apologised for the Department causing any misunderstanding as it had not been intentional. The Department had received an invitation from its PLO and if the Committee wished, the Department could vacate the room.

Ms N Mazzone (DA) said there was no intention to kick DPE out rather in keeping with cost cutting measures by government the Committee was surprised that so many DPE officials had arrived for an AGSA briefing. DPE could certainly attend the meeting as the Department was already there.   

The Acting Chairperson said that since the Committee shared similar sentiments the meeting would proceed as planned. She cautioned DPE about the large delegation going forward that, if all of them came from Pretoria; that was against the spirit of cost-cutting.

Mr Seleke said that all the officials with him were responsible for particular SOEs under DPE.

The Acting Chairperson asked whether AGSA had issue with DPE being present.

Ms Zolisa Zwakala, Deputy Auditor General, AGSA, said the AGSA had no issue with DPE as it had been to two other briefings where it had presented outcomes in the presence of the respective Departments it had audited.
                       
PFMA audit outcomes of the Public Enterprises portfolio for the 2015-16 financial year
Ms Zwakala said AGSAs briefing would cover audit outcomes for DPE and South African Forestry Company SOC Limited (SAFCOL) as South African Express (SAX) had not been concluded though it was at its tail-end. The briefing would also include the four SOEs that were not audited directly by AGSA though it oversaw the audits.

Mr Sybrands Struwig, Senior Manager, AGSA, read through the presentation with the Committee.
           
Objectives
AGSA assessed the fair presentation and reliability of financial statements. Assessment of reliable and credible information for predetermined objectives and compliance with key legislation and financial performance management.
Mr Struwig then explained the colour legend and what the colours meant in terms of audit terminology.
 

Audit opinion history-high level view

AGSA had observed stagnation in the DPEs audit outcomes in the last two years and a slight regression if one observed the last three years.  In the last two years DPE and SAFCOL had had unqualified audit opinions with findings with SAX having a non-concluded audit which was why it had been excluded from the report. Overall the Public Enterprises portfolio had matters on non-compliance in terms of audit opinion.  

• Compliance with legislation

AGSA had identified material misstatements in the original submitted financial statements that had been subsequently corrected, which had enabled DPE and SAFCOL to achieve an unqualified audit opinion. There had also been legislative findings on Supply Chain Management (SCM) legislation and also irregular and fruitless expenditure incurred at both DPE and SAFCOL which related to a non-compliance matter.

Drivers of internal control

• Leadership

AGSA had identified a regression in leadership assessment because of key position vacancies at DPE and SAFCOL which were important in ensuring good governance.

• Financial and performance management

AGSA had observed reliance regarding Information Technology (IT) Management on external suppliers which contributed to weaknesses in governance controls around IT at SAFCOL and DPE.

Discussion
Ms Mazzone wanted an explanation on why the Auditor-General South Africa (AGSA) only audited SAFCOL and SAX and oversaw the audit of the Section 4 public entities? It was read in the media that Denel had not complied with the Public Finance Management Act (PFMA) prescripts where NT had also cried foul of Denel: how was it then that AGSA had given Denel a clean bill of health in terms of its audit outcomes?

When would it get to the point that AGSA would tell State Owned Entities (SOEs) that they were setting their performance targets too low, which were also too easy to achieve repeatedly? Who would AGSA report that to; National Treasury (NT) or DPE? Had AGSA done that before without any result?  What could government do to ensure SOEs became viable again?

Mr N Singh (IFP) asked what reasoning SAX had given AGSA on why it had not finalised its financial statements. What examples could AGSA give of the material misstatements it had found with DPE and SAFCOL’ s initial financial statements submission? AGSA had said that the Executive Authority (EA) of DPE provided some assurance: how did AGSA determine assurance: what were the criteria for that in terms of the EA and leadership? 

Dr Luyenge thanked the AGSA on clarifying terminology and contextualising it in terms of its report. What role did AGSA play in relation to the stagnation in terms of non-compliance by DPE and its SOEs? When would the AGSA recommend that the Committee take action on adverse practices within entities?
What was meant by stagnation in compliance? Were the targets set by entities the bare minimum which would enable measurable outcomes?
What could the slight improvement reported by AGSA on DPE and entities be attributed to? Did AGSA have powers to sanction beyond recommending to the Committee if it observed no improvements in performance versus its audit outcomes for the public enterprise portfolio?

Ms T Stander (DA) asked if AGSA had seen the stakeholder entity compacts between DPE and its entities. Was the slow response from DPE and its entities to AGSA findings related to lack of expertise or a lack of will? AGSA had reported that the audit platforms which related to audit Committees of the public enterprise portfolio; though adequate, had had material misstatements and challenges with SCM legislation in their original submissions. Certainly if those platforms had been functioning optimally they would have been able to give a report to both entities and DPE for their implementation. What was AGSAs view of the audit measures of DPEs Entities?
Regarding the misappropriation of SAFCOLs assets and the opening of a case with the South African Police Service (SAPS) about such; who had reported to SAPS and the National Prosecuting Authority those misappropriations?
 
Mr N Paulsen (EFF) said it was inexcusable that SAX could not submit its financial statements. What consequences were there for that failure to submit by SAX? What criteria did AGSA use to measure for leadership outcomes at DPE and its entities? Why was SAFCOL under DPE in terms of competencies where there was the Department of Agriculture, Forestry and Fisheries (DAFF)?
What further consequences were there for fruitless and wasteful expenditure?

The Acting Chairperson commented that possibly the Committee would have to consider inviting the private auditors of those Section 4 entities that AGSA did not directly audit to present their outcomes of the entities. She also asked AGSA as to whether it had ever engaged those private auditors of those Section 4 entities directly in terms of their audits and deeper findings regarding the financial statements thereof?

Which was better between a clean audit and an unqualified audit with findings?

If SAX had missed its audit deadline submission/ financial statements submission: what concrete suggestion did AGSA have to assist the Committee in holding that SOE accountable.

AGSA seemed to not have punitive measures for auditees that were not performing over the years: was it a matter of not being mandated to punish.

Mr Singh asked what concern was there in terms of AGSAs concern about the DPEs IT unit.

Ms Zwakala replied that the Section 4 entities were not audited by AGSA because of capacity constraints and other issues as every PFMA Department and entity had to have submitted financials by the 31 May annually and be fully audited by the 31 July same year. If one put all national Departments together with their provincial branches in one pot; the capacity of AGSA had to be considered in terms of keeping to the 31 July deadline of completed audits.  In that respect AGSA worked with private firms in the auditing industry especially Broad-Based Black Economic Empowerment (B-BBEE) companies. Transnet, Denel, Eskom and Alexkor were audited by those partners.

She reminded the Committee that in the past three years SAX had been late with its submissions for auditing where unfortunately in the 2015/16 financial year that had been repeated where she asked the Committee’s indulgence to allow AGSA to complete SAXs audit so that AGSA could give the Committee a better view of the issues and why there been a delay in submission of financials.

The Chairperson interjected that Ms Zwakala sounded as if she was apologising on behalf of SAX. Had SAX failed on its mandate to submit financials according to PFMA prescripts or was it AGSA that was delaying the finalisation of the SAX audit?

Ms Zwakala replied that her intention was not to make excuses for SAX but looking at the previous two years SAX could not be signed-off on its audit report as it was waiting for a guarantee from the National Treasury where it had taken from eight months up to a year for SAX to be signed-off.  Even issues around the financial viability of the airline had not turned around as of yet and AGSA certainly would avail themselves to the Committee to give that full picture on why the audit had taken so long and other related matters before AGSA could sign-off all the assurances it needed.

Regarding the Section 4 companies’ audits; AGSA did not wash its hands off of those SOEs as AGSA met with the private auditors of those SOEs at various milestones. Before the audit reports were issued those private companies reached out to AGSA for guidance on complex matters such as audit on compliance and Audit Of Predetermined Objectives (AOPO). AGSA sat in the audit Committees of all those SOEs and there was a project to formalise such interactions both at management and audit levels of those section 4 SOEs. AGSA did training with some of those B-BBEE auditing companies to ensure consistency.

Over and above AGSA reporting its audit outcomes yearly to Committees, it engaged senior management (SM) accounting officers throughout the year on dashboard exercises where relative to key internal controls to highlight weaknesses in terms of assurance providers.   AGSA was intensifying that process of key internal controls review to highlight to assurance providers whether quarterly or half yearly to indicate that proceeding in a particular way where an assets register was not complementing the financials there certainly would be challenges.
In terms of Executive Authorities (EAs) AGSA engaged Ministers quarterly to update them on where problems could arise in Departments and entities in and end of year in terms of commitments.
The Committee would also recall that AGSAs mandate was to enable oversight rather than force the hand of the accounting officer to take action against transgressions.
Mr Struwig said AGSAs role regarding the concern on setting targets too low for easy achievement was to AOPO of the APP and Annual Report (AR) of entities and to then evaluate that on usefulness and reliability. Usefulness was audited against NT requirements which generally followed the SMART principles (specific, measurable, attainable, relevant and time-bound). Reliability indicated that reported achievements against the targets with supporting documentation were audited satisfactorily. AGSA did consider whether certain targets were within a mandate of a particular Department or entity based on the smart principles, but the level of the target set was not evaluated by AGSA though it was aware that was done between the EA and entities for a Department.
The misstatements for DPE involved its contingent liabilities and guarantees only. Regarding SAFCOL the misstatements involved the consolidated financial statements of IFLOMA a subsidiary of SAFCOL based in Mozambique. There were certain amounts that had not been correctly transferred from IFLOMA to SAFCOLs group financial statements which had been material but had been adjusted in the final financial statements. There had also been misstatements in the tax figures of the SAFCOL group financial statements.
Mr Carl Wessels, Senior Manager, AGSA said that DPE had had severe capacity constraints in its finance division which had led to the contingent liabilities and guarantees misstatements. As the Committee recalled AGSA recommended that statements be done quarterly where DPE had done that once for the 2015/16 financial year but as DPE got capacitated again within its finance division AGSA would recommend it return to quarterly consolidation of financial statements.
Mr Struwig said AGSA had noted that there had been performance measure achievements in the year under review in the executive of the Public Enterprise portfolio however; there had remained key vacancies at DPE at the Minister’s level that needed to be addressed. Some cases therein had been addressed and in terms of the audit history, the outcomes had not changed where AGSA believed there had to be emphasis on implementing action plans (APs) around audit outcomes quarterly. 

Mr Wessels added that was indeed where internal audit came in because what AGSA was reporting were the symptoms, the sneezes and the coughs of things not going well. When looking at the action plan it was important for the internal audit to go and verify whether the AP taken by management had resulted in favourable outcomes.

Mr Struwig said the vacancies and the instability were the main root cause for assurance concerns by AGSA. What AGSA had found was that a report or financial statements would have been prepared but there would have been no review as there would have been a vacancy and that role would have not been efficiently delegated to someone else where that needed to be addressed. In some instances, that had been done though some vacancies still remained in key positions during the year AGSA had assessed.

AGSA also ensured that the status of implementation of APs was monitored especially around compliance since DPE had had a challenge on compliance for a couple of years successively on the same matters including SCM and irregular and fruitless expenditure.

Mr Wessels said AGSA had issued a booklet on accounting remedies in the recent past. If there were consistent repeat findings on the same matter it was a matter for the EA and that was where the Committee also had a role but AGSA only reported on outcomes and could only recommend. 

Ms Zwakala said a unique recommendation that AGSA made with DPE was sharing of information because there was Denel that had been clean for the last three years but Transnet had been stuck on AOPO, Eskom was struggling with procurement. AGSA had therefore recommended that DPE organise quarterly forums for the sharing of information with all its entities where AGSA had also availed itself to be part such sessions to present on AOPO.

Mr Struwig said AGSA did audit the shareholder compacts as they were the basis on which to assess the commitments of both entities and DPE and were key on AOPO and consistency.

Ms Stander recalled that the Committee had been asking for the shareholder compacts for a very long time. How was it possible for AGSA to see them but the Committee could not when the compacts were the basis for the AGSA audit? Could AGSA supply the Committee with the compacts?

The Acting Chairperson said the compacts had been given to AGSA so it could complete its work; the Committee had to get the compacts on its own. The Committee had been told that the shareholder compacts had been in the legacy reports of the fourth Parliament Portfolio Committee on Public Enterprises.

Ms Stander said perhaps the Committee had to stop asking questions and to start demanding the shareholder compacts and she felt that had to be included in the Committees Budget Review and Recommendation Reports (BRRR).

Mr Struwig said the slow by DPE had also been mainly due to the vacancies in key positions at DPE

SAFCOLs new Board had reported the material losses due to misappropriations to SAPS and the NPA.

The criteria for key controls on leadership; financial performance management and governance were based on the yearly audit of the Department and its entities.

Regarding whether irregular and fruitless expenditure related to when goods were not received though procured; AGSA had added to its audit procedures an assessment of whether goods had been received or not. However; the definition of irregular expenditure indicated that process would have not been followed. There could have been undue processes followed in procuring services but AGSA had confirmed that goods and services had been received in the 2015/16 Audit of DPE.

Mr Wessels said AGSA had committed to sitting with entities to highlight the things that AGSA looked for during audit in terms such as AOPO and target setting as AGSA realised there were mismatches sometimes as some entities could have good audit outcomes on pre-determined objectives where other entities would be challenged on AOPO. The principle was that AGSA believed that where one did things well, they had to share that knowledge so other could perform as well and where one struggled, one had to ask for help.

SAFCOL and DPE had had key vacancies in the IT Department where they had sourced external consultants to fill that gap during the year under assessment.  For that reason, there had been those dependencies on third parties which needed to be addressed and there had also been policies and procedures that had not yet been in place to govern the IT environment at DPE and SAFCOL.  

He reiterated that AGSA maintained that the APs to address previous year audit outcomes had to be monitored quarterly by the Committee from a dashboard perspective to ensure that there was implementation.

Mr Wessels said theoretically the audit looked at whether financial statements had been presented fairly, whether an entity complied with key laws and regulations and whether the pre-determined objectives had been useful and reliable and Denel had done all of that satisfactorily as per their audit. Regarding disclosures, the entity had indicated in its AR that it was in discussions with NT there was disagreement therein. AGSA audited what had been disclosed by entities therefore the outcome of the discussion or investigation by NT would then trigger the follow up in terms of audit.
AGSA had recommended to DPE however that it had to have a very prudent system for tracking for the kind of requests by Denel because if a Department was close enough to its entities it could anticipate requests so as to have ample time to respond. So that there were no assumptions that since a Department had not responded within 30 days that then meant permission had been granted. Certainly that was something to recommend to NT as well since it was easy to lose track of such requests and for entities to assume the opposite.
As an observer in audit Committees AGSA had gained a lot of insight on entities as that was where risks were discussed and actions were tracked. The filling of the Director-General (DG) position at DPE certainly gave AGSA hope.

The Acting Chairperson said the recommendation of AGSA was on point in terms of the Committee requesting quarterly reports from DPE.

Ms Stander asked if AGSA was satisfied with performance management agreements for SM and middle management at DPE. Were those in place for every individual responsible for delegated authority?
Were there any positions that AGSA had found to have had excessive bonuses paid to in relation to non-performance in a particular function?  Within entities had AGSA found any pattern were B-BBEE certificates; three quotes or any other requirements had not been fulfilled where payments had been made to the same supplier perhaps?    
In the 2013/14 financial year the DPE and its entities had performed relatively well on audit outcomes where there had been a specific regression in the following two financial years to date; could AGSA pinpoint the reasons or events that had resulted in that regression in 2014/15 and 2015/16 FYs?

Ms Stander noted that AGSA had raised the matter of non-SMART targets set by DPE and its entities. AGSA had reported that within the compacts 33% of the pre-determined objectives were inconsistent with 50% of those being non-SMART. Did the audit Committees have access to the compacts and were those audit Committees competent?

Since when had AGSA only audited SAFCOL and SAX with DPE and not the other section 4 companies?

Dr Luyenge analogised that there was an executive employed where his package had a performance bonus attached; an outcome having not been achieved the performance bonus was still paid to said official: was there no audit query there when obviously some PFMA prescripts had been breached?
 
Mr Wessels said there were certain elements of remuneration that were governed by the PFMA but 13th cheque was not a bonus. The Department of Public Service and Administration (DPSA) was busy currently with a large scale project to specify and link performance bonus contracts to performance target however nothing stopped Departments from doing that voluntarily and DPE was a good example of that as most of the DPE SM would not have heard about a performance bonus in a very long time; all that was needed was for that to be rolled out to entities and the lower levels.
The 13th cheque originated from the Public Service Act, Labour Relations and bargaining council tools.
In the 2015/16 financial year there had been disclosures on irregular and fruitless expenditure in terms of paid bonuses when individuals had not performed and it was up to DPE to determine whether the amounts could be recovered.    

There had been two key vacancies that had led to a regression in a specific year which had been compounded by the finance director which had fallen ill. In that year the Director General, the Chief Financial Officer (CFO) and the finance director left at the same time and the individual that had been acting as CFO also left within a short space of time.

The takeover of auditing SAFCOL and SAX, AGSA had planned to audit some of the SOEs within the DPE portfolio where the Minister of DPE requested that the opposite SOEs be audited.

Mr Struwig said AGSA had had an overall plan of which entities to take over for continuous auditing from the private sector in terms of spreading the skills and the capacity and which to leave with the private auditors. In 2013 the Minister at DPE had asked AGSA to take over the audit of SAX whereas AGSA had already planned to take over the audit of SAFCOL as had been discussed with the portfolio Committee and the shareholders’ unit of DPE at that time, as AGSA only audited the DPE at that time without any of its entities.
  
Regarding payments to the same company and an SCM pattern that AGSA would have identified; Mr Struwig said AGSA had not identified such but at SAFCOL there were matters that had been handed over to SAPS and the NPA where such cases related to the patterns of malfunction where payments had been made.

Mr Wessels said if the Committee could refer to AGSAs 2015 general report where it summarised all its audit findings he read: ‘as we recognise that for audit Committees to provide the required level of assurance as second level assurance providers, they are dependent heavily on the reliability of assurance provided by SM and the internal audit unit. The lower the assurance provided by these two role players the more difficult it is for audit Committees to accurately assess the control environment of the auditee, including being reassured that all significant are effectively managed. Audit Committees are therefore advised to consider observing…’ if looking at SM as assurance providers where AGSA would say that was concerning since it provided some assurance that automatically jeopardised the level of assurance provided by the audit Committee. Certainly AGSA did assess audit Committees on competence, independence and the skills pool they brought however; they were dependent on SM.

Ms Stander interjected asking where the issue was then, between SM and the audit Committee in terms of reliable information.

Mr Wessels said the area AGSA had highlighted was compliance with regulations and legislation as there were gaps in terms of the information required and the material misstatement on the financial statements where one would be provided with significantly flawed information to make decisions with.

Ms Stander interjected again needing clarity on whether the misstatements were error since in SAFCOLs case AGSA had indicated that the transfer of information from IFLOMA to the SAFCOLs group financials had not been done correctly. Was that a genuine error or should that individual responsible known better?

The Acting Chairperson recalled that she had asked whether a clean audit should not have been the goal in terms of AGSA recommending to SAFCOL to work towards an unqualified audit with material findings. Was it impossible for SAFCOL to work towards a clean audit?

Mr Struwig said that from AGSAs assessment the misstatements at SAFCOL and DPE had not been intentional as it had been a matter of those key vacancies alluded to earlier. 

AGSAs recommendation for SAFCOL to sustain its audit outcomes related specifically to performance information and not its whole audit and AGSA expected all its auditees to achieve a clean audit.

Mr Wessels said AGSA’s core mandate was to look at housekeeping matters in relation to service delivery; as soon as housekeeping was optimal then service delivery could then be the focus instead of trying to comply with audit outcomes.

The Acting Chairperson thanked AGSA for its consistency on its mandate as that allowed Parliament to better oversee its Departments. She suggested that the minutes that were to be considered that day stand-over for the following day.

The meeting was then adjourned.