The Committee decided that this meeting would be regarded as an informal one with no decisions taken, in view of the fact that most Members and the Chairperson could not attend. The Auditor-General South Africa briefed the Committee on the overall audit results of the Department of Small Business Development (DSBS) and entities Small Enterprise Finance Agency (sefa) and Small Enterprise Development Agency (seda) in 2015/16. Sefa obtained a clean audit, with leadership maintaining a strong internal control environment supported by experienced and skilled staff. Seda showed improvements. The DSBS had been hampered by having no permanent Chief Financial Officer and monthly disciplines of record keeping and reconciling transactions, to ensure the credibility of financial and performance reports, were not fully effective which meant that the quality of financial statements was not good. R1.8 million expenditure was seen in contravention of key legislation and this was later explained as goods being delivered by trainers but no proper processes followed. AGSA recommended that the Committee should request management to provide feedback on the implementation and progress of action plans during quarterly reporting, provide quarterly feedback on key controls, filling of vacancies and action taken against transgressors.
Members noted that they would like to hear the plans of DSBS to ensure that the good achievements were maintained, and what support it was offering to the entities to ensure that their performance levels remained high. Members asked whether the AGSA monitored the establishment of the Small Business Advisory Council because this was something that should have been set up already in terms of the legislation, and this led to questions as to the level of detail that AGSA went into when establishing whether departments were compliant with legislation. They also asked what would happen if austerity plans did not allow for appointment of staff and whether DSBD would be criticised for matters that arose due to lack of skills. The Department, however, clarified that there were plans to fill key posts, including that of the Chief Financial Officer and AGSA felt that the skills were in place. AGSA emphasised that every department should be considering which key posts it must fill and which could be deferred. Members also asked how closely AGSA worked with the independent auditors who attended to the sefa audit, and the level of engagement between the DSBD and AGSA, including whether DSBD was making full use of the opportunities to consult with AGSA.
Mr K Kunene, Committee Secretary, noted that the Chairperson was not present. The few Members who were present decided to treat the meeting as an informal one, did not elect a Chairperson, but asked the Auditor General South Africa (AGSA) to give the presentation.
not, the present members were in accord to proceed since AGSA is already present to make a presentation.
Auditor-General South Africa (AGSA) on Department of Small Business Development (DBSA) 2015/16 audit performance
Mr Ahmed Moolla, Audit Manager, Auditor-General South Africa (AGSA) took the Members through the key aspects of the audit performance of the Department of Small Business Development. He highlighted that there had been much progress and was pleased that Small Enterprise Development Agency (Seda) had made much progress and had obtained a clean audit. There were some key aspects in the Department that needed special attention in order to improve the functionality of its financial management and the quality of its annual financial statements, which he highlighted as follows:
Small Enterprise Development Agency
There has been an improvement in the status of internal controls as evidenced by the clean audit. This is attributable to leadership who had maintained a strong internal control environment that is supported by experienced and skilled staff.
The assurance provided by key role players has improved compared to previous years at Seda, which is clearly reflected in the improved key controls, particularly those relating to reviewing and monitoring of compliance.
Department of Small Business Development (DSBD or the Department)
The Department had suffered from vacancies in key positions – particularly the lack of a permanent Chief Financial Officer (CFO). Furthermore monthly disciplines of record keeping and reconciling transactions to ensure the credibility of financial and performance reports presented to oversight committee are not fully effective.
The assurance provided by key role players at the level of senior management and the accounting officer needed to be improved at the Department. Internal control processes for financial and performance reporting, as well as compliance, were in place but were not fully effective.
Mr Moolla said that for a number of entities, there had been evidence of uncompetitive or unfair procurement processes. An amount of R1.8 million on expenditure was incurred in contravention of key legislation, the goods were delivered but prescribed processes were not followed by the Department in the year under review.
The root cause relating to the low quality of the financial statements was the fact that there was no permanent CFO, and the instability in key positions. He warned that this meant that continuous interventions would be needed to stabilise the internal control environment to ensure that basic accounting disciplines would be enforced. Compliance with legislation should be reinforced by enforcing consequences for unsatisfactory performance which were presently hampering sustained progress towards clean administration.
Auditor General’s recommendations
Mr Moolla submitted the following recommendations to the members:
- The Portfolio Committee should request management to provide feedback on the implementation and progress of action plan during quarterly reporting.
- The Portfolio Committee should request management to provide quarterly feedback on status of key controls.
- The Portfolio Committee should request quarterly feedback on the progress of filling vacancies at key management level.
- List of actions taken against transgressors must be provided quarterly to the Committee, for follow up.
Mr X Mabasa (ANC) expressed his appreciation for the AGSA input. He said that the Members shared the concerns of the AGSA around the vacancies, and suggested that perhaps it would be wise for the Committee to engage with the DSBD and AGSA together to get an explanation from the DSBD, and a plan for how it aimed to address this major shortcoming that was impacting on other key areas. He also asked what DSBD planned to ensure that there was no deterioration in its entities again, and that the good performance levels achieved would be maintained. For that reason he would like to hear from DSBD how it intended to offer support to the entities.
Mr H Kruger (DA) said that another very important entity was the Small Enterprise Finance Agency (sefa) and he asked for an overview on its annual financial statements. It apparently still was reporting to the Department of Trade and Industry, and he wondered why this was so.
Mr Kruger also noted that there had been material misstatements in the annual financial statements of the Department, and asked if AGSA took the view that the appointment of a permanent CFO might address that problem.
Mr T Chance (DA) referred to the slide on the irregular spending and asked for more detail on what this amount had been spent on, and with whom. He commented that potentially the Minister of Finance would be imposing further austerity measures which could well include further cuts in personnel expenditure. If that meant that the vacancies in the DSBD were then not able to be filled, he wondered how this would affect performance, specifically its ability to get clean audits.
Mr Moolla clarified that the sefa audit outcome was actually already included in the presentation, at slide 18. Sefa had obtained a clean audit and there were no significant issues with its annual financial statements. He confirmed that at present, sefa did fall under the DSBD but it was audited not by AGSA but by a private firm. He explained that AGSA had some discretion as to which audits it chose to do, and which to sub-contract. However, if it did not attend, itself, to the audit, AGSA would have to be consulted in the appointment of other auditors, and they would have to follow certain procedures and perform certain checks. AGSA intended to move closer to the private audits. Although it did not actually do the audit, it did have representatives attending the audit committee and it also did a review of the audit reports before they would be released. There were also engagements with management around the audits.
Mr Moolla explained that the misstatements in the annual financial statements were attributed to the lack of a permanent CFO, but he was satisfied that the current CFO had the ability and capacity to perform well. AGSA has discussed this issue with management and management was aware of the problem, but also believed that the issues can be sorted out and the current CFO is adequately qualified to assume the position permanently, should that be the decision. Mr Moolla stressed that the key point was that management and the CFO must implement measures to make sure that there will be annual financial statements that are complete and accurate. He pointed out that even if there was a skilled and qualified person in place now, measures would also have to be put in place to ensure that irregularities and inconsistencies would not arise. In general, with the DSBD, there had been a lot of disclosure notes, which were not then properly supported by the automated system, so that manual systems then had to be developed for matters like accruals and commitments. The AGSA had recommended to the DSBD that it should establish those processes to ensure that complete and accurate financial statements were created.
Ms Malikah Groenewald, Audit Manager, AGSA, explained the irregular expenditure. DSBD had procured training services from five suppliers but when the AGSA asked for a list of paid suppliers for that particular training it was unable to get the list. The amount spent was over R500 000, so obviously this was a matter of non-compliance with the Treasury regulation. She fact that the AGSA was unsure about the nature of the supplies meant that this was recorded as irregular expenditure.
Mr Moolla stated the DSBD might be in a position where it might be inadequately funded to fill all the vacant positions, and if this happened, then the recommendations to DSBD, similar to all other departments, was that it must prioritise filling the key positions where there was funding available for them, but to freeze other positions that were not critical to the function or the core of the Department.
Mr Kruger suggested that the DSBD must be asked to provide more feedback on that point.
Mr Chance highlighted that his question was not so aimed at what the DSBD must do to fill those vacancies, but what would happen if the DSBD was unable to fill vacancies because of a cut in budget, and whether this would then be held against the Department on a performance audit.
Mr Moolla confirmed that the department would not be penalised for something that was clearly outside its control and arose from budget constraints or cuts. However, findings related to lack of compliance with legislation and material misstatements in the financial statements, or financial management concerns would be reported. Even if the findings resulted from a key position not being filled, AGSA would still continue to report them, because they would be concerns around financial management, or non-compliance with legislation. The DSBD would still have to do something to ensure that financial management was run properly and that the financial statements were complete and accurate.
Mr Lindokuhle Mkhumane, Chief Director, DSBD, stated that the DSBD has started engaging with Small Enterprise Development Agency (seda) more strongly and was having quarterly meetings relating to governance issues. Seda would present to the Department any issues that it believed that the Minister should be attending to. At the moment, the DSBD was in the process of appointing replacement members for those on the Board whose tenure had ended. It was looking at the critical skills that would assist seda in maintaining the standard. There is also a unit that deals with governance issues, which assists seda with governance to make sure that funds are utilised efficiently.
Ms Bridgette Peterson, Chief Director: Corporate Services, DSBD, gave further input on the vacancies. The DSBS had focused on filling the critical posts, so the CFO post had been filled and the Head of Corporate Services in HR had also been filled. The position of Head of Strategy had also been filled during the financial year under review. There had been a programme review in the last financial year. DSBD was in the process of developing a structure that supported the overarching mandate of the Department, which would shortly start to be taken through the approval process. She reminded Members that some departments actually took a number of years to bed down the right structure, and DSBD had progressed quite substantially. A service delivery model had been proposed, which was based on the services that the Department delivered. Once that basic structure had been approved, the matching and placing process would be done for the current staff and then the DSBD would be looking at positions that still needed to be advertised. The whole process was following a defined project plan and this was on track. It was also looking to shorten the process of approval in order to fast track the process of filling key posts.
Mr Chance said that one of the provisions of the 2004 Small Businesses Act was the formation of the national Small Business Advisory Council. He thought that one of the major weaknesses of the DSBD was the fact that this had not been set up. He wondered if this was a point that the AGSA had picked up.
Mr Mabasa asked AGSA whether it had the impression that the DSBD was making maximum use of the opportunities that AGSA provided for engagement and input, and whether AGSA would be able to offer any training once the DSBD had employed new staff, so that they could very rapidly fit in. He asked if there was engagement between the audit firm appointed to audit sefa.
Mr Moolla said the responsibility of the AGSA was to verify that what was contained in the annual financial statements was in fact correct, and it would look at all the components of the financial statements and find the supporting evidence. It would also see to the verification of the annual performance report, which meant checking that the department had complied with the framework for management programme performance information and that it is reported accurately, consistently, and reliably. AGSA would not focus on the establishment or otherwise of the Council so this would not be identified through an audit process. However, if the Committee found that an important aspect it could be included in the next audit process.
AGSA is continuously engaging with the DSBD and when the Director General was appointed in September 2016, AGSA also briefed and held a separate meeting with that person to explain the importance of cooperating with AGSA, what the audit is about and the information required. Mr Moolla believed that there was good engagement by DSBD in this case and the Director General had been available to meet also to discuss key controls and address the issues identified by AGSA during quarterly engagements.
AGSA does not offer any training for newly appointed staff, because it has to maintain objectivity and independence, so it only offers an audit services as prescribed by legislation. There are no other services AGSA can render although it does make recommendations and does identify root causes as related to the audit of the Department.
He repeated that the private firm that audited sefa was appointed in consultation with the AGSA, but the report was submitted by the firm in its private capacity. The Public Audit Act, section 4(3),, gave AGSA a discretion whether it wished to audit public entities, but required it to audit departments. AGSA in fact audited most, but not all of the public entities. AGSA would still review any audit reports produced by private auditors and it did attend the audit committee meetings.
Mr Chance stated that the AGSA is mandated to evaluate the annual performance plan, the implementation of the plan and the compliance with legislation. He asked whether AGSA first looked at the legislation and then the plans, or with the plans, stating that if it started by looking at the plans, he was worried whether some of the legislation may not be completely ignored – for instance, the requirement for a Small Business Advisory Council. He wondered how broadly the AGSA did interpret its mandate, and how closely it would question whether a department was implementing its policy mandate.
Mr Moolla explained exactly what the performance audit would entail. The AGSA would merely check whether the Annual Performance Plan had been determined according to the framework – in other words, to determine whether SMART indicators and targets had been used. It was not up to AGSA to check whether all relevant legislation had been considered or linked or made reference to in the APP. The only point that AGSA would check was whether what had been included in the APP was relevant to the mandate of the Department. It would not check to see whether the mandate of the Department had been fully reflected in the APP. If – as had happened now – something was mentioned that the Committee would like AGSA to follow up on, it could do so, but that was not strictly speaking within its mandate to determine this in the first place.
The meeting was adjourned.
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