Department of Justice 2015/16 audit outcomes: Auditor-General briefing

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Justice and Correctional Services

11 October 2016
Chairperson: Dr M Motshekga (ANC)
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Meeting Summary

Department of Justice and Constitutional Development Annual Report
Correctional Services Annual Report

Auditor-General South Africa (AGSA) reported on the audits of the Department of Justice and Constitutional Development, the Office of the Chief Justice and the Department of Correctional Services. The delegation reported an improvement over 3 years, which it attributed to leadership stability and commitment to implement their audit action plans to resolve qualifications in previous audits. However, poor financial statement preparation, inadequate monitoring of compliance with applicable legislation, absence of internal controls to detect unauthorised, irregular, and wasteful expenditure, poor review of performance reports, lack of training and understanding of technical indicator descriptions, and lack of skills in the capture of performance information remain concerns. It recommended the elimination of material misstatements in financial statements, confirmations from entities on proper oversight and review by the CFO and management and tracking of progress on implementation of action plans and programmes. It concluded that to improve and maintain the overall audit outcomes, financial statements process must ensure compliance with key legislation, while performance planning and reporting must be improved.

In discussion, members welcomed the improved audit findings. However, they expressed concern over repeat audit findings, the increased irregular expenditure and whether this arises from corruption or shoddy compliance. Members expressed concern over non-SMART performance indicators, unverifiable historical balances in Third Party Funds which resulted in its qualified audit opinion, and reinvestment of Third Party Funds. Members asked about the vacancies at the Office of the Chief Justice, its regression, and the key commitments of the Minister on performance information management system and upgrade of IT systems.
 
The delegation agreed that an inadequate IT system affect the quality of financial statements. However, it is the officials who are not complying by following the checklists, circulars, and guidance mechanisms, who are the main cause of audit findings. It affirmed that fraud is not involved in the compliance process. The problem is that orders are placed that are not based on supporting documents. It explained that Third Party Funds do not require statements of income and expenditure. It also explained that overdrafts are a working capital issue. It further explained the nature of vacancies in the OCJ and the Integritron Integrated Solutions contract awarded by DCS which the Minister Masutha had to cancel. Finally, it explained the nature of internal audits and how unauthorised expenditure is incurred 

Meeting report

Auditor General briefing on Department of Justice and Constitutional Development (DoJ&CD)
Mr Yussuf Essack, Senior Manager: Auditor General South Africa (AGSA) responsible for the DoJ&CD, presented the audit of the DoJ&CD. He explained that AGSA has a constitutional mandate to strengthen democracy by enabling oversight, accountability and governance in the public sector, thereby building public confidence. He reported an improvement in audit outcomes over the past three years. This improvement in the audit outcome can be attributed to improvement in leadership stability and commitment to implement the action plan to resolve audit qualifications in previous years. However, the following concerns remain:
-           Poor financial statement preparation;
-           Inadequate monitoring of compliance with applicable legislation, resulting in non-compliance, especially with Supply Chain Management legislation;
-           No internal controls in place to detect unauthorised, irregular, fruitless and wasteful expenditure;
-           Irregular expenditure in 97% of the 2015/16 audit process
-           Poor review of performance reports, leading to material misstatements;
-           Lack of training and understanding of technical indicator descriptions and their consistent application across the centres;
-           Lack of skills of officials to accurately capture reported performance information at regional and management areas.

On the positive side, Mr Essack reported that the SAHRC has improved on compliance with legislation, payment of creditors, and proper commitment from management in resolving outstanding issues. He further reported that ring-fencing was undertaken with respect to some aspects of the budget. Issues involved in removing the ring fencing from the financial statement included engagement with National Treasury on unexplained balances.

On the negative side, there were regressions in the Special Investigating Unit (SIU) and the Public Protector. There were repetitive audit findings and work must be performed for the audit findings to be improved. Many of the entities did not report any material changes. The SIU, Justice Department, and the Public Protector reported material adjustments.

AGSA met with the Minister in July 2016.  No new commitments were solicited from the minister but certain of the prior year’s unmet commitments were reinforced:
- The performance information management system will be used effectively to collect information from the various branches and regions.
- Ageing Guardian’s Fund IT system to be prioritised for upgrading / replacement to ensure proper financial reporting.

- The CFO to take control of supply chain and asset management reporting functions and report on progress monthly for investigation and corrective action.
- Support to be provided to the department to fill vacancies as soon as they arise, especially at senior management level.
- Replace Third Party Funds IT system to ensure proper financial reporting.

Recommendations
- To eliminate material adjustments to monthly financial reports and financial statements by having them adequately reviewed by management
- To obtain confirmations from entities on proper oversight and review of annual financial statements by the CFO and management
- To track progress on implementation of audit action plans and programmes with particular focus on compliance with legislation and supply chain management.

Auditor General briefing on Office of the Chief Justice (OCJ)
Ms Fikile Mashao, AGSA Senior Manager responsible for the Office of the Chief Justice, presented the OCJ audit report. She remarked that there are only two issues of non-compliance in the audit. These are with regard to material misstatements in the financial statements and the 30-day payment obligation. As the Office is newly established, it had a number of vacancies which posed a significant challenge. The AGSA made some suggestions on how the Committee could assist.

Discussion
Mr W Horn (DA) observed that, from the programme handed out, members were under the impression that the Minister would be available this morning, contrary to new information that he would be available only from the 2 pm session. He expressed concern about repeat audit findings. Will repeat findings automatically lead to a regression in audit outcomes? When will an unqualified audit opinion result in a qualified audit opinion as a result of lack of attention to these repeat findings? Which of these entities is at the risk of falling foul of regression as a result of repeat findings? With respect to repeat finding and non-consequence management, what are the reasons for the failure by the Department and these entities to deal with non-compliance with legislation? He noted that senior officials should have the integrity to comply with all relevant legislation.

Mr Horn welcomed the decrease in the amount of irregular expenditure. He asked the causes for the irregular expenditure, the number of incidents that make up the irregular expenditure, and whether a spotlight should be put on irregular expenditure. This would make it clear whether irregular expenditure arises from corruption or shoddy work in terms of compliance.

On Third Party Funds, the ring fencing of unidentified money constitutes a stumbling block to an unqualified audit. The question is this: Must the department still proceed with an exercise to determine the identities or source of the depositors of Third Party Funds or will the finding ultimately, in time, be forgotten? Can the Department leave it for now without it ultimately being held against the Third Party Funds financial statement so that an unqualified audit opinion can be obtained without the DoJ&CD dealing further with ring-fenced, unidentified funds?

On the OCJ, Mr Horn noted that performance indicators are not well defined. Does the AG in any way assist management to better define these indicators? It is worrying that AGSA, year after year, reports that the performance indicators are not helpful. Is it left to DoJ&CD and its entities to start using defined indicators or do they get guidance? If they do get guidance, should the Committee conclude that DoJ&CD just does not care about performance indicator compliance?

About the OCJ vacancies, it would be helpful to know which vacancies AGSA is worried about.

For the 30-day payment obligation, Mr Horn expressed concern about the overdraft, wondering whether it is the result of a cash flow operational issue or a broader failure on the part of the DoJ&CD. What is to be made of this? If it continues, it could result in creditors have outstanding payments of 60 or even 90 days. It appears there is more money going out than is coming in, and this does not make for a good balance in the budget.

Mr L Mpumlwana (ANC) sought clarification over reinvestment of Third Party Funds.

Mr Swart thanked the presenters. He noted that the audit of the entities has generally improved. However, the quality of submitted annual performance reports shows a decrease from 20% to 40%. He asked for clarity on this supposed regression. He referred to the recommendations relating to the key commitments of the Minister. These commitments include a performance information management system and an upgrade of IT systems. He asked if the Minister promised to rectify these and failed to do so.

Mr S Swart (ACDP) asked about AGSA’s quarterly engagement with the Minister on the ongoing quality of the audit and also the internal audit.

Ms C Pilane-Majake (ANC) showed appreciation for the overall improvement in the audit report. She noted that systems are being put in place to address the historic problem of Third Party Funds. She asked about AGSA’s finding on lack of compliance with the payment within 30 days obligation. Are there justifications for why payments are not made in time? Is there anything [mechanism] that articulates corruption, given that there are systems in place to deal with corruption?

Responding, Mr Essack explained that a failure in the system affects the quality of financial statements. The ideal is to have a clean audit through strong institutional mechanisms. He cited Legal Aid South Africa as an example of how to adopt measures for a clean audit.

Mr Essack noted that audited entities have checklists, circulars, practice laws, and guidance mechanisms, etc. The issue is that the officials were not complying. Accounting officers need to explain what is given to them in terms of the PFMA. From an audit point of view, a reviewer is a bit hamstrung in discovering how officials are transgressing because s/he can only deal with the documents available. An accounting officer needs to go deeper and see how officials are transgressing in their lines of responsibility and contributing to repeat findings.

There is no element of fraud in the compliance process. The problem is that orders are placed based on supporting documents.

On Third Party Funds, statements of income and expenditure are not required, given that these funds are trust funds merely requiring a statement of financial balance for debtors and creditors. Ring fencing will remain until a resolution is reached on engagement with National Treasury and the DoJ&CD through the budget vote on what is an appropriate accounting statement.

Overdrafts are incurred, primarily because the State Attorney works on behalf of all other organs of government. Examples are defending and prosecuting claims for funds recovery. Thus, overdrafts are a working capital issue.

Regarding financial statements, the CFOs have the ultimate responsibility on the quality of financial statements.

On pre-determined objectives, page six of the briefing document covers the challenges to these objectives. In terms of the Minister’s commitments, the highlighted commitments were actually made by the previous Minister, though the present Minister is aware of them. However, the two commitments that have not been implemented did not have an adverse effect on the audit outcome.

On the OCJ and 30-day payment of invoice compliance, AGSA does examine the reasons for non-compliance. For example, security contracts are problematic for the Justice Department. Reasons for non-compliance include queries about invoices and contractual terms.

AGSA has reviewed the Justice Administered Fund Bill and made inputs aimed at plugging loopholes.

Ms Pilane-Majake noted that the Bill deals more with legal technicalities rather than financial technicalities.

Mr Essack replied that the form of the Bill is dependent on the form that the entity would take – that is whether it is a public or private entity. He noted that when the Bill was drafted, AGSA had no idea what form the entity would take.

Ms Mashao explained the support offered to the OCJ in the financial year. She stated that the vacancies in the OCJ are: finance manager, IT section, and performance management.

Ms Pilane-Majake asked whether AGSA has met with the OCJ on the vacancies, to which Mr Essack replied affirmatively.

Auditor General briefing on Department of Correctional Services (DCS)
Mr Lourens van Vuuren, Business Executive in AGSA, stated that DCS had managed to move from a qualified audit to a qualified audit with findings. The main reason for improvement in the financial report is stability in management and a commitment to implement the audit action plan to resolve prior year qualifications. However, compliance with laws and regulations has not fared very well. If there was not a process to allow entities to make adjustments, it would have been an unqualified audit for DCS.

There were audit findings on usefulness and reliability of performance information that need improvement. Also, oversight responsibility needs improvement, specifically vacancies that need to be filled and oversight by senior management.

On assurance providers, senior management controls need to improve. Internal audit needs to improve also.

There is no improvement in compliance with legislation and quality of financial statements.

There was an Unauthorised expenditure of R121 000 [Fruitless and wasteful expenditure: R1.71m; Irregular expenditure: R219m]. However, the DCS investigates the causes of the unauthorised, fruitless, and wasteful expenditure.

There has been no real movement in the three-year trend and management needs to have an audit action plan. Instability is no longer a root cause. However, some vacancies in senior management need to be filled, even though the critical vacancies of chief financial officer and commissioner have been filled. Of concern is a lack of consequence for poor performance. It is important that timely action is taken for non-compliance in supply chain management regulation.

AGSA recommends that the Committee monitors the filling of key vacancies, monitoring of performance information and compliance with legislation. It also recommends monitoring of management actions to instil a culture of accountability.

Discussion
Mr Horn queried the performance indicators and their usefulness and reliability, given that there seems to be no progress in some of the indicators.

The department slow response to identified internal control deficiencies has resulted in errors not being prevented, detected and corrected in financial and performance information. This also resulted in non-compliance in laws and regulations.

On the slow investigation by DCS of identified internal control deficiencies, including fruitless and wasteful spending, Mr Horn asked about AGSA's finding on the slow time frame and what the ideal is. He asked about AGSA’s finding on the Integritron Integrated Solutions contract award by DCS, which the Minister of Finance allegedly ordered Minister Masutha to cancel. Bearing in mind that AGSA said that the contract would form part of the 2015/16 Audit, he wondered whether that contract award is the cause of the R219 million irregular expenditure. If not, what ultimately was AGSA’s finding on this award and how many contracts constitute this R219 million?

Mr Mpumlwana asked if internal audits are outsourced and the extent of their effectiveness. He asked if over-large virements - moving funds from one unit to the other - was a cause of unauthorised expenditure.

Mr Bongo (ANC) thanked AGSA for its report. He noted the improvement in the DCS audit and congratulated the DCS, the Committee for its oversight, and expressed the hope for a future clean audit. He stated that the DCS needs to respond to the finding on wasteful expenditure.

Ms M Mothapo (ANC) raised the filling of vacancies, noting that the processes for filling vacancies might have played a key role in difficulties of filling vacancies. She asked for clarity on the findings that have remained stagnant in terms of previous audit reports.

Ms Pilane-Majake supported Mr Horn’s call for clarity in integrated systems funding. She also asked for clarity on implementation problems on the part of management.

Responding, Mr van Vuuren explained that the problem with the lack of an integrated system lies mainly with the IT unit. Part of the solution might lie in a computerised system. However, it also has a lot to do with stating the criteria, ensuring that everyone understands these through proper training, reviewing monthly reports, and encouraging internal auditing. On the procurement of the integrated inmate management system, AGSA does not investigate transactions. National Treasury does this. However, part of the normal audit process focuses on is supply chain management and compliance, which is part of the reason for the increase in irregular expenditure. Disclosure on irregular expenditure and non-compliance with legislation is found on page 189 of the DCS Annual Report. He pointed to a footnote on the expenditure of R105 million. The actual funds for this procurement comes from DoJ&CD. The budget for the integrated justice system is incurred by DoJ&CD. He explained that National Treasury investigated that contract and issued a report. However, the scope of that report and the scope of AGSA’s audit are different.

Internal audits are carried out in-house. They can from time to time source additional capacity, but they rarely do this. The internal auditor is usually a full time employee of the Department of Correctional Services.

Unauthorised expenditure is incurred in three main ways. The first is procurement outside the purpose of the budget vote allocated it. An example is going beyond the mandate of a Correctional Services programme. The second is exceeding the total vote, as in this case by R121 000, while the third is by exceeding the main divisions of a vote or programme. AGSA has no specific finding with respect to wasteful expenditure and ring fencing.

On vacancies, AGSA focused on vacancies in senior positions, since these positions are more involved in performance information.

On the three-year trend in non-compliance, the key non-compliance is supply chain management, which needs increased attention.

Regarding the integrated justice system, ultimately the department that takes responsibility for it is the DoJ, even though the other departments have a role to play.

The Chairperson thanked everyone and closed the meeting at 1:15pm.

 

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