Auditor-General of South Africa 2015/16 Audit Report; Parliament’s 2015/16 Annual Report Analysis: Committee’s Researchers

Meeting report

Auditor General of South Africa (AGSA): Presentation

Mr Eugene Zungu, National Leader: Audit Services, AGSA, informed the Committee that the Parliament of the Republic of South Africa had sustained its audit outcome of being unqualified, with no findings from the previous year. This was due to a stronger focus by leadership on monitoring the implementation of the action plan to address past audit findings and the related processes of performing an adequate risk assessment and addressing identified control weaknesses.

The overall quality of the financial statements submitted for auditing had improved compared to the previous year, mainly due to the improved review of, and enhanced reconciling controls for, financial information before inclusion thereof in the financial statements. Although the financial statements were free of material misstatements, the following controls should be monitored to sustain a control environment that supported reliable financial reporting:

• Management should continue to enhance existing processes for reconciling and reviewing financial information supporting other disclosures in the financial statements;
• Management should enforce workflow processes to ensure that all invoices were paid within the prescribed 30 days of receipt;
• Management had implemented the new supply chain management (SCM) regulations as from April 2015; however, processes and controls around the SCM process should continue to be enhanced to sustain a control environment that supports compliance with the regulations. Irregular expenditure had increased slightly from R569 000 in the previous year, to R653 000 in the current year. This was mainly attributed to non-compliance with procurement processes.

Although Parliament had a stable financial health environment, it had an operating deficit year on year, while a net liability position had also been realised due to an increase in the provision for post-retirement benefits for Members of Parliament. These indicators should be monitored, as they could pose sustainability challenges in the longer term. AGSA’s current assessment indicated that these did not have a negative impact in the short to medium term, due to adequate cash reserves.

Action plans and commitments made in the prior year had not been fully implemented for the area of performance reporting, as the annual performance report had not been adequately reviewed prior to submission for audit purposes. This had resulted in Parliament submitting an annual performance report that contained material misstatements, which had subsequently been corrected.

The following controls should be strengthened to establish and sustain a control environment that supports useful and reliable reporting on the performance of Parliament:

• Management should strengthen record management controls to ensure that supporting documentation for the reported performance contained in the annual performance report is properly maintained and can be easily retrieved. Appropriate consequence management measures should be implemented by leadership for the incomplete implementation of action plans in the area of performance reporting;
• Action plans should be implemented to ensure that quarterly financial and performance reports are tabled in Parliament within the legislated time frames to allow for effective oversight. The accounting officer should implement processes to ensure that the appropriate levels of management monitor the action plans relating to the implementation of standard operating procedures for all programmes;
• The strengthening of systems to plan, collate and report on performance information would contribute towards creating and sustaining a control environment that supports the quality and reliability of the annual performance report.

Parliament had reasonable systems of internal control; however, it was encouraged to seek continuous improvements in implementing effective human resource management controls, developing standard operating procedures and maintaining proper records for reporting on predetermined objectives, and monitoring the implementation of its action plans for internal control deficiencies reported. The first levels of assurance provided in the area of financial and performance reporting should furthermore be strengthened to avoid repeat audit findings. While there had been stability in the leadership of Parliament, the senior management vacancy rate of 29.41% was the same as for the previous year because of the strategic austerity initiative to freeze certain posts.

The Parliament had adequate controls with regard to information technology (IT) governance, IT service continuity, physical and environmental controls, problem and incident management, change management and user account management.

Mr Zungu said that his office had not met with the executive authority during the past year. However, it had assessed the executive authority as having performed their oversight functions adequately, as evidenced by the sustained clean audit outcome. The executive authority should further ensure continuous monitoring of commitments made by the accounting officer to address audit findings and key controls to ensure the sustainability of the audit outcome. Internal audit and the audit committee continued to perform their functions in accordance with their mandate.

In his conclusion, he said that the Secretary to Parliament and management should continue to work towards improving the key controls, addressing previously identified root causes, and ensuring that there were improvements in the key risk areas. This would provide assurance on the quality of the financial statements and performance reports, as well as ensuring compliance with key legislation.

Parliamentary Researchers: Presentation
Mr Mbuyiselo Hlekiso, Researcher: Parliamentary Research Unit, took the Members through the expenditure performances of the programmes. Programme 1 had overspent by 26.1% of its allocation and achieved only five out of eight targets (62.7%). Programme 2, which deals with legislative oversight, was described as the worst performing programme. It had 16 targets and achieved only six. This programme had the second highest vacancy rate, compared to other programmes, and had achieved only 37.5% of its targets. Programmes 4 and 5 had both spent almost all of their budgets, but had achieved only 50% of their performance targets.

Mr Phelelani Dlomo, Researcher: Parliamentary Research Unit, said that the Auditor-General had made an independent assessment of the financial statements of Parliament, and given a professional opinion that these statements were a fair representation of Parliament’s financial position. Therefore, although there were more than two financial statements, the analysis had paid special attention to two key financial statements known as the income statement and balance sheet. These statements were an encounter in the oversight role of the Joint Standing Committee on Financial Management Act of Parliament (JSCFMAP). The bottom line was that overseeing the financial affairs of Parliament was the key responsibility of the JSCFMAP.

Tabling the income highlights, he said that Parliament was heavily dependent on the fiscus. More than 90% percent of its budget was funded from the National Revenue Account (NRA). Parliament generates less than 10% revenue, which includes earned interest from its investments, donations and debtors. It had generated total revenue of R 29.897 million in 2015/16, down by R5.814 million from R35.711 million in 2014/15.

In addition to the annual appropriation, Parliament receives statutory appropriation which is allocated for the remuneration of Members of Parliament. Unlike the annual appropriation, the statutory allocation was a direct charge from the National Revenue Account. The statutory allocation had amounted to R440.296 million in 2016, decreasing by R40.710 million from R481.006 million in 2015.

Donations had amounted to R38.95 million in 2016. In 2014 and 2015, the financial statements had not reflected donations as a stand-alone item. Therefore, the amounts donated in those years were unknown.

Parliament’s total income amounted to R2 103.381 billion in 2016, increasing by R86.068 million from R2 024.887 billion in 2015. The total income of Parliament included the annual appropriation, statutory appropriation, revenue generated (earned interest and revenue from operations) and donations.

Reporting on the expenditure highlights, he said that Parliament’s expenditure had exceeded income over the three consecutive years that were under review. Total expenditure in 2016 had amounted to R2 209.880 billion, resulting in a deficit of R110.272 million. The combined total deficits for 2016, 2015 and 2014 had amounted to R437.531 million as at 31 March 2016.

On 31 March 2016, Parliament had total assets of R537.371 million against a total liability of R1 516.181 billion, reflecting an accumulated deficit of R978.81 million over many years.

The researcher pointed out that R653 000 in irregular expenditure had been incurred in 2016. However, the accumulated irregular expenditure over the years amounted to R15. 483 million. Irregularities included:

• Tax certificates not provided: R245 000;
• Supply chain management processes not followed: R2 133 000;
• Use of service provider after contract expired: R11 751 000;
• Procurement of goods without prior approval: R1 119 000;
• Procurement without formal contract: R11 000.

It was also reported that R276 000 in fruitless and wasteful expenditure had been incurred in 2016. However, the fruitless and wasteful expenditure that had been incurred over the years amounted to R830 000. This included:

• Traffic fines and administration fees: R13 000;
• Cancellation fees for investigations: R206 000;
• Interest on late payments: R218 000;
• Damage to hired goods: R18 000:
• Backlog due to unavailability of Parliament staff: R257 000.

As at 31 March 2016, a loss of R3.773 million on the disposal of assets was recorded in the income statement.

With regard to governance issues, the audit committee of Parliament had not taken into account the fact that Parliament had operated with a deficit for more than three years, and in all of its reports (2014, 2015 and 2016) had not realised that a deficit may pose the risk of Parliament not meeting its obligations to pay its creditors. The risk management process had not fully matured due to the fact that the risk management policy, risk management framework and risk management strategy were still in the development stage. The internal audit unit had conducted an audit which had identified opportunities for further improvement.

Mr Dlomo alerted the Committee that Parliament had operated with a deficit during the years under review, and wanted to know where the problems in the budgeting process were, because there were inefficiencies in this process. The total deficit over the period of three years (2016, 2015 and 2014) added up to R437.531 million. The recurrence of a deficit should be avoided, as it may prevent Parliament from achieving its mission and objectives.

Discussion

Mr N Singh (IFP) wanted to know if AGSA was considering the issue of a deficit as a going concern. How many beneficial and constructive meetings had AGSA held with the executive authority? He enquired why no analysis had been done on the Parliamentary Budget Office. Had any in-depth analysis been done on the value for money now that there was outsourcing, as there had been talk of in-sourcing catering services? Lastly, he wanted to find out when last a human resources (HR) needs analysis had been carried out.

Mr Zungu responded on the deficit issue, and explained that if Parliament were a stand-alone entity, it would be a going concern, and this would be an issue for the AG. Parliament had incurred a deficit of R110m. There was a need to know what had brought it into this situation. Parliament had had to provide medical aid cover for current and previous members. This process was done yearly. There had been an increase in its liability and that had increased the deficit. However, there was no way that Parliament would not be able to pay for the deficit, because it had the National Treasury to back it up.

Regarding meetings with the executive authority, he said meetings had not taken place during 2015/16.

He said the Auditor General (AG) had got no right to conduct an analysis on the Parliamentary Budget Office. No detailed work had been done, but the AG had looked at the salaries paid to staff in that office.

In respect of the catering services, the AG was not in a position to look into that issue. AGSA did not do value-for-money audits.

Regarding an HR needs analysis, a person had been appointed to do a feasibility study and look at the number of available posts.

Mr M Waters (DA) asked how often AGSA met with Parliament. He wanted to know if there had been any correspondence between the Secretary of Parliament and the executive authority on the issue of fruitless expenditure, which had increased to R830 000,

Mr Zungu said that AGSA met regularly with Parliament to discuss issues raised in the audit. It met quarterly with the Secretary of Parliament. Regarding fruitless expenditure, he said the only thing that needed to be tightened and strengthened was the controls.

Ms T Motara (ANC) wanted to know where the problems were in the budgeting process, because that was where there were inefficiencies.

Mr Zungu said that this was not something AGSA looked at in the audit. AGSA looked at what was reported in the performance report to see if it was in line with reality.

The Chairperson asked Members to reserve some of their questions for when they met the management of Parliament for consideration of the Parliamentary Annual Report for 2015/16.

National Education, Health and Allied Workers Union (NEHAWU): Presentation

A shop steward from NEHAWU reported on two issues. Firstly, he told the Committee that seven members had been suspended last year, and secondly, that there were too many vacancies, and this was affecting the performance of the workers. Money had been budgeted for vacancies, but the Parliament had said that there were no funds available. Vacancies were advertised and people were interviewed, but the union gets told there was no money for filling the positions.

Adoption of Minutes

Mr Singh moved the adoption of the minutes of 23 September 2016

Mr C de Beer (ANC) seconded, and the minutes were adopted.

The meeting was adjourned.