The AGSA said that the audit of the Department of Defence (DOD) and the Special Defence Account (SDA) was outstanding because there was a significant matter that had not been resolved with regard to whether the SDA was a separate legal entity, and whether the financial transactions needed to be separate. The AGSA would therefore focus only on the Department of Military Veterans (DMV), the Castle Control Board (CCB) and Armscor.
The CCB had received a clean audit opinion. Its concern was that it did not control the entire Castle precinct, and this complicated management. There was ill-discipline among the soldiers, which was giving the Castle a bad image. The CCB was requesting an extra R4.5m from the Department, and sought the Committee’s support.
The DMV reported that it had spent 84.5% of its budget, but had achieved a 61% success rate for its programme performance. It should be commended for having no unauthorized expenditure, as well as for having an unqualified audit opinion.
Armscor said that a key issue was that the SA navy dockyard was involved in a potential transfer, and there was need for a status update on the matter. The outstanding Defence Industrial Participation (DIP) agreement from the strategic defence procurement process should be finalised so that commercial opportunities could be exploited on contracting.
Office of the Auditor General of South Africa (AGSA)
Mr Lourens van Vuuren, Business Executive: AGSA, introduced the AGSA team and highlighted the presentation.
Mr Solly Jiyana, Senior Manager: AGSA, said the AGSA’s mode of presentation had been amended, as they now started with the audit opinion. This was unlike previously, where the role of the AGSA and its objectives were communicated first. Their role in that arrangement was to make sure that they assisted the Portfolio Committee in its oversight when they produced the Budgetary Review and Recommendation Report (BRRR). The AGSA also examined the areas of fair presentation and the reliability of financial statements, reliable and credible performance information for predetermined objectives, and compliance with key legislation on financial and performance management.
Ms Mbali Tsotetsi, Senior Manager-Auditor General, talked about the key audit outcomes for 2016/17 and said that the audit of the Department of Defence (DOD) and the Special Defence Account (SDA) was outstanding, so they would focus only on the Department of Military Veterans (DMV), the Castle Control Board (CCB) and Armscor.
Mr S Marais (DA) expressed his concern about the importance of the DOD audit, and wanted to know the reason behind the outstanding report.
Ms Tsotetsi responded that there was a significant matter that had not been resolved. The AGSA had come to a conclusion that the SDA was not a separate legal entity, with no separate legal spending, so the implications on the financial reporting side were that it had to be included in the financial statement of the DOD. However, there had been no agreement between the DOD and the AGSA, as the DOD did not agree with that view. There had been discussions between the Treasury, the DOD and the AGSA on the matter, but it had not been resolved. She added that she was sure the Committee had seen the section 65 letter from the Minister on why the DOD report could not be tabled.
There had been an overall improvement in the auditees’ performances, and the DMV had moved from a qualified opinion to an unqualified opinion, with findings. Prior issues around asset management had been resolved, but there still concerns with regard to compliance with laws and regulations.
She said that the AGSA did not have findings in the annual performance plan (APP) for the CCB and Armscor, but did have findings for the DMV. The findings impacted on empowerment, stakeholder management and socio-economic support, which were the core functions of the DOD. There had been 87% spending of the overall budget, but only 55% achievement of planned targets. All key areas for Armscor were in place, except for information communication technology (ICT) governance and design and implementation of ICT controls. She did not have the budget amounts for Armscor, as this was not broken down in their corporate plan, and did not have findings with regard to its role of supporting the DOD.
The areas of concern for the DMV were on oversight responsibility, and policies and procedures. However, all the financial areas required intervention due to compliance and reporting issues, and this also applied to the governance area. The areas of internal audit were of concern due to capacity challenges, as the structures did not allow for the Department to have adequate people within internal audit. This directly impacted on the audits, as the internal audit was responsible for reviewing internal controls.
Ms Tsotetsi said AGSA had identified two indicators as key audit projects for the DMV. These were education support, where they had achieved 179% of their plan, and a project for the provision of housing, where they had achieved 17% of their plan for the financial year. There were no regulations that guided the provision of education support, but there was a policy in the pipeline. There was concern about inefficiency in the provision of housing which was related to the coordination with municipalities regarding services, inefficient housing project management and no approved policy guiding housing provision within the Department.
The reason for the negative indicators they had picked up at Armscor was the cut in funding they had received, despite their operations remaining the same. For the DMV, the issue was not paying creditors in 20 days, which had resulted in increased accruals. There had also been an increase in fruitless and wasteful expenditure.
She said that the key commitments by the Minister were in progress, but fast-tracking the filling of vacancies had not been implemented. She asked the Committee to follow up on the amendment of regulations for the DMV.
The Chairperson advised the Committee that since the DOD would be presenting their annual report soon, they should keep in mind the information and be ready to engage on the matters that had been raised. He also urged the Members to look at the AGSA’s revised audit methodology.
Mr S Esau (DA) referred to the concerns from the DMV and Armscor on ICT and governance, as well as performance management, and wanted to know whether there had been an intervention by Armscor regarding the database. Was the filtering of information that was done by Armscor being hampered, since it was also dealing with IT issues? Was the AGSA concerned about this? He asked how the figure of 298 houses in the housing provision project had been audited, and if houses being built in the local municipalities had been taken into consideration. The Acting DG had stated that the DMV’s education support was following an internal policy, but the AGSA had said there was no policy, so he wanted to know what where the policy guidelines could be found and where the money overspent on education had been transferred to, as people were using this for their personal benefit. He said that there were many challenges regarding the provision of houses to military veterans due to various third parties and engagements had been made for various options and initiatives, so he wanted to know if those options had been noted.
Ms N Dambuza (ANC) said she was not convinced with the issues of performance, and she wanted to know exactly the stance of the report since it was unqualified, yet there were performance-related issues in it.
Ms Tsotetsi responded that the matter of key controls, and Armscor helping the DMV with the database, were not related as the review had been done separately without looking at the involvement of Armscor. What Armscor was doing was just verifying whether the people in the database were actually military veterans in order for the DMV to have a reliable database. Therefore it was clearly just a cleaning exercise, and not necessarily IT work.
For three financial years, the AGSA had been auditing the targeted achievements of the DMV and had actually gone to check the houses physically. In other areas, they had audited the sample but overall they were satisfied and had reached the 298 figure as a consolidated figure over the years. They did have a draft housing policy, but it was not finalised so implementation was hard. The AGSA recommended expediting approval of the policy.
Regarding overspending on education support and fund shifting, she said the DMV had mechanisms that allowed funds to be moved from non-progressing areas to high demand areas. Treasury had approved it and the AGSA had audited it. The policy for education support had not been implemented because consultations had not been finalised. The report had been unqualified, with findings, and had focused only on financial issues, but material findings had been reported and the AGSA was escalating them, but they did not yet impact on the audit opinion.
Mr Van Vuuren commented on the performance information, saying that the focus was not whether targets were achieved or not, but whether it had been reported accurately to the user of the financial statement. On the issue of funds shifting, there was an appropriation account in the reports, and looking at that would help the Committee to understand the context.
Mr Marais asked if the education policy not being approved meant that the money was not being handed out to the bursary applicants, or anyone else.
Ms Tsotetsi responded that the money was paid out to everyone who had been approved by the Department.
Mr D Gamede (ANC) said the AGSA’s opinion was that there had been an improvement, but it would assist the Committee if they would clearly say what position they were coming from to the present progressive position.
The Chairperson asked the account advisers from the CCB, the DMV and Armscor to focus on the key areas and not make a repetition of the issues outlined already. He added that the critical issue of the tabling of the DMV annual report had to be resolved, and a legal opinion must be sought, with the AGSA taking a more active role while allowing the law to be the beacon to follow.
Mr Marais suggested that the Committee should write to the Department and the Minister stating that it accepted the opinion of the technical advisor and the AGSA, and request that the SDA and DoD figures be combined so that the annual report could be tabled.
Mr Van Vuuren clarified that the issue was whether the SDA was a legally accepted entity, and the opinion from the state law advisors had confirmed that it was not a legally accepted entity, and therefore not an entity in terms of the PFMA. For accounting purposes, it had to be accounted in one set of financial statements despite having separate account. However, the Department did not agree.
Ms Tsotetsi said that the PFMA amendment in 2005 had changed only the reference chapters, but the bulk of the Act itself had not changed.
Mr Gamede wanted to know how the audit criteria had been applied in the previous 22 years.
Mr Marais commented that the issue involved the classified nature of the funds, which meant they were not disclosed. He asked how the classified funds were audited.
Mr Van Vuuren responded that there was a qualification based on a certain scope, due to the limitations. He contended that there could be a separate set of transactions for the SDA, but they would have to be included in the DOD as well, and that was where the challenge was. Accounting standards and principles required them to be treated in one statement, and this was the issue.
The Chairperson closed the discussion by saying the Department and the AGSA had to engage and agree on the way forward so that the DOD report could be tabled.
Mr Marais said that he understood what the Chairperson was saying and that a consolidated report needed to be made with both sides in agreement, as the PFMA and legal entity laws fell under the same umbrella and a compromise could be reached.
Castle Control Board (CCB)
The CCB asked the Committee to take note of the fact that it had received a clean audit opinion. The CCB did not control the entire precinct of the Castle, and that complicated management. There was ill-discipline among the soldiers which was giving the Castle a bad image. It was requesting an extra R4.5m from the Department, which was a concern that the Committee should address. The accumulated surplus had decreased and the revenue deficit had increased, and this was a big challenge. There had been an irregular expenditure of about R1.7 million that had been condoned by the board.
Mr Marais observed that it seemed the CCB had set targets that were not sustainable in the past three years, but financially they had not performed.
Ms Tsotetsi said that the issue of financial sustainability for the CCB had not come up in the AGSA’s analysis, but there could have been an issue with the financial indicators. The overspending had been attributed to the 350th anniversary festivities of the CCB during the year.
Mr Esau said that the Chief Executive Officer (CEO) of the CCB had promised a revenue generation strategy, and in the three years the performance targets had been changed. Had the AG raised a concern about this?
Ms Tsotetsi said there was finding that the targets were not attainable, and they had gone back to the original target measurement.
Department of Military Veterans (DMV)
The DMV said it had spent 99.2% of its administration budget, 77.7% of the socio-economic support budget, and 82.7% of its allocation for empowerment and stakeholder management. Total expenditure amounted to 84.5% of the budget. The Department had had no unauthorized expenditure and should be commended for this, as well as for having an unqualified audit opinion. The programme performance had a 61% success rate.
Mr Wilhelm Janse van Rensburg, Researcher: Joint Standing Committee (JSC) on Defence, said that key issues were that the SA Navy dockyard was involved in a potential transfer, and there was need for a status update on it. There was need to finalise the outstanding Defence Industrial Participation (DIP) agreement from the strategic defence procurement process, and commercial opportunities needed to be exploited on contracting. There had been a clean audit finding, and this had to be maintained.
The Chairperson emphasised the need for engagement between the AGSA, the Department and technical advisors to reach an agreement for the DMV annual report to be tabled.
The meeting was adjourned.
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