Justice and Constitutional Development Department 2001/2002: hearing

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Meeting Summary

A summary of this committee meeting is not yet available.

Meeting report

25 June 2003

Chairperson: Mr F Beukman (NNP)

Documents handed out:
Department of Justice and Constitutional Development Annual Report 2001/2002
Auditor General's Report 2001/2002 (see Appendix)

The Department of Justice and Constitutional Development received a qualified report from the Auditor-General for 2001/2. Of particular concern in that report, were the numerous vacancies which existed in the Department, poor training of staff, lack of supervision and review of managers, poor discipline amongst staff, the culture of non-compliance and the overall lack of accountability. There were also poor control systems in place. These issues within the Department had posed problems for a considerable length of time. Following on-site visits by a SCOPA workgroup to Justice offices in Kwazulu-Natal and the Eastern Cape, which corroborated these concerns, the Committee called the Department in for a meeting.

The Director-General conceded that major problems had existed within the department. However, he assured the Committee that the Department had considerably improved its financial management, and that these problems were being dealt with, with various systems being put in place.

Though SCOPA acknowledged the improvements that had been made, it was concerned that there was no clear commitment from management about the time frames for when the problems would be under control.

Opening Remarks: Ms P. Mothoagae (Group Convenor)
Ms Mothoagae (ANC) stated that SCOPA had undertaken site visits to the Eastern Cape and Kwazulu-Natal, which indicated to them the need to meet with the Department. The Committee appreciated what the Department was doing in order to improve itself. However, she said that the Department still faced major challenges.

SCOPA planned to engage the Department in the following broad areas:
- The Paymaster-General Account. The Chairperson, Mr F Beukman, would be in charge of questioning here.
- Revenue and asset management would be dealt with by Mr B. Bell.
- Suspense accounts would be allocated to Ms P. Mothoagae.
- Unauthorised expenditure had been linked to budgetary control, and would be dealt with by Mr A. Mofokeng.
- Monies in trust, which included bail and maintenance monies, amounting R830 million. Mr V. Smith would deal with these questions.
- The internal control and internal audit unit would be handled by Mr M. Robertson, assisted by the Chair.
- People issues, relating to training and staff matters, would be dealt with by Mr B. Kannemeyer.

The Justice and Constitutional Development's Director-General, Mr Vusi Pikoli, was given an opportunity to address the Committee.

The Director-General reported that the Department had moved forward considerably, so that their position was not now what it had been two or three years before. They were attending to the issues which Ms Mothoagae had raised. A number of people who had been found to be in breach of the Department's operations, had been dismissed.

He informed the Committee that the Department was working towards a report which would be classified in Category C.

1. People Issues: Mr B. Kannemeyer
Mr Kannemeyer (ANC) stated that the nature of the hearings were such that the Committee would not dwell on the good work that had been achieved by the Department. SCOPA acknowledged the fact that a considerable effort had been made to turn the bad situation in the Department around, and Parliament as a whole was aware of the situation which the Director-General had inherited in the Department.

SCOPA was concerned about the turnaround time of dealing with the issues that had been raised in the Auditor-General's report. The key focus would be those problematic areas that were recurrent, as well as new issues that had emerged.

The Committee was quite happy about the strides the Department had made in terms of putting systems in place to a fair extent. However, the Auditor-General's report indicated that in the area of people, including staff management and training, there was still some space to be covered.

On the matter of institutionalisation of processes, they hoped the Department would succeed in institutionalising good practices, while not building good practices around individuals. Such a situation would mean that things would run smoothly only for as long as those individuals were around. However, in the event that they left, things could fall apart. By way of illustration, he said that SCOPA had requested information from the Department, and because one or two key people were not available, they were given the wrong information. Only on the availability of the Chief Financial Officer (CFO), were they able to receive the correct information.

He commended the Department for the processes of appointing operations managers. He asked what the objective with regard to these appointments had been, and where these managers stood in relation to the court managers.

The Director-General stated that the Department was attempting to increase the necessary capacity of managers in the Department. The wide geographic scope of the Department's offices throughout the country made the span of control extremely difficult. The idea of appointing operations managers was to break the country down into operational clusters, in order to facilitate administration. For this purpose, fifty operations managers had been appointed countrywide.
The idea was that the Regional Financial Directors would be able to liase directly with the operations managers. In the past, the Department's structures had not allowed for that type of interaction.

Mr Kannemeyer commented that the appointment of operations managers were fairly important in terms of turning around the state of financial administration in the Department generally. He established, with the help of the Director-General, that about ten clusters had been created, which would be serviced by the operations managers. He further established that, in order for these people to assist the Regional Financial Directors, they would require some financial experience or expertise. In the light of that, he asked what the required minimum entry level had been, in advertising these posts.

The Director-General responded that the minimum qualifications had been a Matriculation Certificate. However, he stated that a number of those people who had been employed as operations managers, had experience within the Department of 10½ years.

Mr Kannemeyer commented he was pleased that a fair number of people from the private sector had been employed. However, he questioned if they had the relevant experience.

In terms of the environment, Mr Kannemeyer stated that it would become clear that the Department was winning the battle, when it was no longer necessary for them to use the threat of disciplinary action against employees. There were currently approximately 28 projects underway in the Department, of which three had been finalised. He asked if the Department was not attempting to do too much at the same time, and thereby losing focus. He asked to be given a sense of order of priority for these projects, as well as a sense of time frames for completion thereof.

The Director-General responded that the Department had listed the projects into about five broad areas, in order to facilitate operations.

2. Paymaster-General Account: Mr F. Beukman
Mr Beukman (ANC) asked that the Director-General indicate what controls, including supervision and review, had been implemented to ensure the Paymaster-General account was reconciled on a monthly basis.

The Director-General, Mr Vusi Pikoli, responded that it had taken the Department some time, but he was happy to report that the account was, indeed, being reconciled on a monthly basis. This would be reflected on their accounting system.

The Centre Manager (Auditor-General's office), Mr Imraan Jeewa, confirmed that significant progress had been made with regard to the reconciliation of the Paymaster-General account.

The Chairperson asked if the Director-General could confirm that all reconciling items had been adequately validated and analysed to ensure that long-outstanding items had been cleared.

The Director-General responded that a major problem was experienced with the suspense account, and the Department was attempting to clear the account. However, it transpired that in 1992, a circular had been issued instructing employees to destroy all documentation after a six-month period. The Department had in 2002, issued another circular, instructing employees that the instructions of the 1992 circular were no longer to be followed.

The Chairperson asked what the minimum retention period for documentation was presently, and if there was an adequate monitoring process, to assist management to ensure that the instructions of 2002 were being followed.

The Operations Managers had the responsibility to check that the new instructions were being carried out. National Treasury guidelines stipulated appropriate retention periods of documentation.

Mr B Nair (ANC) felt that, if National Treasury stipulated guidelines for documentation retention, then any circular carrying contradicting instructions, were clearly in violation of such guidelines. He found it hard to understand how such instructions could have been issued, and followed.

The Director-General responded that this was a problem that had now been corrected. The only way in which documents could now be destroyed, was in line with official instructions. He stated further that this had been one of the biggest problems experienced in the Department, as documentation could not be traced. However, Departmental officials had come in line, and were now in compliance with the PFMA.

Mr Alan Mackenzie (CFO) stated that the circular of which the Director-General had spoken, was in reality meant for the destruction of copies. However, officials had misinterpreted this to mean that all documents, including originals, were to be destroyed.

The Chairperson asked if the Department had instituted disciplinary action against staff members who did not adhere to controls on document maintenance.

The Director-General responded that he had not received any information that any staff members were not in compliance with instructions on document retention.

The Chairperson asked what steps had been taken to resolve the Paymaster-General adjustment account, which reflected errors of R24 million at year-end, and required investigations and corrections by National Treasury.

The Director-General responded that the Department was engaging with National Treasury on the matter, which had not yet been finalised.

3. Revenue: Mr B Bell
Mr Bell (DA) stated that any revenue owned by a Department, over and above voted funds, was to be paid back to National Treasury. It seemed that some regional officers were paying back revenue funds, but those payments were not being received. He asked what measures had been implemented to ensure that all revenue earned by the Department, was recorded on the Financial Management Systems (FMS) package.

The Director-General agreed that originally, there had been uncertainty regarding payments made, and where they had come from. Since then, the Department was better able to deal with the matter.

Mr Bell asked if the Department could provide assurance that it was able to clearly indicate which revenue belonged to the department, and which revenue was attributable to the trust fund.

Mr Mackenzie stated that the Department was able to differentiate between the two accounts. However, the Department had identified three categories of income. These were voted funds, trust funds, and a third, unclassified category, where monies were being received which the Department was unsure of. In the current financial year, they have an unclassified income of R177 million.

Mr Bell asked what was being done about the huge sum of money which the Department was receiving, and could not account for.

Mr A Mackenzie stated that, with regard to the Monies in Trust account, the Department had asked for a thirteen-digit code to be applied to each payment source, which the Department could then reference. The depositor is asked to quote the thirteen-digit code when sending money. Furthermore, he acknowledged that the Department was faced with a problem. However, through employing more banking sector techniques, they hoped to improve the recording of income.

The Mr Jeewa stated that the unclassified category was the receipts expense account, which was currently work in progress.

Mr Bell asked if a monthly reconciliation was performed between confirmations received from the South African Revenue Service (SARS) and the accounting records of the Department.

The Director-General responded in the affirmative.

Ms Sandra Gomm (Department) offered that in the previous year, the Department had identified the amounts which had not been recorded by FMS. Those amounts include masters funds and court funds. On a monthly basis, revenue paid over by Justice offices directly, was being reconciled at the national office.

In closing his own session of questioning, Mr Bell appealed to the Department to ensure that they did not find themselves in a similar situation in the future. He hoped that the measures they were adopting, would bring about the desired turnaround in the Department.

4. Suspense Accounts: Ms P. Mothoagae
Ms Mothoagae asked the Director-General to indicate a time-frame for the completion of the investigative exercise on suspense accounts, and to inform the Committee on any current findings that would require write-offs in addition to the R195 million already identified.

The Director-General stated that this particular problem dated back to 1996. The Department had engaged the services of an agency to ensure that they were able to deal with the matter. The Department had been able to identify the problem in terms of the outstanding R195 million, the bulk of which was R180 million incurred from agency services. The other small amounts were for transactions carried out. They hoped to deal with the matter very soon.

Ms Mothoagae asked how much of the R180 million would be written off.

The Director-General replied that various state departments owed them money. However, because of the lack of supporting documentation, they were unable to back up their claims to those departments. The full amount could not be written off without engaging National Treasury, but it was very likely that the Department would not be able to recover all the money.

Mr V Mbethi (Chief Director: Justice and Protection Services) confirmed this, saying that some factors that came into play here were outstanding balances, and cases where the debtor departments refused to pay, because of a lack of funds. Where the debtor departments admit their liability, National Treasury would subtract that debt from their budget allocation. Where there was no proof of debt, National Treasury would assist the Department to write it off.

Ms Mothoagae asked if the task team had identified any fraudulent, fruitless expenditure transactions allocated to suspense accounts, which had not previously been identified.

The Director-General responded that he was not aware of any fraudulent expenditure.

With regard to the lack of documentation complicating matters, Ms Mothoagae asked what the department was going to do to prevent incurring the same problem for the following report.

The Director-General responded that the outstanding figure had initially been R250 million, and had been brought down to R195 million.

Ms Mothoagae asked if any measures had been implemented to prevent the escalating usage of suspense accounts.

Ms Gomm responded that the monthly analyses of the accounts, were the measures that were put in place for that purpose.

Ms Mothoagae asked if all department staff had been made aware that the incorrect documentation had been circulated with regard to the destruction of documents older than six months, and that it should not be adhered to.

The Director-General responded that instructions to this effect had been issued in the previous year, in a new circular. Because of the new instructions, they did not expect the new 2002/3 Annual Report to have the same problems as were identified in the 2001/2 one.

5. Unauthorised Expenditure and Budget Management: Mr R. Mofokeng
Mr R. Mofokeng (ANC) noted that it was expected that law and order would prevail within the Department of Justice and Constitutional Development. In preparing a departmental budget, discipline should be exercised. For the years 1997 to 2002, the problem existed that the budget had not been correctly administered. He stressed that it might be necessary for the Department to report to SCOPA on a quarterly basis.

He asked the Director-General to provide reasons for the budget not being captured on FMS timeously, and to indicate how regional offices monitored their spending if budgets were not available for benchmarking.

The Director-General stated that he felt it was unacceptable to maintain over-spending. There were historical reasons for the lack of capturing information. The Deputy Director-General was facing disciplinary action for having failed to capture the information onto FMS. That responsibility had been taken away from him. The Department was now establishing a portable database, in order to determine the extent of spending, as well as of overspending.

Mr Mofokeng asked the Director-General to indicate the methods to ensure that budget preparation and devolution of budgets within the various regional offices would be correctly done for monitoring purposes.

The Director-General responded that regional offices were being phased out, and the courts would be the actual operation centres. Operations managers would work closely with the regional directors.

Mr Mofokeng asked what financial reports were being generated for review by the Departmental Budget Committee.

The Director-General responded that the Committee had only started in 2002, to monitor expenditure practices. The practices that were now being followed, differed drastically from past practices. The Department had received an additional R150 million, to deal with overspending. The Department had submitted a report in March, showing a shortfall of about R200 million.

6. Monies In Trust: Mr V. Smith
Mr Smith (ANC) commented that SCOPA was "very uncomfortable" with the contents of the Auditor General report received for the Department. It was his understanding that monies in trust were located in Magistrates' Courts. He asked if the Department had a sense of how much money was kept in the Magistrates' Courts, as at the end of March 2002.

The Director-General agreed that the situation relating to monies in trust was a cause for concern. He reported R1.9 billion in the Guardian Fund. He was not able to say how much money was being kept in terms of maintenance and bail funds. There were historical reasons for this. They were attempting to produce a balance sheet, in order to determine the extent of the Department's liability, in showing how much was owed to members of the public. He said that although there must be huge amounts held in trust, he could give no indication as to how much.

Mr Mackenzie said that the Annual Report had a listing (page 114) of how much money was in the account. The balance sheet, when it was finalised, would show the income, and the amount owing.

Mr Smith wanted to know what was being done about the situation, and asked for a date by when the matter would be resolved. He suggested that this was a very real problem to someone who was depositing maintenance money for his children, adding there was no guarantee that the person for whom the money was meant, would receive it. Someone for whom the money was not meant, could probably walk away with it.

The Director-General responded that National Treasury would have to be engaged in resolving the situation. The valuation of maintenance money was being addressed. He was not comfortable with giving dates at this stage.

Mr Smith asked when all offices administering the trust fund would be computerised.

The Director-General responded that the Department had embarked upon a Digital Nervous System (DNS) project in terms of addressing the present archaic systems.

Mr Smith asked about reconciliation between the FMS and the Bank.

The Director-General responded that the Department was working on the new version of the JADAS system, which was in a piloting phase. The Department was also looking into other software that could be used.

They had experienced problems with lawyers mismanaging the Trust Account, mixing the business account with the Trust Account. He stated that an amount of only R15 000 could be kept as petty cash. When that runs out, money is often borrowed from other accounts. This is a bad practise.

Mr Smith asked to be given some indication that the forensic audits had been concluded, and that at some stage, the situation would be resolved.

The Director-General reported that 207 cases were under investigation, some of those having been reported to the SAPS. He concluded by saying that the matter was being addressed.

Mr Smith asked if everything prior to 2002 was ring-fenced, would the situation in terms of regular reconciliation be entirely resolved.

The Director-General responded that the aim was for the Department to be in a position where it could produce the financial details, which would indicate the extent of the problem. If SCOPA were to agree to write off old debts, the Director-General felt the Department would be able to supply SCOPA with time lines for resolving their internal problems.

Mr Mackenzie said that this was, for the Department, the most important issue. The Department originally undertook to outsource the financial services, by an amount of 15%. The Board's decision was that Mr Mackenzie would be the transaction adviser. Treasury decided that the PPP process, which is a 64-week process, had to be followed by the Department, which meant that they were forced to restart, within the formal PPP process. The Department had subsequently re-engineered itself in order to improve its operations. However, they lacked the facilities and the infrastructure to manage cash.

Mr Smith commented that the conversion to PPP was acceptable, but that recent history had taught that that system was not the panacea of revenue. Transparency and service delivery must still be maintained, and it was not enough to "pass the buck".

7. Asset Management: Mr B. Bell
Mr Bell observed that the Department was still operating on cash bases, as opposed to the accrual system. He asked by when they would convert to the accrual system.

Mr Mackenzie responded that the trend in world-wide accounting was towards the accrual system. However, he said that in South Africa, we could not move to an accrual accounting system on the one hand, without moving to an accrual budget process on the other hand. National Treasury progress towards accrual accounting and Treasury's MTEF budgeting and accounting processes are in line with world-wide trends. The first step is the advanced asset management process, which would lead the Department towards further enactments in accrual accounting.

Mr Bell asked what processes were being implemented by the Department to ensure that the asset registers in the department were accurate, complete and updated in preparation for accrual accounting.

Mr Gumede interjected to state that the law required the conversion to accrual accounting. It was not acceptable to say that the accrual system was impractical.

Ms Mothoagae agreed, saying it was not clear if the Department had already started this move towards accrual accounting, or if they were simply dragging their feet, because of the perceived difficulties.

The Director-General agreed that there was no choice in the matter, as the conversion to the accrual accounting system was required by law. However, that conversion process had been delayed in the Department by its restructuring process. He assured the Committee that the Department did have a draft plan in place to guide the conversion process to accrual accounting.

Mr Mackenzie stated he was in total support of the accrual accounting system. He reiterated that his only reservation that implementation of accrual accounting would "dovetail" against the budgeting account. He confirmed that there was a plan for conversion. For the past two years, he had presented a paper to the private sector, in which he had outlined that plan, and which had been very well-received.

Mr Bell asked if the LOGIS system had been reconciled to the asset registers of the Department.

Mr Mackenzie responded that it had not. There was a project by which the Department was looking at alternatives to the LOGIS system.

Mr Bell asked if the departmental staff were being trained on the requirements and controls of asset management, especially since that had been a repetitive weakness in the Department.

Mr Mackenzie replied that he had been given responsibility for both asset management and procurement. Traditionally, LOGIS would go under the procurement process. Now, however, the LOGIS system was being moved out of procurement, and into accounting. That would improve the process dramatically. They also have a section which deals with contract negotiations. The asset management process was scheduled to be fully operational by March 2004.

Mr Bell commented that there should be a tremendous amount of money tied up in assets. He asked if the Director-General had any idea of what the combined asset value was, and by when such information could be accurately supplied.

Mr Mackenzie said that the Department would report on assets in the next financial statement. Because it was specifically required by the PFMA, this information would therefore be available in that statement.

Mr Bell asked if the Department had quantified the losses, if any, that had occurred as a result of poor asset management.

The Director-General replied that there had been financial losses, and there was a particular section within the Department which was dedicated to tracking the extent of the financial losses due to poor asset management.

Ms Mothoagae asked if the Department saw the matter of poor asset management as an important issue, and if there was a sense of urgency surrounding the problem.

The Director-General responded in the affirmative. Because of their concern, they had implemented various systems to deal with the situation.

Mr Kannemeyer asked why, in the light of the fact that the Department saw asset management as an important factor, the project was unfunded. He informed the Department that, without the existence of an asset register, the Department would have no way of knowing how much they had in terms of assets, especially since various items had been recovered.

The Director-General responded that maintaining a good asset management system was indeed a priority. However, in the light of the budget which was allocated to the Department, and the issues which they had to manage, the Department was compelled to "juggle" the funds which they received.

Mr Mackenzie informed the Committee that all unfunded priorities were proposed to National Treasury. They would then decide which projects were funded, and which were not. In terms of the supplementary requests to Treasury, the Department intended to put this matter very high on their list of budget requests, and hoped that Treasury would supply the funds. He added that the amount requested was an affordable sum for National Treasury to grant.

Mr Kannemeyer stated that when submitting a budget request to National Treasury, the Department normally listed the order of priority. If sufficient pressure, and the proper motivation, were to be applied in requesting the necessary funds for effective asset management, he felt that the funds would most likely be granted, especially since the monies required were not billions, but only a few million rands. Remembering that the Director-General had earlier expressed the desire of the Department to be classified as Category C, one of the important requirements for such categorisation would be the presence of a properly maintained asset register.

8. Internal Audit Unit: Mr F Beukman, Mr M Robertson
Mr Beukman asked the Director-General to indicate what training initiatives were in place to ensure that the staff of the internal audit unit were equipped to perform their duties.

The Director-General stated that the Internal Audit Committee had been established in 1989, adding that the internal audit had concentrated on the control management, risk management, and good governance issues. However, he had also given them some ad hoc functions. The unit accounted to the Audit Committee. The Director-General took responsibility for the training and equipping of staff, from his own office.

Mr Beukman asked if the Director-General was satisfied with the assignments performed in the Department by the Unit.

The response of the Director-General was that progress was being made. He was especially satisfied with the level of qualifications of staff in the internal audit unit.

Mr Robertson asked if the Director-General could provide the Committee with an explanation regarding the methodology adopted by the unit for identifying offices for testing, by the internal audit unit.

The Director-General explained that samples had been taken of offices around the country. The Department was therefore able to identify the best and the worst performing courts. That allowed them to have a special focus on those courts which were not performing well.

9. General - Financial Statements: Mr B Kannemeyer
Mr Kannemeyer asked what the impact was of the ad hoc work assigned to the audit unit by the Director-General.

Mr John Scott (Centre Manager) responded that for the past year, the amount of "firefighting" had affected the focus that should generally be given to normal operations.

Mr Kannemeyer suggested that that was a fairly significant weakness within the internal audit section. Ultimately, the idea should be that space be made for ad hoc work, which would include firefighting.

He added the fact that reliance could not be placed on the work that had been done by the internal audit unit, was another matter for concern.

With regard to monies owing by other departments (page 79, Annexure A of the Annual Report), Mr Kannemeyer asked if interest was being charged to those departments.

Mr Mackenzie answered in the negative.

Mr Kannemeyer asked if he was aware that there were lawful requirements that interest should be levied to those departments who defaulted on paying promptly. He stated the levying of interest was to ensure that accounts were paid on time.

Mr Mbethi reported it was true that interest should be charged on debt to the state, although there was currently no provision for that. Previously though, the stipulation was that interest should be charged to entities outside the state. He committed himself to looking into the matter, in order to give more clarity on the issue.

In his closing statement, the Director-General said that he welcomed interaction of this nature. He thanked the Chairperson for the honest work in terms of his and the Committee's oversight. He reiterated that the Department had indeed implemented efforts towards moving from a Category A to a Category C classification.

Ms Mothoagae made a closing statement on behalf of the Committee. She noted that there had been some errors in the Auditor's report, and was not sure how much those errors affected the status of the report itself. She thanked the Department for their attendance, saying that she was convinced there was an urgency regarding sustainability, efficient management, and so forth. The Committee appreciated what the Department was doing to bring about change. The challenges regarding skills development, staff training, delivery, and others, were still there. The Committee was not sure if there was a lack of understanding within the Department with regard to policy implementation in terms of PFMA requirements. However, National Treasury would be assisting the Department.

The Chairperson thanked everyone for their attendance. He said it was important that the position in which the Department of Justice and Constitutional Development found themselves, should be rectified. In the first part of the proceedings, the accounting officer had given clear undertakings with regard to very important issues. In the second part of the proceedings, information had been offered that must be followed up in the next year by the office of the Auditor-General. SCOPA would monitor the situation on a continual basis.

At this stage, the members of the Department of Justice and Constitutional Development left the chamber, in order to allow the Committee to proceed with its internal evaluation of the proceedings.

Report of the Auditor-General for the year ended 31 March 2002 (Excluding NPA)
Department of Justice and Constitutional Development

1. Audit Assignment

The financial statements as set out on pages 32 to 79, for the year ended 31 March 2002, have been audited in terms of section 188 of the Constitution of the Republic of South Africa, 1996 (Act No. 108 of 1996), read with sections 3 and 5 of the Auditor-General Act, 1995 (Act No. 12 of 1995). These financial statements, the maintenance of effective control measures and compliance with relevant laws and regulations are the responsibility of the accounting officer. My responsibility is to express an opinion on these financial statements, based on the audit.

2. Nature and Scope
The audit was conducted in accordance with Statements of South African Auditing Standards. Those standards require that I plan and perform the audit to obtain reasonable assurance that the financial statements are free of material misstatement. An audit includes: • examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, • assessing the accounting principles used and significant estimates made by management, and • evaluating the overall financial statement presentation. Furthermore, an audit includes an examination, on a test basis, of evidence supporting compliance in all material respects with the relevant laws and regulations which came to my attention and are applicable to financial matters. I believe that the audit provides a reasonable basis for my opinion.

3. Qualification

3.1 Paymaster-General account

The following material misstatements have been identified: Report of the Auditor-General

(a) Unsupported payments totalling R15 million, which were cleared by the bank, were not recorded on the Financial Management System (FMS) as expenditure.

(b) Significant interface problems were experienced between the department's bank accounts and corporate banks, the Reserve Bank and the National Treasury. This had the following effect:

• A net overstatement of the paymaster-general (PMG) account balance by R3,3 million relating to outstanding warrant vouchers and deposits. A full reconciliation has not been completed and this amount cannot be viewed as complete and accurate.

• Duplicate entries amounting to R46 million were included in the department's accounts with the corporate banks. It was not possible to correct these transactions on the financial statements due to the uncertainty regarding the completeness of entries processed on the FMS.

• The Paymaster-General adjustment account balance of R24,2 million at year-end reflected errors which had not been cleared by National Treasury, required correction at year-end.

3.2 Revenue

Included in revenue is an amount of R5,6 million that was not recorded on the FMS. Uncertainty exists regarding the allocation of this revenue to the department's financial statements as opposed to the financial records for monies in trust.

3.3 Suspense and disallowance accounts

For three consecutive years it was reported that an action plan for the timely analysis and follow-up of suspense and disallowance accounts was implemented in the department. Accounts are being analysed by a special task team, but the balances disclosed for these accounts still include the following:

(a) Transactions totalling R36 million have been uncleared for more than one year. Uncertainty exists with regard to the recoverability of these long outstanding amounts and the possible effect on the balances disclosed in the financial statements.

(b) Significant differences between interdepartmental balances amounting to R2,8 million for debtor (due by) departments and R6,4 million for creditor (due to) departments. These differences have neither been resolved nor recorded as prescribed by the National Treasury's guide for the preparation of annual reports of departments. Uncertainty exists with regard to the validity and accuracy of the debtors and creditors reflected in the balance sheet.

(c) The department was unable to provide a breakdown per department of receivables of R14,5 million for agency services, which are older than one year.

4. Qualified Audit Opinion

In my opinion, except for the effect on the financial statements of the matters referred to in paragraph 3, the financial statements fairly present, in all material respects, the financial position of the Department of Justice and Constitutional Development at 31 March 2002 and the results of its operations and cash flows for the year then ended in accordance with prescribed accounting practice.

5. Emphasis of Matter

Without further qualifying the audit opinion expressed above, attention is drawn to the following matters:

5.1 Matters not affecting the financial statements

5.1.1 Financial management

The implementation of the Public Finance Management Act, 1999 (Act No. 1 of 1999) (PFMA) is a key element in a set of reforms to the management of public finances. It represents major challenges to all departments and those officials responsible for the management of finances in the public sector. The National Treasury has developed regulations in terms of the PFMA to help improve financial management, but the process of implementation will take some time to complete.

The department's plans to increase the financial skills of its accounting staff are progressing very slowly and the implementation of improved financial business systems to enhance financial management and improve accountability and disclosure is taking much longer than anticipated. This resulted in continued inefficiencies in internal control systems and procedures relating to the following areas:

• Management of debtors
• Administration of employees' leave
• Accounting for unrecorded liabilities (Refer to paragraph 5.1.2)
• Management of donor funds (Refer to paragraph 5.1.3)
• Administration of employees' payables
• Management of trust funds (Refer to separate report on monies in trust)
• Management of assets (Refer to paragraph 5.1.6)
• Application of delegated authority
• Reconciliation of operating and financial systems
• Budgeting and budgetary control and monitoring at regional level
5.1.2 Contingent liability

(a) Housing guarantees - Disclosed in the contents of note 27 to the financial statements is an amount of R23,9 million as a contingent liability for housing guarantees of employees. As reported previously, the audit again revealed differences between reports generated by the PERSAL system, the guarantee register (kept manually) and information on the files. This lack of control limits the department's ability to assess the exposure in terms of the Housing Guarantee Policy. Files with no or insufficient documentation relating to guarantees were also identified.

5.1.3 Donor funding
Transactions totalling R123 000 were not substantiated by sufficient supporting documentation and the accounting entries could therefore not be verified. Certain project managers had not been appointed by the accounting officer before the commencement of the project, as required by the donor agreement.

5.1.4 Non-compliance with the Public Finance Management Act

(a) Section 38(f) - Processing backlogs resulted in payments to hospitals for psychiatric observation not being made on time. On various occasions there were accounts that were not settled within the prescribed period as referred to in the PFMA.

(b) Section 42 - Asset transfers of computer servers from the South African Police Service to the value of R70 million have not been made in accordance with the PFMA.

5.1.5 Separate accountability for the National Prosecuting Authority

For the fiscal budgetary purpose the National Prosecuting Authority (NPA) is included in the Department's annual budget as a programme.With approval the NPA has established separate accountability and financial statements have been prepared for the 2001 financial year. A separate audit report will therefore be issued for publishing in the annual report of the NPA.
The department will also prepare consolidated financial statements to combine its results with that of the NPA.

5.1.6 Control over assets (inventory and equipment)

Various shortcomings in the control over assets that had been reported on in my previous audit reports were identified again. The following matters resulted in an inability to always verify the existence and completeness of stock, furniture and equipment:

(a) Delays in the processing of asset disposal transactions resulted in equipment disposals not being captured on LOGIS on time. The value of assets on LOGIS at year-end was overstated.

(b) Asset and inventory registers have not been updated to reflect disposals, transfers, purchases, damaged assets and obsolete inventory items.

(c) Assets are not marked as prescribed, resulting in difficulty to identify specific assets on LOGIS.

(d) Prescribed provisioning administration forms, records and cards for the manual system were not used at some suboffices.

(e) Asset registers were not maintained at various suboffices.

(f) Annual stocktaking of inventory and equipment was not performed, leaving shortages unaccounted for.

(g) Adequate segregation of duties between ordering, receiving and record-keeping functions in suboffices did not always occur.

(h) Obsolete stock items have not been written off in terms of the Department's financial instructions.

5.2 Performance audit

During the year under review a performance audit of procurement management by the Department was conducted. The audit has been completed and a separate report will be issued.

5.3 Forensic audit

During the year under review a forensic investigation was undertaken at the request of the Department, at a number of regional offices throughout the country. This investigation has not been finalised and a separate report will be issued thereafter.

6. Appreciation

The assistance rendered by the staff of the Department of Justice and Constitutional Development during the audit is sincerely appreciated.

S A Fakie
Auditor-General Pretoria


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