National Treasury audit: Auditor-General briefing

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Finance Standing Committee

10 October 2018
Chairperson: Ms D Mahlangu (ANC) (Acting)
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Meeting Summary

The Committee received a briefing from the Auditor-General South Africa (AGSA) on audit outcomes of 14 auditees in the National Treasury (Finance) Portfolio. The role of the AGSA is to reflect on the audit work performed to assist the Committee in its oversight role of assessing the performance of the entities taking into consideration the objective of the committee to produce a Budgetary Review and Recommendations Report (BRRR).

On the 2017/18 audit outcomes, 46% of the 14 auditees received clean audits, and 77% were found to have quality financial statements. In comparison to the previous year, there was a regression from 69% to 54% in the quality of performance reports. This was concerning as information provided for audit purposes should be reliable, complete and credible. Irregular expenditure increased by R835 million to R959 million, up from R124 million in the previous year. Treasury was the main contributor to the R959 million, constituting 80% of the total. The deviation was as a result of two significant non-compliances identified during the audit process. The first related to evergreen contracts for the maintenance of the transversal system. Treasury had not gone out for a competitive bidding process. The other was in relation to R369 million transferred by Treasury to the Government Technical Advisory Centre (GTAC). The transfer was not signed by the accounting officer as per standard procedure. GTAC was also sitting with R64 million worth of irregular expenditure due to its failure to follow competitive bidding processes. SARS was also a contributor to the irregular expenditure, one notable case of repeat non-compliance being the performance bonus of R4 million that was paid without the Minister’s approval. Some contracts above a stipulated threshold were also renewed without the approval of Treasury in accordance with the law.

Three auditees were found having material misstatements in their financial statements; these being National Treasury, GTAC and the Government Pensions Administration Agency (GPAA). On the financial health and financial management for the 13 entities, no material uncertainty exists whether auditees can continue to operate in future. The most common findings were on supply chain management, and were as follows: local content minimum threshold for local production not adhered (11% of the audited entities); competitive bidding not invited (26%); declarations of interest not submitted (5%); preference point system not applied or incorrectly applied (21%); suppliers' tax affairs not in order (11%); inadequate contract performance measures and monitoring in three entities; and performance of contractors not being monitored on monthly basis in one entity. The main root causes for non-compliance were the slow response to improving key controls and addressing risk areas as well as implementing some of the recommendations that come through the audit process. Management (accounting officers/ authorities and senior management do not respond with the required urgency to AGSA’s messages about addressing risks and improving internal controls. Also, instability or vacancies in key positions within Treasury and the rest of the entities was a major challenge. The instability and prolonged vacancies in key positions can cause a competency gap and affect the rate of improvement in audit outcomes. There was need for robust action plans to address these critical areas. In light of the findings, AGSA recommended that the Committee: follow up and evaluate progress of audit action plans put in place by the entities to improve audit outcomes; follow up with entities that incurred irregular, fruitless and wasteful expenditure to ensure there is consequence management; follow up with entities with vacancies in key positions to ensure they are filled timeously; and follow up with entities with key ICT projects to ensure that there is proper monitoring and control of project plans/deliverables.

Members wanted to know how a balance would be struck between the need to fill vacancies on one hand, and the desire to shrink the public service wage bill on the other. They asked why the GPAA was not having functional internal controls as identified. It was time for the AGSA to steer away from passive opinions. It was clear that departments and entities were bereft of a culture of consequence management and accountability. The AG would have to insist on strict compliance and there had to be some thought about measures and legislative interventions to drive such insistence. It could not be that the same issues are identified for successive and consecutive years without consequences. The AG should move away from a passive approach. AGSA should think about manipulative measures to nudge compliance.

Lastly, consideration of the High-level Panel Report was deferred to a later date. Members had not received and read the Report as yet. It was agreed upon that it would be prudent to first have Members go through the report before any resolutions are made.
 

Meeting report

Briefing by Auditor-General South Africa (AGSA)
Ms Narisha Poonsamy, Senior Manager, AGSA, took the Committee through the AGSA’s report. The presentation was based on 14 auditees in the National Treasury (Finance) Portfolio. The role of the AGSA is to reflect on the audit work performed to assist the Committee in its oversight role of assessing the performance of the entities taking into consideration the objective of the Committee to produce a Budgetary Review and Recommendations Report (BRRR). On the 2017/18 audit outcomes, 46% of the 14 auditees received clean audits, and 77% were found to have quality financial statements. There was a regression from 69% in 2016/17 to 54% in the quality of performance reports. This was concerning as information provided for audit purposes should be reliable, complete and credible. Irregular expenditure increased by R835 million to R959 million, up from R124 million in the previous year. Treasury was the main contributor to the R959 million, constituting 80% of the total. The deviation was as a result of two significant non-compliances identified during the audit process. The first related to evergreen contracts for the maintenance of the transversal system. Treasury had not gone out for a competitive bidding process. The other was in relation to R369 million transferred by Treasury to the Government Technical Advisory Centre (GTAC). The transfer was not signed by the accounting officer as per standard procedure. GTAC was also sitting with R64 million worth of irregular expenditure due to its failure to follow competitive bidding processes. SARS was also a contributor to the irregular expenditure, one notable case of repeat non-compliance being the performance bonus of R4 million that was paid without the Minister’s approval. Some contracts above a stipulated threshold were also renewed without the approval of Treasury in accordance with the law.

Three auditees had material misstatements in their financial statements; these being National Treasury, GTAC and the Government Pensions Administration Agency (GPAA). On the financial health and financial management for the 13 entities, no material uncertainty exists whether auditees can continue to operate in future. The most common findings were on supply chain management, and were as follows: local content minimum threshold for local production not adhered (11% audited entities); competitive bidding not invited (26%); declarations of interest not submitted (5%); preference point system not applied or incorrectly applied (21%); suppliers' tax affairs not in order (11%); inadequate contract performance measures and monitoring in three entities; and performance of contractors not being monitored on monthly basis in one entity. The main root causes for non-compliance were the slow response to improving key controls and addressing risk areas as well as implementing some of the recommendations that come through the audit process. Management (accounting officers/ authorities and senior management do not respond with the required urgency to the AGSA’s messages about addressing risks and improving internal controls. Also, instability or vacancies in key positions within Treasury and the rest of the entities was a major challenge. The instability and prolonged vacancies in key positions can cause a competency gap and affect the rate of improvement in audit outcomes. There was need for robust action plans to address these critical areas.

The AGSA found no improvement in the ‘plan-do-check-act’ cycle. The status of audit action plans remain unchanged and usefulness of performance indicators and targets regressed in the following entities: GTAC, Financial Intelligence Centre (FIC), Treasury and the Land Bank. Overall internal controls regressed in terms of leadership, financial performance management as well as governance. The entities that are most concerning in this regard being Treasury, FIC, SARS and the Financial Services Board. This also spoke to administrative instability within some of these entities which resulted in internal controls not being fully implemented and monitored. As it stood, the GPAA’s internal audit unit was basically non-functional.

In light of the findings, AGSA recommended that the Committee: follow up and evaluate progress of audit action plans put in place by the entities to improve audit outcomes; follow up with entities that incurred irregular, fruitless and wasteful expenditure to ensure there is consequence management; follow up with entities with vacancies in key positions to ensure they are filled timeously; and follow up with entities with key ICT projects to ensure that there is proper monitoring and control of project plans/deliverables.

Discussion
Ms P Nkonyeni (ANC) appreciated the high-level report on audit outcomes. She however felt some crucial information was left out of the presentation- information which would be important in the Committee’s oversight duties. It was disappointing to note that entities, particularly SARS and Treasury were not doing what was expected of them. The Committee needed to hold all the non-compliant entities to account. She asked for an update on the GPAA IT system modernisation project.

Ms N Ntantiso (ANC) wanted to know how a balance would be struck between the need to fill vacancies on one hand, and the desire to shrink the public service wage bill on the other. She asked why GPAA was not having functional internal controls as identified.

Mr A Lees (DA) asked the AGSA to explain how it was able to establish whether entities’ tax affairs are in order. Why was the GPAA’s internal audit unit incompetent? What was GPAA’s response and what was it doing about it? The concerns about IT system contracts at Treasury have been an ongoing issue. He asked when it would possibly be dealt with. Who was responsible for the auditing of the two section 4(3) entities not audited by AGSA?

The Acting Chairperson said the presentation by AGSA was empowering as the entities were still yet to appear before Committee. To what extent does the AG have the power to insist on consequence management for entities with material findings? The Committee would need to monitor consequence management as it was a serious weakness within departments and entities.

Mr N Nhleko (ANC) said it was time for the AGSA to steer away from passive opinions. It was clear that departments and entities were bereft of a culture of consequence management and accountability. The AG would have to insist on strict compliance and there had to be some thought about measures and legislative interventions to drive such insistence. It could not be that the same issues are identified for successive and consecutive years without consequences. The AG should move away from a passive approach. The AGSA should think about manipulative measures to nudge compliance.

Mr Polani Sokombela, Business Executive, AGSA, said the AGSA would endeavour to furnish the Committee with additional information by the end of the week. On modernisation of IT systems at GPAA, the systems interface were being updated and automated so as to improve efficiency. The AGSA was however frustrated by the project management of the modernisation. The project was moving at a slow pace and irregular contracts had been identified. Project assurance was underway to address a lot of the gaps given it was behind schedule and taking forever to be implemented. On the filling of vacancies, entities were required to categorise the posts and conduct a feasibility study before issuing moratoriums on vacant posts. Key and strategic positions would need to be filled in spite of issuance of moratoriums. There were various identified problems at GPAA adding to concerns about their internal audits. These include lack of consequence management and glaring errors in their financial statements. The GPAA management had been engaged and a request for service and capacity sharing was made to Treasury. AGSA chose not to audit the two section 4(3) entities in terms of the Public Finance Management Act and the Public Audit Act. However, they do report to AGSA on a regular basis. Both entities had unqualified audits and no red flags were identified by their respective auditors. On SARS, there were no material findings on the tax side of their books, although there were concerns about how refunds were being handled. However, the findings did not warrant an adverse audit opinion.

Ms Poonsamy said the AGSA does meet with stakeholders on a regular basis. The AGSA also monitors progress and conducts debriefs with entities to ensure implementation of robust audit plans through the status of record review tool. AGSA requires commitments from the executive and management of auditees to ensure action plans are addressed. The continual frustration was instability within public service which sees some of the issues falling into cracks. AGSA was equally concerned about consequence management. The AGSA would appreciate regular engagements with the Committee to share the status of records review for the various entities. This which would ensure Members also take the necessary steps and monitor these action plans. She thanked the Committee for the opportunity.

Deliberations on High-level Panel Report
The Acting Chairperson noted that Members seemed to have not received and read the High-level Panel Report as yet. It would be prudent to first have Members go through the report before any resolutions are taken.

Mr D Maynier (DA) suggested that copies of the report be distributed to Members for their perusal. The report summary and recommendations would then be considered at a later date.

Members agreed and the meeting was adjourned. 

 

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