Department of Agriculture & CASIDRA 2016 /17 & 2017/18 Annual Reports: AGSA on audit outcomes

Public Accounts (SCOPA) (WCPP)

26 February 2019
Chairperson: Mr F Christians (ACDP)
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Meeting Summary

The Standing Committee was briefed on the PFMA audit outcomes of the Western Cape Department of Agriculture 2016,2017and 2018; and it was  briefed on the PFMA audit outcomes of Western Cape Casidra for the 2016,2017,2018 financial years.

 

The Standing Committee on Public Accounts was left baffled by the manner in which the Western Cape Department of Agriculture failed to disclose and account for the funds it transferred to Casidra in its financial statements for the financial periods between 2016 and 2018. This became apparent when the Auditor-General of SA (AGSA) was briefing the Western Cape Provincial Parliament SCOPA (Standing Committee on Public Accounts) on the audit outcomes of the Western Cape Department of Agriculture and its entity, Casidra, for the 2016/17 and 2017/18 financial years.

The AG reported that the Department has for these two financial years entered into contracts with implementing agents without following the prescribed procedures and it failed to account for payments made to these implementing agents in accordance with requirements prescribed by Treasury Regulations.

Members questioned what the AG was looking at in terms of funding for the legislative mandate; if what Casidra was doing on behalf of the Department was falling under goods and services because it appeared Casidra was identifying and fast-tracking what the Department envisioned; what the exact issue the AG monitored on Programme 4 (Local Economic and Business Development) because there were material findings on the reliability and usefulness of the information; what made the AG thing everything was not recorded; if the AG was focusing on quality and quantity concerning the implementation of land reform projects by Casidra and what made the AG realise the truth or made them aware that there was something missing in the report.

Irregular expenditure was understated because the Department did not identify and disclose any irregular expenditure resulting from non-compliance with applicable supply chain management prescripts by implementing agents as required by the PFMA. These misstatements have remained unresolved.

The AG further reported Casidra received a clean audit for the 2016/17 period, and spent R34.5 million on operating expenditure, excluding project expenditure and salaries of R277.1 million. But for the 2017/18 financial year the entity recorded an unqualified opinion, having spent R38.3 million on operating expenditure, excluding project expenditure and salaries of R309.9 million.

Members remarked that the AG audit report on Casidra suggested that there was nothing wrong in how the entity acquired its funds with regard to transfers and subsidies and wanted to know what the AG was looking at in terms of funding for the legislation mandate. Members sought understanding on  the point at which the Department started to deviate because it had predetermined objectives, but failed to comply with them. Members  wanted to find out if what Casidra was doing on behalf of the Department was falling under goods and services because it appeared Casidra was identifying and fast-tracking what the Department already envisioned

Meeting report

Briefing on the Audit Outcomes of the Department of Agriculture 2016/17 and 2017/18
Mr Ashiq Allie, Senior Manager, AGSA (Auditor General South Africa), informed the Committee that the Department received a qualified opinion during the 2016/17 financial year. The Western Cape Department of Agriculture spent R807.8 million of a budget of R815.9 million, resulting in an overall under-expenditure of R8.1 million or 1%. The Department’s revenue budget of R28.9 million was exceeded by R11.2 million or 38.8%.

On transfers and subsidies, the Department did not account for payments made to implementing agents according to the requirements of the National Treasury. The Department accounted for these payments as transfers and subsidies instead of either expenditure for capital assets or goods and services. As a result, transfers and subsidies were overstated by R274 340 625 in the current year and by R250 067 615 in the prior year. The AG was not able to determine the full extent of all the affected financial statement components and to determine the individual misstatements because it was impractical to do so.

Concerning irregular expenditure, the Department entered into contracts with implementing agents without applying Treasury Regulations. The Department did not identify and disclose any irregular expenditure resulting from non-compliance with applicable SCM(Supply Chain Management) prescripts by implementing agents such as by the PFMA (Public Finance Management Act). Consequently, irregular expenditure was understated.

Regarding predetermined objectives, the AG did not raise any material findings on the usefulness and reliability of the reported performance information for programmes 3 and 4 (Farmer Support and Veterinary Service).

Mr Allie reported that the leadership did not exercise adequate oversight over financial reporting to ensure there was consistence in how the entities were accounting for funds transferred to them. This has resulted in non-adherence to SCM prescripts. The AG was encouraging the Department to componentise assets in their asset registers and to develop their inventory management systems as these would be a requirement in the future.

The National Treasury was currently drafting an Accounting Manual to distinguish between ‘goods and services’ and ‘transfer payments’ because this could potentially influence the future classification of these transactions.

For the 2017/18 financial year the Department also received a qualified opinion as well. The Department spent R866.9 million of a budget of R877.6 million, resulting in an overall under-expenditure of R10.8 million or 1.2%. The Department’s revenue budget of R29.2 million was exceeded by R19.3 million or 65.9%.

Pertaining to transfers and subsidies, the Department did not account to payments made to implementing agents in accordance with Treasury Regulations. The Department accounted for these payments as transfers and subsidies instead of either expenditure for capital assets or goods and services. As a result, transfers and subsidies were overstated by R259 191 000 in the current year and by R274 340 625 in the year prior. The AG was not able to determine the full extent of all the affected financial statement components and to determine the individual misstatements because it was impractical to do so.

With regard to irregular expenditure, the Department entered into contracts with implementing agents without applying Treasury Regulations. The Department did not identify and disclose any irregular expenditure resulting from non-compliance with applicable SCM prescripts by implementing agents as by the PFMA. Consequently, irregular expenditure was understated.

Regarding predetermined objectives, the AG raised material findings on the usefulness and reliability of the reported performance information for programme 2 (Sustainable Resource Management), but raised no material findings for programmes 3 and 4 (Farmer Support and Veterinary Service). Concerning sub-programme 2.2 (Land Care), the AG was unable to obtain sufficient appropriate audit evidence to validate the existence of systems and processes that enable reliable reporting of actual achievements against the indicators (number of protection works, number of veld utilisation works, and number of farm plans update for sustainable farming purposes).

Mr Allie pointed out that although leadership exercised adequate oversight over financial reporting, the audit outcome has been modified due to technical requirements on how entities should be reporting for funds transferred to them, which consequently resulted in the misclassification of the funds transferred by the department to the entities.

He reported that the annual performance report contained misstatements of material indicators, some of which were corrected. There also limitations on the evidence provided as per the technical indicator description. This was due to an inadequate system and processes to collate evidence required for those indicators.

The AG was encouraging the Department to componentise assets in their asset registers and to develop their inventory management systems as these would be a requirement in the future. The National Treasury was currently drafting an Accounting Manual to distinguish between ‘goods and services’ and ‘transfer payments’ because this could potentially influence the future classification of these transactions.

Briefing on the audit outcomes of Casidra for 2016/17 and 2017/18
Mr Allie reported that the entity received a clean audit for the 2016/17 period. The entity spent R34.5 million on operating expenditure. This was excluding project expenditure and salaries of R277.1 million. There were no material findings raised on the usefulness and reliability of the reported performance information on programmes, 2, 3 and 4 (Agriculture and Land Reform, Rural Infrastructure and Poverty Alleviation, and Local Economic and Business Development). Further, the AG did not identify any significant deficiencies in internal controls. Entities were encouraged to familiarise themselves with GRAP Standards to ensure that adequate processes were put in place to ensure full compliance once the standards become effective.

Then for the 2017/18 financial year the entity recorded an unqualified opinion. It spent R38.3 million on operating expenditure excluding project expenditure and salaries of R309.9 million.

About predetermined objectives, the AG did not raise any material findings on the usefulness and reliability of the reported performance information on programmes 2 and 3 (Agriculture and Land Reform and Rural Infrastructure Development and Poverty Alleviation). Regarding the number of co-operatives assisted with business support interventions in terms of advice on programme 4 (Local Economic and Business Development), the AG was unable to obtain sufficient appropriate audit evidence that clearly defined the predetermined source of information to be used when measuring the completeness of the indicator. There was a lack of proper performance management systems and processes and formal operating standard procedures that determined how the achievement would be measured, monitored and reported.

The AG identified material misstatements in the annual performance report submitted for auditing. These material misstatements were on the reported performance information of Local Economic and Business Development. The management corrected some of the misstatements, and the AG raised material findings on the usefulness and reliability of the reported performance information.

Concerning internal control deficiencies, the management did not put adequate processes in place to ensure internal review procedures could identify and correct material misstatements in the financial statements and the annual performance report before submission for auditing.

Entities were encouraged to familiarise themselves with GRAP Standards to ensure that adequate processes were put in place to ensure full compliance once the standards became effective.

Discussion

Deliberations on the audit outcomes of Western Cape Casidra 2016/17 and 2017/18 financial years

Ms C Beerwinkel (ANC) remarked that the AG audit report on Casidra suggested that there was nothing wrong in how the entity acquired its funds with regard to transfers and subsidies.

Mr Allie stated they looked at the agreements of the Department. This was a consistent matter taken up by all departments nationally. They looked at prior amounts for transfers in terms of agreements. He said the problems were on disclosures on expenditure. The Department of Agriculture was transferring money to Casidra, but when they looked at Casidra’s financial statements, that transfer was not reflected. The concern was about disclosure and how it affected the users of financial statements.

Mr D Joseph (DA) wanted to know what the AG was looking at in terms of funding for the legislation mandate. He further wanted to understand the point at which the Department started to deviate because it had predetermined objectives, but failed to comply with them. Because the breakdown of how the transfers were not reflected in the financial statements, that meant that the Department had to show how the transfer was spent.

Mr Allie said that they looked at transfers and what the money was spent on. The spending was the responsibility of the Department. Everything has to be classified as goods and services. He further stated that Casidra was executing the mandate on behalf of the Department. The money spent was not Casidra’s money per se. Casidra was receiving a commission. The funds that came in and out of Casidra’s account were not explained in the financial statements because it was not their mandate to do that, but only to make sure there was compliance in spending the money. This was a matter of an accounting procedure. He said Casidra was an implementing agent, and there were certain circumstances when it took ownership of the project. When that happened, Casidra would account for the money it used in the project.

Ms M Maseko (DA) wanted to find out if what Casidra was doing on behalf of the Department was falling under goods and services because it appeared Casidra was identifying and fast-tracking what the Department envisioned.

Mr PJ Eksteen, PWC Director, explained that everything was guided by the agreement the parties entered into. The disclosure on expenditure should be made in the financial statements of the Department. He said there was enough documentation to what was needed in the structure of reporting finances for the Department. The Department, for better financial reporting purposes, should always document in its financial records the money it has transferred to Casidra.

Ms Beerwinkel remarked that the answer in this whole thing lay in the principle on how the two parties were conducting their business. Transfer payments have remained transfers in this case because one did not get a breakdown of what the transfer was spent on. But goods and services were providing a breakdown on money spent. So, if transfers were put under goods and services, then there would be a breakdown on every cent spent.

Mr S Tyatyam (ANC) asked what the exact issue the AG monitored on Programme 4 (Local Economic and Business Development) because there were material findings on the reliability and usefulness of the information.

Mr Allie indicated that they monitored standard operating procedures. The entity had to ensure that everything was recorded according to operating procedures.

Ms Beerwinkel asked what made the AG think everything was not recorded.

Mr Eksteen said the identified processes that were applied were limited. There was no proper register for business consultation processes.

Ms Maseko wanted to establish if the AG was focusing on quality and quantity concerning the implementation of land reform projects by Casidra.

Mr Allie explained their concern on Programme 4 was to look at the accuracy of numbers provided and check the completeness of everything by also making use of an external source. They also ensured if everything that needed to be reported has been reported.

Ms Beerwinkel asked what made the AG realise the truth or made them aware that there was something missing in the report.

Mr Eksteen explained that there were two objectives used when evaluating a project. ‘One, you look at the register and evidence accompanying it in terms of numbers, two you check completeness of information Three , you test validity of information, and four you look at processes in place to see if what needed to be done was recorded and the information was complete..

The meeting was adjourned.
 

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