National Treasury & entities audit outcomes: AGSA briefing

Meeting report

Mr Solly Segooa, Corporate Executive, Auditor General of South Africa (AGSA), said the objective of the briefing was to provide an overview of the audit outcomes of the 16 entities within the government’s finance portfolio. It would draw attention to key findings and their root causes in order to assist the Committee in producing a Budgetary Review and Recommendations Report (BRRR).

Ms Liezl Kestlmeier, Senior Manager: AGSA, told the Committee the annual audit report covered three areas: whether there was fair presentation and no significant misrepresentation in the financial statements; whether there was reliable performance information on key objectives; and whether there was compliance with financial laws and regulations.

She presented a series of detailed slides which showed that only four entities were in the green area of a chart on audit outcomes for 2018-19, which meant that they had received clean audits with no findings on shortcomings in their management. The four were the Land Bank Insurance Company (LBIC), the Financial Sector Conduct Authority (FSCA), the Independent Regulatory Board for Auditors (IRBA), and the Pension Funds Adjudicator (PFA).

While the rest had received unqualified audit opinions, they were in the yellow area of the chart, signifying that there were findings of shortcomings in financial management and performance. Those “in the yellow” were: the National Treasury; the Development Bank of Southern Africa (DBSA); the Public Investment Corporation (PIC); the SA Revenue Service (SARS); the Land and Agricultural Development Bank of South Africa (LB); the Financial Intelligence Centre (FIC); the Government Pension and Administration Agency (GPAA); the Government Technical and Advisory Centre (GTAC); the Financial and Fiscal Commission (FFC); the Ombud for Financial Advisory and Intermediary Services (FAIS); and the Co-operative Banks Development Agency (CBDA).

Ms Kestlmeier said the audit outcomes had regressed over the past five years. In the 2014-15 year, 44% of the entities had received unqualified audit opinions with no findings. In 2018-19, only 25% had achieved this.

On the quality of financial reporting, she said 44% of the entities had submitted financial statements with errors that had to be corrected during the audit. There had also been a regression in the quality of performance reports, with only 31% producing reports with no errors, down from 50% the previous year.

Ms Kestlmeier said 75% of the entities were found to be non-compliant with key legislation. The top five areas of non-compliance involved:

• Material misstatements in submitted financial statements;
• Procurement and contract management;
• Prevention of irregular, fruitless and wasteful expenditure;
• Consequence management in holding people accountable for mismanagement;
• Non-compliance at the PIC with the Public Investment Corporation Act in dealing with assets under management.

She highlighted concerns about the National Treasury’s Integrated Financial Management System (IFMS) programme. There was no formal business case, a lack of proper project management and inadequate budget monitoring. Vacancies in key positions could cause delays in the project.

At the PIC, there was non-compliance with investment policies, guidelines and procedures for assets under management. Material non-compliance findings were:

• Non-compliance with governance processes;
• Investment deals were approved without sufficient due diligence processes;
• Loan contracts were not aligned to deals as they had been approved;
• Conditions set by the PIC’s portfolio management committee were not included in the legal contract for a deal;
• Auditing scope was limited by a failure to provide audit evidence in areas such as deal origination, disbursements and monitoring of investments.

Ms Kestlmeier displayed a colour chart showing the status of internal controls in the finance portfolio. Most of the entities fell in the green or yellow sections, signifying either clean audits or unqualified opinions with findings. However, the chart showed that intervention was required at the GPAA and FFC, where there was a lack of proper record keeping. Action was also required at the FFC where daily and monthly financial controls were lacking. A deterioration in the reviewing and monitoring of compliance at the National Treasury, the GPAA, the GTAC, the FAIS Ombud and the FFC also needed to be addressed.

Fruitless and wasteful expenditure - where no value for money was received - increased from R71 million to R82 million in 2018/19. Most of it was incurred by the National Treasury and SARS. Of the total, R65 million was spent by the Treasury on technical support and licences related to its Integrated Financial Management System (IFMS) 2 information technology project.

Irregular expenditure had increased to R1 billion from R960 million the previous year. The irregular spending occurred when goods and services were procured in contravention of key legislation. The biggest contributors were the Treasury (R466 million) and SARS (R454 million). Most of the irregular spending was a result of procurement being done without approval from the appropriate authority, and deviations from competitive bidding processes.

There had been a regression in compliance with supply chain management (SCM) requirements. Among the most common findings were uncompetitive and unfair procurement processes at 47% of the auditees. Another common finding was that contracts differed from the original bid invitations, or were extended or modified without the approval of a delegated official.

Ms Kestlmeier listed three root causes of poor audit outcomes:

• Instability and prolonged vacancies in key positions, which caused a competency gap;
• Inadequate consequence management, where officials who deliberately or negligently contravened legislation were not held accountable, leading to such behaviour being seen as acceptable and tolerated;
• Slow or no response in addressing key risk areas, when managers or accounting officers did not respond with the required urgency to messages about improving internal controls.

The AGSA report made several recommendations to the Department of Finance and its entities. It said they should evaluate the progress of audit action plans; they should follow up on irregular expenditure and ensure there was proper consequence management; they should ensure key positions were filled timeously; and they should ensure there was proper monitoring and planning of key information communication technology (ICT) projects. The report also recommended that the Standing Committee on Finance conduct regular follow-ups with the executive authority to ensure that these steps were taken,

Discussion

Dr D George (DA) referred to what he called “noise” over several years about a so-called rogue unit, which had somehow been secretly funded within SARS. He asked whether the AGSA had specifically looked for irregular spending on activities which could have been part of such an operation.

He commented that the AGSA had reported a regression in the audit outcomes at the PIC, and asked whether they had looked at the PIC’s loan book. It was known that loans could be made under the guise of a bond asset, and then written off and the money stolen. He asked whether any loans had been found to be non-compliant with standards.

Referring to AGSA’s list of the root causes of poor audit outcomes, he asked which specific entities had these problems.

Mr I Morolong (ANC) referred to the findings about contracts which were extended or modified without the approval of a delegated official. He asked to what extent this bordered on corruption which should be investigated by the proper authorities. He was concerned about the general state of governance at the PIC.

Ms D Mabiletsa (ANC) said a key question was what action was being taken to deal with the problems identified. She expressed concern about ongoing staff vacancies.

Ms D Peters (ANC) said public confidence in government was waning. She wanted to know what the office of the AG was doing to ensure that poor audit outcomes were dealt with promptly. Was it part of AGSA’s function to help build internal audit capacity in government bodies, as audit committees were critical in ensuring that the AGSA findings were followed through and that there was proper consequence management in cases of wrongdoing? She asked what weight AGSA’s findings carried, saying if warning bells had been heeded it would not have been necessary to appoint commissions of inquiry into financial wrongdoing.

AGSA’s response

Mr Segooa said he agreed that the findings on internal controls were “not palatable,” and the Committee was right to express its concern about irregular expenditure. A change in the law in April this year had enhanced the mandate of the AG. Instead of merely reporting findings, the AG could now take steps when material irregularities were identified. In these cases, the AG would issue recommendations. If no action was taken within a reasonable timeframe, remedial action would be ordered. Failure to comply could result in a certificate of debt being issued in the name of the accounting officer or responsible individuals. In the past there had been a culture of no consequences. He was certain the picture would change as the new system was rolled out.

In response to Mr Morolong’s question, he said irregular expenditure could border on corruption, and these cases would have to be referred for further investigation.

Mr Polani Sokombela, Business Executive, AGSA, said the SARS audit had not specifically identified spending which could be linked to a rogue unit.

On the PIC, he said policies and procedures were either outdated or not adhered to. Procedures were overridden by management and some deals did not go through proper governance structures. He undertook to provide a list of deals investigated. However, he pointed out that the PIC acted on behalf of investees such as the Government Employees Pension Fund or the Unemployment Insurance Fund. Details of loans would be given in their financial statements, and not in those of the PIC.

Ms Kestlmeier elaborated on the root causes of problems at different entities.

Those affected by instability or vacancies in key positions were the National Treasury, the Government Technical and Advisory Centre (GTAC), the Government Pension and Administration Agency (GPAA) and the Financial and Fiscal Commission (FFC).

Entities at which there were inadequate consequences for poor performance and transgressions were the GPAA and the Land Bank.

Those where there was a poor response to improving controls and addressing risk areas were the National Treasury, the FIC, GPAA, GTAC, SARS, the FFC, the Land Bank LIfe Insurance Company, and the Financial Advisory and Intermediary Services Ombud.

On building internal audit capacity, Mr Segooa said the AG’s role was to provide independent audit assurance and not to build capacity at auditees. However, audit reports did highlight issues that needed improvement.

Further discussion

Dr George referred to those entities listed as not responding with the required urgency to messages about improving controls. The National Treasury, as the custodian of financial management, needed to be asked why it was on that list.

Mr Morolong asked about the functionality of the board audit committees of the Finance Portfolio entities, and whether they really helped the audit process.

Mr Segooa said the annual audits revealed issues that needed to be resolved. Management would be made aware of the need for action plans and AGSA would, through status reports, monitor the progress. If at the end of the year the same issues arose, it would be concluded that management had been slow to respond. The National Treasury had for several years received unqualified reports with findings. Failure to deal with issues raised by the AG was “keeping them in the yellow.”

On the effectiveness of board audit committees, Ms Kestlmeier said that at 14 of the 15 entities reviewed, the audit committees had provided the required oversight. The exception was at the PIC, where issues of non-compliance with the PIC Act had been identified.

Concluding the meeting, the Chairperson said he was concerned that regulatory bodies like the National Treasury and GPAA did not themselves comply with regulations. The Committee could not keep quiet about irregular expenditure at the NationalTreasury and SARS totalling R1 billion, and would have to take them to task. The Treasury had to ensure proper supply chain management in government, yet they were the first transgressors. On the PIC, he said the Committee would have to delve deeply into the issue of loans being written off after being granted without proper due diligence investigations.

The meeting was adjourned.