Department of Justice & Correctional Services 2018/19 audit outcomes

Meeting report

Mr A Mohamed (ANC) was elected as acting chairperson as the Chairperson was absent. He welcomed the Auditor-General South Africa (AGSA) team who would be helping the Committee with its oversight.

Mr Lourens van Vuuren, Business Executive: AGSA, said the main focus for the day was to discuss the audit outcomes but they would find time to do capacity building on the AGSA expanded mandate.

Department of Correctional Services
Mr Yongama Madolo, Senior Manager: AGSA, said the audit briefing would assist with the Committee's oversight. He noted that the Department audit committee was appointed in April.

Department of Correctional Services continued its history of poor audit outcomes with no improvement. The audit opinion was qualified on commitments and irregular expenditure. Commitments were also qualified in 2017/18. The DCS annual financial statements remain a concern as material adjustments had to be effected to them. DCS did not maintain accurate and complete records of the contractual information used to determine commitments. It did not have an adequate system for identifying all irregular expenditure. There was disregard for compliance with legislation. Previous year irregular and fruitless and wasteful expenditure was not investigated. However, there was a decrease in irregular expenditure and fruitless and wasteful expenditure since 2017/18. The DCS audit committee was appointed in April.

He discussed DCS financial health. Three criteria were used to gauge this. Revenue management, asset and liability management and cash management and all three were of concern.

The root causes for DCS poor audit outcome for 2018/19 were:
- Slow or no response to improving key controls and addressing risk areas
- Inadequate consequences for poor performance and transgressions
- Instability or vacancies in key positions

AGSA recommendations to DCS were:
• Design and implement an action plan to resolve audit findings.
• Management should follow up on progress with implementation of the action plan.
• Fill key vacant positions.
• Implement consequence management for incurring fruitless and wasteful expenditure and irregular expenditure and other cases of financial misconduct.

The Committee was advised to provide oversight into the implementation of the audit action plan and to monitor implementation of consequence management.

AGSA expanded mandate
Mr Madolo noted that the Public Audit Amendment Act came into operation on 1 April 2019 and the expanded mandate has three key areas:
- refer material irregularities to relevant public bodies for further investigation
- taking binding action for failure to implement AGSA recommendations for material irregularities
- issue a certificate of debt for failure to implement remedial action if financial loss was involved.
Once the certificate of debt has been issued, recovery measures for the lost funds would follow.
He said that no material irregularities were identified in this cycle.

Discussion
The Chairperson asked if senior authority was assessed, did that mean that other levels were not assessed.

Mr Madolo replied that other levels will be assessed in subsequent years.

The Chairperson asked for more details on the certificate of debt. He noted the AGSA recommendation for the Department to implement an audit action plan and asked if this dealt with the matrix of previous findings? On slide 22, AGSA identified root causes for the audit findings. Did AGSA have statistics on the impact of vacancies on direct financial management? On slide 22, AGSA identified root causes for the audit findings. Did AGSA have statistics on the impact of vacancies on direct financial management? On slide 18, was the R3m fruitless and wasteful expenditure due to interest paid on court orders and arbitration awards avoidable? On slide 12, on the prevention of unauthorised expenditure, what factors affected this? How many officials were involved in the non-compliance with legislation?

Mr X Nqola (ANC) noted there are some improvements and some regression on regular expenditure. Slide 16 dealt with financial health. Liabilities exceeding assets means one cannot pay one's creditors. Is the Department close to insolvency? He noted the AGSA recommendation to monitor implementation of the audit action plan to overcome challenges. Has an action plan been designed yet to help the Committee to actually monitor this development?

Mr W Horn (DA) noted that if a contract was awarded in an irregular manner, all payments made on that contract would be irregular expenditure. There is a huge decrease in this kind of misconduct. How was this achieved? Historically, R1.9 billion rand was due to SSA contracts etc. We need to understand why there is a huge decrease. Was it that those contracts were cancelled? AGSA stated that not all cases of wasteful expenditure have been investigated. Can we be told what amounts? How many investigations have been done and at what value? He referred to the new extended mandate of AGSA and asked when it will make use of its new powers to initiate a referral of a material irregularity to investigation authorities. Have you decided on a procedure for that? He noted the DoJ&CS failure to counteract a lack of daily and monthly controls. In the past the AG told us that to ensure better audit outcomes it would no longer wait until year-end before engaging with the Department. This should have been done quarterly if it was done at all. Did these meetings take place? It would be helpful for the Committee to understand why AGSA states that there is a lack of consequence management in this portfolio. Did the Department not embark on any kind of disciplinary action? Slide 14 mentions there was a failure by the Correctional Services executive to give assurances. That means that although you met with the National Commissioner, AGSA has not been given the correct plans and undertakings by the executive. Can we understand what deficiencies need addressing?

Prof C Msimang (IFP) said the root causes of the Department audit findings need to be attended to. It may seem simple to try and fill vacancies, and then explain why they are not filled. When a post is created, it is budgeted for. If the vacancies are not filled, there will not be stability in the Department. It is also concerning that officials are not accountable and there is no consequence management for failure to comply. A Department without accountability cannot function.

Mr T Mulaudzi (EFF) noted that since the Sixth Parliament AGSA has an expanded mandate to implement its recommendations. Legislation was passed that increased its power. Since then, how far have you gone in implementing your recommendations? How many people did you bite?

The Chairperson referred to slide 19 on irregular expenditure and asked how many instances of such payments were there.

Response
Mr van Vuuren noted a lot of the questions were on irregular expenditure and the expanded mandate. The final slides talk about the AGSA mandate expansion. This expansion introduced the concept of material irregularity. The additional powers allow the AG to refer matters to other agencies for investigation. Once something meets the definition of a material irregularity, AGSA can refer this to bodies best suited to investigate it. In the 2018/19 audits only the first part of the definition was implemented - so not all non-compliance has yet been covered.

The second part of the mandate is that when an item has not been referred to those bodies for investigation, the AG can take remedial action. We give accounting officers 20 days to review the item. The AG will then indicate what should be done to fix the material irregularity and under what timeframes. If the officer does not do that in that timeframe, the AG will recommend remedial action - binding in law. If the officer, as noted on slide 26, does not implement the remedial action, they will be notified and a certificate of debt will be moved towards. Twenty days are given to respond and the AG will then decide if it is happy with that response.

The Department has a number of ongoing investigations. If you want more details about the irregular expenditure, you can go to page 204 of the Annual Report.

AGSA is applying a phased-in approach to its expanded mandate so this part of the definition of material irregularity: "fraud, theft or a breach of a fiduciary duty" has not been included as part of 2018/19 audits. You will see that some of these contracts that have been referred for investigation, date back to 2007. Going forward, the Committee might recommend more current transactions are investigated.

It is important each government entity has an audit action plan. All the audit findings should be included in that action plan. The Portfolio Committee should ask the Department how far along it is with that action plan so that oversight can be exercised. He replied that the vacancies could have an impact on the control environment. It is important for the Committee to engage with the National Commissioner and ask why those vacancies have not been filled. On fruitless and wasteful expenditure, in some cases there were court orders where payments were not made in time. Payments need to be made on time. Where they were not and penalties were incurred, this is the definition of fruitless and wasteful expenditure. On financial health, there is a regulation that requires a department to pay suppliers within 30 days. Those not paid in 30 days, that payment is added to the surplus. Unauthorised expenditure would then be spending that money after that time. It is measured from the receipt date of an acceptable invoice, then the onus is on the Department. This protects against ineffectual billing.

AGSA engages with the entity's management at least twice a year. We engage with the accounting officer and highlight key challenges so the accounting officer gets a sense from us, and not just the entity's management team. It is not just an audit, but an engagement that we believe can assist the accounting officer. Management needs to ensure that on a day to day basis the right processes and controls are in place.

Mr Madolo replied that for irregular expenditure in 2017/18, 36 cases were recorded, 9 of which were investigated. Since 2011, 198 cases have been identified. Classification as irregular expenditure will come from contravention of the rules of expenditure.

Mr Horn asked what the practical effect of the certificate of debt was. It is a testimony to failure to implement, but what does it mean in real terms?

Mr van Vuuren responded that a certificate is issued when there is a financial loss. It is issued to an accounting officer (Director General) of a department or the accounting authority (board members) of an entity and that money will be recovered from the Accounting Officer/Accounting Authority (AO/AA). The Public Audit Act ends there. It is not the Auditor General’s responsibility to recover the money.

Mr Nqola asked what are the risks stemming from not having an audit committee.

Mr van Vuuren replied that the executive signs off on the appointment of the audit committee . It has the function of risk management. It controls and directs internal audits and engages with the external auditors too. The accounting officer still has the responsibility to act.

Public Protector South Africa
Ms Fikile Mashao, Senior Manager: AGSA, said that Public Protector South was not clean but it has managed to improve. There has been a clear reduction in audit findings. Instability has been addressed and key positions have been filled. Financial statement preparation remains a concern, as material adjustments had to be made. Its performance reporting had improved and had no findings. In 2019, there is no record of any new irregular expenditure. There has been a drastic reduction in invoices not being paid within thirty days. There are still some material adjustments to be made on assurance provision. This is an ongoing process. Before there were no internal controls that assisted AGSA to help identify issues. PPSA should ensure that there is an adequate review of the financial statements and monitor that payments are made within 30 days throughout the year.

Discussion
The Chairperson asked what IT systems are used by the Public Protector.

Ms Mashao responded that those systems are separate from Justice.

Mr Horn asked by how much the PPSA deficit had been reduced. Slide 9 shows a surplus for the year. The deficit can only be wiped out if there is a surplus so why has AGSA marked asset and liability management as a concern.

Ms Mashao replied that the entity is not out of the "of concern " zone. They have managed to reach a surplus in the current year only, with limited investment, so it is a temporary fix and an ongoing concern.

Department of Justice & Constitutional Development (DoJCD)
Mr Rehaan Mohamed Ali, AGSA Senior Manager, said that AGSA usually covered the full Justice portfolio in the meeting on audit outcomes. However, one can now see a steady improvement in most of the DoJ&CD entities such as the Special Investigating Unit, Legal Aid South Africa, Guardian Fund, President's Fund and the Justice Administered Fund which have clean audits so it will be unnecessary for this.

Both the Department of Justice and South African Human Rights Commission received an unqualified opinion with findings. The quality of SAHRC financial statements has improved. The challenges within the SAHRC supply chain management environment remain.

Top qualification areas for DoJCD were movable tangible assets and contingent liabilities. The state attorney offices have preferred suppliers. The absence of a proper procurement system means risk of collusion and inflated and fictitious settlements. Inadequate implementation of the audit action plan resulted in the DoJCD audit outcome stagnating. Some improvements were however noted across all audit focus areas.

Once DoJCD court services met targets they stopped recording performance information. The performance indicator environment is sound but the lack of reporting thereafter is an issue to address. The court management system is not always aligned with the information that it wants to collect. The system only allows you to withdraw current information, not backlogged information.

The Chairperson observed that Court Services had set targets for itself but these were not aligned with their operating systems.

Mr Ali noted that there would have to be a system reconfiguration.

The Chairperson asked when one talks about counsel being briefed, how does AGSA ensure, when one briefs counsel, that you brief to the expertise of a particular counsel? One cannot just say that one recommends the "cheapest guy" because he is the cheapest. How do you brief?

Mr Ali responded that AGSA presents in high court cases, but it is not for themselves.

Mr Ali said that the top areas of non-compliance are procurement and contract management (DoJCD, SAHRC), quality of financial statements (DoJCD, SAHRC), prevention of unauthorised, irregular and fruitless and wasteful expenditure (DoJCD, SAHRC) and revenue management (DoJCD). There is R137 million irregular expenditure for the DoJCD in 2019. Department of Justice irregular expenditure increased but fruitless and wasteful expenditure decreased. R985m was recorded over the past two years. R771 million was identified in 2018/19 relating to the prior year. There have now been improvements in the Department's procurement. R394 million is due to non-compliance for extensions of security management contracts at courts. R170 million is for the appointment of legal service providers without any procurement process being followed. R366 million is as a result of variation orders implemented on IDT projects without the National Treasury’s approval. There are 11 Public Works projects receiving money.

The Chairperson asked where Public Works oversight responsibility fell.

Mr Ali noted there is a responsibility to go to Treasury to confirm funds have been allocated appropriately, which is apparently lacking in the Department itself. The majority of the disclosed fruitless and wasteful expenditure for the current year (R6m) and prior year (R48m) was caused by curator fee expenditure relating to NPA. For supply chain management, the most common findings were that contract extensions greater than15% were concluded without Treasury approval, there were uncompetitive and unfair procurement processes. False declarations of interest were made by 25 suppliers.

Root causes of ongoing audit findings were senior management who do not respond with the required urgency to AGSA recommendations about addressing risks and improving internal controls and that the instability caused by prolonged vacancies in key positions can cause a competency gap and affect the rate of improvement in audit outcomes.

The Chairperson asked if there was an issue with senior management.

Mr Ali replied that they did not actually implement all the prior AGSA recommendations in the audit action plan. AGSA is ok with the planning part – it is the implementation that is the problem. He concluded by pointing to the 2018/19 recommendations for DoJCD and the Committee.

Discussion
The Chairperson said the Committee noted the recommendations and it would follow up with the Department.

Mr Horn asked what the fruitless and wasteful expenditure entailed. On the AGSA recommendations about filling key vacancies in asset management and supply chain, how long have these vacancies been there? Is it recurring from previous years or is it just this year vacancies have not been filled in a timely manner?

The Chairperson referred to slide 21 and asked why there was irregular expenditure for this year when that irregular expenditure came to light relating to a previous year.

Mr Ali responded about vacancies that there are also many managers in acting positions. There is no stability in the leadership of the supply chain, so it is difficult to get better outcomes. Asset management positions were filled late in the year. Throughout the Department, there needs to be an approved organisational structure which is in line with what the Department actually is doing. It has been an ongoing challenge for a few years. The R771 million identified in the current year relating to the prior year is not disclosed and dated as when it occurs, it is disclosed in the year in which it is identified.

The Chairperson remarked that AGSA would not be dealing with the Office of the Chief Justice [as it had a clean audit]. He thanked the presenters.

Mr van Vuuren asked Members to provide feedback on the form provided on their engagement for the day so that they could improve going forward. AGSA is particularly focused on parliamentary capacity building.

The Chairperson commented that the Committee had not had much time to conduct oversight in previous years so it was good to have the opportunity for it this year.

The morning session was adjourned.