First Special Report on financial management of government’s COVID-19 initiatives: AGSA briefing

Standing Committee on Auditor General

04 September 2020
Chairperson: Mr S Somyo (ANC)
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Meeting Summary

AGSA First Special Report on financial management of government’s COVID-19 initiatives 
AGSA Media Release 

In this virtual meeting, the Auditor General briefed the Committee on the first special report on the management of government’s Covid-19 initiatives. The report only covered R230 billion of the total stimulus package allocation.

The AG reported that the information technology systems used in government were not agile enough to respond to the changes required. The pre-existing deficiencies in the supply chain processes of government were amplified by the introduction of the emergency procurement processes allowed for personal protective equipment. Based on what was audited to date, there are clear signs of overpricing, unfair processes, potential fraud and supply chain management legislation being sidestepped. In addition, delays in the delivery of personal protective equipment and quality concerns could have been avoided through better planning and management of suppliers. The AG noted that poor record keeping is a common feature across many of the initiatives, which means that auditees do not always have updated or reliable information on the goods and services delivered and the implementation of initiatives, which also made it difficult to completely audit these matters. Some initiatives were slow to get off the ground, despite large amounts allocated to provide relief or fund important front-line work and projects. The pre-existing inability to coordinate and oversee efforts where multiple departments, agencies and spheres of government are involved, continue to plague these projects.

This report should be used to direct oversight actions on how the multibillion rands entrusted for the Covid response was used. Upcoming months should be used to monitor whether control weaknesses that open the funds to abuse are being closed and whether instances where abuse has occurred were dealt with appropriately.

From the R230 billion, R40 billion was allocated for wage protection through the UIF TERS scheme. The remaining R190 billion was the subject of adjustment budget that was tabled by the Minister of Finance. Of the R190 billion, R145 billion was allocated to various Departments that were on the frontline in fighting the spread of Covid-19. The remaining R45 billion had not yet been appropriated. These funds formed part of the scope of the audit.

Members asked the AG to submit a legacy report with recommendations and guidance on how the Committee can best conduct its oversight going forward; whether the AG’s Report would be shared with the DPME; causes of the delays during the audit; outsourced expertise; whether the Office of the AG could get involved in the development of government systems; turnaround times on the emergency procurement and poor record keeping investigations; whether municipalities had received the relief funding or not; whether the AG during its audit picked up any significant supported provided by Departments to victims of gender-based violence; the role and contributions of the internal audit function in Departments; the role of municipalities and how much bite the AGSA had; whether any of the findings in the Report would be covered by the new expanded mandate where the AGSA is empowered to issue out direct remedial actions; how the multi-disciplinary approach could assist in curbing the uncompetitive behaviour that was reported in the media by companies and businesses that inflated prices for essential goods and services and whether the AGSA was interacting with the Competition Commission on curbing this uncompetitive behaviour; AG’s advice on how the impact of the credit guarantee scheme could be measured; and the impact of the Public Procurement Bill. 

Meeting report

Opening Remarks
The Chairperson welcomed everyone present and submitted the agenda for adoption. He welcomed the Mr Kimi Makwetu and expressed his gratitude for the work that the AG has done as his tenure is nearing its end.

Briefing by the Auditor General of South Africa
Mr Kimi Makwetu, Auditor General of South Africa, indicated that when the AG presented its official Report, it had assembled a multi-disciplinary team. The majority of the people in that team were diverse in terms of expertise. These individuals possessed the adequate experience and are often referenced in Departments' Strategic Plans and Annual Performance Plans. 

The findings of this Report speak for itself and many journalists have written well enough already about what these findings mean. Members should be well informed about these findings given the information that has already been published in the media.

There was a growing narrative that suggested that the whole R500 billion had gone missing. The Report only covers R230 billion of the total stimulus package allocation. The remaining was being handled as part of the tax relief by SARS.

The R70 billion was a relief from SARS as a mechanism to allow for deferral of collected money and postponement of payments that businesses were to make to SARS. This was to allow businesses to not be cash strapped but there was a hope to repatriate that money back to SARS when things go back to normal. SARS has a proper scrutiny to determine how this R70 billion would have been used by the businesses. When the AGSA audits SARS, we will ensure that we report transparently on that R70 billion.

The R200 billion was a credit scheme for businesses, which was underwritten by the National Treasury. The Minister of Small Business Development has informed the AG that of that amount, R15 billion had been used. The conditions of the loans were determined by the lender and borrower laws and conditions, despite that it is underwritten by the National Treasury.

The R40 billion spoke to the wage protection relating to the Unemployment Insurance Fund (UIF) to assist people and businesses that were affected by Covid-19. This money also formed part of the scope of the audit.

The R190 billion was the subject of adjustment budget that was tabled by the Minister of Finance. Of that amount R145 billion was allocated to various Departments that were on the front line in fighting the spread of Covid-19. R45 billion has not yet been appropriated but will be appropriated in the MTBPS or in the next budget.

The audit staff spent the past three months ascertaining how the R145 billion and the wage protection was handled. The AGSA adopted an approach centred on preventing corruption and non-compliance of internal controls. Prevention as a mechanism is one of the principal considerations that must go into the scrutiny of oversight. The AGSA spoke to the Accounting Offices and Authorities of all the Departments that were charged to spending that R145 billion to counsel them and introduce stronger prevention controls. The AGSA told them that it would come back once the processes had been done and conduct the detection test – to ascertain whether the preventative controls were introduced.

On the UIF side, the AGSA wanted to see whether there was compliance with the labour laws of the country and utilised its tools to extract whether there were people who were employed but were under 18. The AGSA detected this reported that the UIF did pay people that are under 18 years. The AGSA also linked its database with the government database, and when ID numbers were sent to all databases, it picked up people in the UIF database who also appeared on the SASSA database. The AGSA also ask the Accounting Officer why this happened, people being paid far in excess than the limit of payment that was allowed.

The preliminary findings pointed to procurement amounts that were higher than the regulations issued by the National Treasury.

R65.9 billion was spent during the April-July audit period. R57 billion of that amount was allocated for the Unemployment Insurance Fund (UIF) and the South African Social Security Agency (Sassa) grants such as the social relief and distress grant of R350, and R500 grant top-up for care-givers.

When the R500 billion was initially announced, there was a significant outcry about how the money would be spent. The R20 billion that was meant for local government has not yet been transferred because Treasury wanted to ensure that all the necessary measures that would protect it were implemented. The bulk of the R20 billion has now recently been being activated.

The AGSA listed the observations it had made:
-The rapid implementation of the initiatives in already compromised control environments created significant risks that most auditees were not able to address
-The information technology systems used by government were not agile enough to respond to the changes required
-Pre-existing deficiencies in the supply chain processes of government were amplified by the introduction of the emergency procurement processes.
-Poor record-keeping is a common feature across many initiatives, which also made it difficult for us to audit
-The pre-existing inability to coordinate and oversee efforts that involve multiple departments, agencies and spheres of government continues to plague projects
-Our data analyses identified indicators of a higher risk of fraud and abuse of funds
These matters have been flagged and referred to the auditors who were now busy conducting the audits. The real time audit approach and the depth of work done through data analyses has proven to be beneficial in identifying matters that auditees can address timeously, preventing only further recurrence.

This report should be used to direct oversight actions on how the multibillion rands entrusted for the Covid response was used. Upcoming months should be used to monitor whether control weaknesses that open the funds to abuse are being closed and whether instances where abuse has occurred were dealt with appropriately.

Accounting officers and authorities should invest in preventative controls.  It pays off when an institution is called on to deal with a crisis and is better than dealing with lengthy and costly investigation and a loss of resources and public confidence. Transparency and accountability for government spending must always prevail – even in the midst of a crisis.

Mr Z Mlenzana (ANC) asked whether the Auditor General was able to put together a detailed legacy report with his recommendations and guidance on how the Committee can best conduct its oversight going forward.

He also asked whether the AGSA could share its Report with the DPME and the Office of the President to devise an impact assessment. He added that the AGSA could put together everything it can in terms of a desktop exercise but implementation needs to be at the core. 

Mr N Singh (IFP) thanked the Auditor General for this Report and the briefing. It is always said that during adversity we should always look for opportunities and opportunities have certainly presented themselves in this new normal. If it was not for Covid-19, much of this work by the AG could not have been done and this work was done under harsh conditions. One can only imagine the outcome if the work was done under normal circumstances. There is a great burden placed on the Committee, Parliament and the AGSA and it is clear that the public has a lot of confidence in the AGSA.

In some of the media reports it was reported that the AG had mentioned that there were delays in conducting the audit by some people. Could the AG disclose to the Members who were these individuals that sought to delay the audit?

The AG mentioned that it did have capacity, but he was uncertain whether it was sustainable and the Committee might need to recommend some ring-fenced funding for additional capacity. Members were aware that the AGSA utilised its own personnel but surely there was some outsourcing done. What expertise did the AGSA outsource and perhaps those expertise could be in-sourced?

The Committee needs to be furnished with the directors names as opposed to the names of the companies that have been alleged in corrupt activities when procuring services to government. We might find that some of these directors are also in directorship of many other companies and it will be much easier to catch the perpetrators that have evaded SARS as well if we proceed in this fashion.

Ms V Mente (EFF) advised the AG that if his Office feels that more support is required in order for it to execute its mandate freely without fear or favour, the Committee was the right platform for the AG to express himself freely on where it requires more support.

She asked whether it was possible for the AGSA to get involved when all systems of government are being developed. If we do not have capacity to detect whether these systems were effective and appropriate during the developmental stage, we will always be following the money or performing post-mortem mechanisms. This may refer to financial systems or internal control systems. She referred to a case study about beneficiaries that were picked up in the SASSA system as beneficiaries but also receiving UIF payments from the TERS Scheme. It took the AGSA’s work to pick these discrepancies up; clearly the departments or government systems are not integrated well enough to pick up duplications or fraudulent activities.

The AG mentioned a follow up emergency procurement investigation currently underway. Emergency procurements should have been in May. If these stretched out to July means that the departments have been using incorrect regulations for procurement. Thus; how soon will this investigation be concluded so that Members can be furnished with it and use its outcomes when conducting its oversight. That investigation will assist Members to have access to conclusive information.

Lastly, on the poor recording keeping; there is an investigation underway on this matter by the AGSA. How soon can this investigation be concluded for Members to get the Report? 

The AGSA has shown its capacity on real time audit and performance audits. The work that has been done was commendable.

Ms C Seoposengwe (ANC) asked whether municipalities have now received the relief allocation and whether that did not affect the service delivery of municipalities considering how many of them were financially distressed.

On gender-based violence, women have been subjected to this during this lockdown period: has the Office of the AG picked up any support that has been provided by departments to women during this period?

Lastly, what role did the internal audit function in the Departments play during the audit process and implementing the preventative measures that were raised during engagements with the Accounting Officers?

Mr O Mathafa (ANC) was happy with the fashion in which the information was presented by the AG. He asked about the role of municipalities and how much bite the AGSA had in terms of auditing their allocations. In previous engagements there were no-go municipalities where the AGSA staff was intimidated and harassed in an effort to prevent them from carrying out their work.
With the AG’s expanded mandate, will some of the findings in the Report be covered by this where the AGSA is empowered to issue out direct remedial actions?
On the multi-disciplinary approach, how could this approach assist curbing the uncompetitive behaviour that was also reported in the media? One of the findings was that PPE was not procured at market related prices – prices were inflated. It is also a fact that there were some price escalations taking place in the market. Is this approach going to interact with the Competition Commission in order to curb this uncompetitive behaviour when public funds are exposed?

As for the credit guarantee scheme, even though this scheme is not constituted by public funds, the guarantee for repayments, should the borrowers' default, will come from public funds. How would the AG advise on how to measures the Scheme’s impact? In one of the briefings for small business development; there was a public outcry that the money available through the Scheme reached a few companies that were predominantly white.
On slide 20 (Call to Action), would the AGSA agree that the planned Public Procurement Bill in its finality would be a step in the right direction in addressing repetitive issues of governance relating to procurement? 

Mr Makwetu addressed the suggestion about a legacy report and stated that he will make a plan. Part of these engagements will form part of that Legacy Report. It often takes a journey like this for an institution to grow from strength to strength. He had already started putting some thoughts together for the Legacy Report which will convey some plans and measures that can be put to good use going forward.

On sharing of information with the DPME, this Report will find its way to the DPME and the AGSA had a scheduled engagement with the inter-ministerial Committee set up by the President and chaired by the Minister of Justice to share part of what he has already covered in respect to the Report. In that engagement the DPME will be present.

Before this exercise, the AGSA could not put these multi-disciplinary teams together in the manner it has done so now. The AGSA has always had people responsible for forensic audits, and in the technology environment. When the AGSA Reports come up people often switch off because they hear irregular expenditure but never follow up on the details contained in the Reports. For example, our IT specialists are combined with financial auditors and then we bring the forensic experts in that team because we are looking for a qualitative insight. If a service provider is going to supply a department and the service provider delivers an invoice from the CNA printed invoice book, this service provider has a R20 million contract to supply various but the invoice sent to the Department is a CNA invoice.

So, we always tell our teams during planning to look out for these printed stationery invoices because it is suggesting the service provider with a R20 million contract does not have an accounting system in their environment. In the midst of being allocated this contract, that service provider finds an invoice book to issue an invoice. We will now ensure that there is capacity.

There was a limited extent of outsourcing options. The AGSA did outsource people or service providers that became part of our teams when conducting the audits and the services the person or company was procured for. The AGSA also ensured that the people in those teams learn those skills as well so that they can be passed on to the organisation.

The large reasons for the delays were; for example, the team would go to the UIF for audits and before the team arrives they would receive a call informing them that people tested positive for Covid-19 and the office would be closed for a week or two. In some instances, as the teams commence with the audit of the PPE, they would get run-arounds from the staff members. It was not an ideal period to interact with people.

It is in the nature of this as we are strengthening our capacity to increase access to information technology. Most people have been working remotely until there is a clear direction on Covid-19. This meant that the demand for broadband connectivity shot up because staff members need to be connected. The AGSA will take the technology investment into account as it begins working on its strategic plans and Members must ask about the new costs associated with operational activities in the future. This also includes the investment on technology because going forward there will be a number of staff members that will continue working remotely. The AGSA must conduct an analysis on what it will need for investment in IT infrastructure and once this has been conducted, it will be furnished to the Committee.

On the involvement of the development of government systems, the AGSA AG has to be in an arm’s length involvement. Once it is involved during the development of the system, the AGSA will be referenced as part of the system. The AGSA is also not present in that environment to oversee the effective and proper implementation of that system, that is managements’ responsibility. When somebody makes a big error, we do not want them to associate us with the design of that system. Our responsibility is to independently assess weaknesses in that design. Even the Public Audit Act makes it clear that the AGSA must not be involved in the design of systems that it will subsequently subject to an audit. However, it can be involved from a counsel point of view.

In the second report in November, the AGSA will report on the emergency procurement. The SIU will also report on this and it has announced that it has been investigating an expenditure of about R5 billion in respect to procurement in health, including PPE. The figure that we have flagged is somewhere around R6.5 billion so our numbers are not far apart. We will detail the findings of emergency procurement in the second Report and the SIU will be part of the engagement on it.

The issue of poor recording keeping and documentary evidence will be covered in the second Report.

The tools of trade are required to be constantly updated or developed and the people that are after government money are often very sophisticated.

In the context of Covid-19, when people were not allowed to move around others went on the IT platforms and created pictures with funny names and addresses and some tried to steal our ID numbers. Once they have our ID numbers, they will submit those to SASSA or UIF and claim as though they were us. This is why we need to be ahead in the technology and information systems as auditors so that we can prevent and detect these matters.

As for municipalities, the National Treasury is busy with the activities that are impacting on the financial capabilities of municipalities. The AGSA will wait on the National Treasury to indicate whether it has done all the necessities. In our Report on local government in July, we reported that there was not much to go around in respect to the resources in local government. We have also counselled Treasury to not rush the process, because there may be serious problems when it comes to accountability. We have seen the work done and it is almost complete and they will soon begin channelling those funds so that they can be handled with proper care and guidance.

The role of internal auditors is vitally important and next week the AGSA will be launching a set of preventative control guides, which it had developed with the support from Treasury to ensure that they filter into different portfolios in government. We have identified about six of them and articulated what they are; what they mean; what they prevent; how should they be used; which different elements of controls must be put together to apply them and that will include the internal auditors.

In terms of the work that was done now, we did not interact much with internal auditors but some departments did utilise their internal audit function in the application of preventative measures and controls. There were some historic weaknesses in some of the audit functions but it seems that some work has been put in as part of the development journey.

The Chairperson thanked the Auditor General for his Report. 

The meeting was adjourned.

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