2019/20 Audit outcomes of DMRE & entities: AGSA briefing

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Mineral Resources and Energy

03 November 2020
Chairperson: Mr S Luzipo (ANC)
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Meeting Summary

In a virtual meeting, the Auditor-General of South Africa briefed the Committee on the audit outcomes of the Department of Mineral Resources and Energy for the 2019/20 financial year, and those of its entities whose Annual Reports had been finalised.

The Annual Reports of five entities, all under the former Department of Energy, were still outstanding. The Auditor-General said if all audits were completed, the positive aggregate performance reported in the current meeting could change into a negative one. The Committee acknowledged the findings that the Auditor-General presented but concluded that a thorough understanding of the situation in the Department could only be attained after receiving reports from the entities in the next meeting.

The Auditor-General presented the audit outcomes for the Department of Mineral Resources and Energy as two different entities: the Department of Mineral Resources and the Department of Energy, although only one Executive Authority had been responsible during the entire financial year.

The delays in finalising all the audit outcomes were due to a combination of factors. It did not necessarily mean that entities failed to submit their financial statements on time. The auditing process encountered several challenges, including delays were due to COVID-19 and setbacks due to private entities that were hired to help with the auditing process.

The Committee expressed appreciation for the comprehensive presentation. They commended South African Diamond and Precious Metals Regulator, which was the only entity in the portfolio that had obtained a clean audit. However, there were concerns about the audits that were still not finalised. The Chairperson asked how the missing audits affected the results that had been presented in the meeting. Questions were raised on supply chain issues and on what assistance the Auditor-General was able to offer on dealing with these challenges. Members asked about the expanded mandate of the Auditor-General and on what steps were being taken around consequence management, particularly with respect to Chief Executive Officers in entities where there had been a lack of compliance with supply chain management legislation. Members were concerned too that investigations into fruitless and wasteful expenditure had not been undertaken in all cases.

 

Meeting report

The Chairperson greeted everyone in the meeting and encouraged Members to always begin on time. With humour he said the Committee had to avoid fruitless and wasteful time. He said that the core of the meeting was to discuss the audit outcomes of the Department of Mineral Resources and Energy (DMRE) by the Auditor-General of South Africa (AGSA). He explained that in the previous financial year, the Department of Mineral Resources (DMR) and the Department of Energy (DOE) were audited as separate portfolios hence Members had to be cognisant of that. He encouraged the AGSA to expose its accounting officers to Portfolio Committee meetings as they also contributed to the performance of the entity. He acknowledged an apology from a Member and welcomed Ms P Madokwe (EFF) as the new permanent Member of the Portfolio Committee in the place of Ms N Hlonyana. He said the Committee was looking forward to her constructive engagements and reminded her that as a Committee Member her responsibility was to carry the nation forward. He then invited the AGSA to proceed with its briefing.
 
Briefing by AGSA
Ms Lufuno Mmbadi, Senior Manager, AGSA, greeted everyone and led the presentation. She said that despite the DMRE merger, the briefing reported the financial statements of the DMR and the DOE separately. The presentation for the briefing contained graphs, tables, and schematics. Therefore before discussing the audit outcomes in detail, she simplified some of the tools that were used to interpret the outcomes. She described the three key areas that AGSA’s audit examined: fair presentation of financial statements, reliable performance for predetermined objectives, and compliance with all laws and regulations governing financial matters. She explained that the AGSA expressed five different audit opinions: unqualified opinion with no findings (clean audit); financially unqualified opinion with findings; qualified opinion; adverse opinion, and disclaimed opinion. Finally, she dissected the portfolio that was being examined and outlined the key entities that were audited. The table below elaborates further.

[please see presentation for further detail]

The ASGA stated that for the 2019/20 financial year the SADPMR obtained a clean audit. This was a significant improvement from its consecutive unchanged audit outcomes since the 2016/17 financial year. The MHSC, Mintek, and SDT audit outcomes remained constant from the previous financial year. The DMR and the CGS on the other hand regressed due to non-compliance with key legislation. Material non-compliance was also identified in the DMR, CGS, Mintek, MHSC, and SDT. There were no outstanding audits for the DMR.

For the 2019/20 financial year the DOE recorded improved audit outcomes, progressing from a qualified audit opinion in the previous year to an unqualified audit with findings. This was because it disclosed its irregular expenditure, but there was still material non-compliance with key legislation. The NNR remained in the same position as the previous year (unqualified with findings) because material non-compliance was still reported. The audits of all the other entities under the DOE were still outstanding. These comprise the CEF Group, NECSA, NERSA, NRWDI, and SANEDI.

For both financial years, eight entities submitted financial statements according to the legislation, thus, the report remained constant as this was also the case for the previous years. The NNR and SADPMR were the only two entities that submitted their financial statements without errors. This was a regression from the 2018/19 financial year where there were four entities without errors. More regressions were recorded in the quality of financial submissions after audit. Whereas there were three culprits in the 2018/19 financial year, there were six in the 2019/20 financial year. In terms of the modified audit opinion on the annual financial statement, no entities were recorded, and this was a significant improvement.

Mintek and SADPMR submitted performance reports without errors in both financial years. A regression was noted in the quality of the final performance reports submitted after audit. The number increased from three entities in the 2018/19 financial year to four (CGS, DOE, MHSC, DMR) in the current year..

Several instances were noted of disregard for compliance with legislation in both the 2018/19 and 2019/20 financial years. The AGSA divided findings on compliance with key legislation into two categories, i.e., compliance-with no findings and compliance-with findings. For the 2019/20 financial year, SADPMR and NNR fell in the bracket of compliance with no findings whilst the SDT, MHSC, Mintek, DMR, CGS, DOE fell into the second category.

The AGSA listed the top five areas of non-compliance across the portfolios. These were the quality of financial statements submitted for audit; procurement and contract management; prevention of irregular, fruitless, and wasteful expenditure; consequence management; and strategic planning and performance management. The presentation slides show which entities were associated with each problem area.

The AGSA considered the status of internal control under three sections (leadership; financial and performance management and governance). In the assessment of these sections across the portfolio, three showed regression, one was unchanged, and one showed improvement. The improvement was in the leadership section, where six of the seven entities who had finalised their annual reports were found to have effective leadership. The exception here was the SDT, where leadership was a concern.

Internal control within financial and performance management was of concern in all of the reporting entities when the AGSA considered how each reviewed and monitored compliance. It was of concern in DMR, SDT and NNR in respect of proper record keeping and daily and monthly controls. DOE, CGS, MINTEK and SADPMR were found to have good internal control for record keeping and daily and monthly controls.

The internal controls for governance (i.e. risk management) were found to be good for all the reporting entities, except for SDT. New concern was expressed by the AGSA on internal controls on risk management at SDT.
 
The AGSA reported that the revenue and expenditure management of entities was generally concerning. But there had been a small improvement: fruitless and wasteful expenditure decreased over 2 years. For the 2018/19 financial year fruitless and wasteful expenditure was R118 million, and it fell to R90 million for the 2019/20 financial year. In this period of two financial years, investigations of fruitless and wasteful expenditure were done by the DMR but not by the DOE.

The AGSA reported that the bulk of wasteful expenditure was due to storage costs for geyser units to various suppliers by the DOE. The remainder of the costs were due to travel expenses not approved, missed flights by staff, and late renewal of system licence fees.

In terms of irregular expenditure, the total amount dropped from R192,850 million in the 2018/19 financial year to R48,878 million in the 2019/20 financial year. Irregular expenditure for the current year was claimed to have resulted from, among other things, procurement without proper competitive bidding, and payments made without following proper processes.

The AGSA reported that there was a regression in supply chain management compliance in the 2019/20 financial year. Material findings were made against DMR for contracts that were awarded to suppliers whose tax matters had not been declared to be in order. Concern was raised about goods, works or services that were not procured through a procurement process which was fair, equitable, transparent and competitive (SDT, NNR and MINTEK); and about an instance where CGS paid a supplier more than the original quotation that had been accepted.

The AGSA summarised the root causes for problems that were evident for the financial health of the reporting entities in the 2018/19 and 2019/20 financial years. In the cases of DMR; DOE; MINTEK; CGS; SDT and MHSC, the AGSA found there to be slow or no response to its recommendations for improving key controls and addressing risk areas. “Management (accounting officers/ authorities and senior management) do not respond with the required urgency to our messages about addressing risks and improving internal controls.” And in the case of NNR the AGSA report found report found there was inadequate monitoring by senior management to ensure regular and timely reviews of performance information. 

The AGSA explained that the status of records review was an instrument it used to identify key areas of concern that had the potential to compromise the preparation of performance and financial reports. For the current financial year, reviews were performed for the DMR, DOE, Mintek, CGS, SDT, SADPMR, and NNR. Negative results were reported for SDT and SADPMR in four focus areas.

The AGSA recommended that management of the Department and the entities should respond with greater urgency to the AGSA’s messages about addressing risks identified and improving internal controls. Reviews of performance information by senior management had to be done more regularly.

The AGSA recommended that the Portfolio Committee should require that accounting authorities and the Minister provide feedback on the implementation and progress of action plans to ensure improvement in the audit outcomes of the portfolio.

The briefing concluded with the AGSA commending the SADPMR for obtaining a clean audit and outlining the main challenges that were identified in the audit.

The Chairperson thanked the AGSA and Ms Mmbadi for the briefing and opened the meeting for discussion.  

Discussion
Mr K Mileham (DA) greeted everyone and thanked the AGSA for its comprehensive report. He expressed concerns about the number of entities that had not finalised their annual reports. Although he indicated that he was fully aware of the fact that the AGSA had no control over when these reports were submitted to it, he asked if the AGSA could provide more insight on why it had not received these reports from the entities in question. He noted that almost every year there were reports about challenges around supply chain management. He then asked if it was possible for the AGSA to assist the DMRE and these entities with a framework to overcome this setback because it seemed they were not doing anything constructive.

Ms C Phillips (DA) greeted everyone and asked if it was possible to show the percentage of the budget that was irregularly spent instead of the monetary amount in slide 20. She also asked if the contract for the monument [to deceased mineworkers that was commissioned by the MHSC] was included in the irregular expenditure category because it was above the budgeted amount by 26%.

Ms N Hlonyana (EFF) asked for clarity on the payments that were discussed on slide 21 of the presentation on problems with supply chain management. She highlighted that in the previous year, the AGSA was granted power to deal with entities that did not comply. Therefore, what measures were going to be taken to deal with the Chief Executive Officers (CEOs) of these entities?

Mr W Wolmarans (ANC) greeted everyone and applauded the AGSA for providing a comprehensive report. He said it provided greater detail on issues that the Committee had been discussing with the DMRE and its entities in the previous meetings. Like Mr Mileham, he pointed out that every year the AGSA reported problems concerning the supply chain. This also included the tendency to pay entities without evaluating if their tax matters were in order, and the overpayment of invoices without the necessary documentation from the authorities. He asked the AGSA if, according to its experience, these were deliberate actions by personnel who, despite being highly qualified and competent, continued to make the same mistakes every year. This was also in light of the fact that consequence management was absent on this level.

Mr Wolmarans said that while this was not entirely the AGSA’s fault, findings in the report called for the Committee to arrange more oversights to monitor this behaviour in the Department. In conclusion, he said there were some slight improvements in several areas among the entities despite the many challenges that were alluded to.

Mr S Kula (ANC) greeted the Chairperson in isiXhosa and welcomed the AGSA’s report. He praised the SADPMR for attaining a clean audit. He asked if the AGSA had a strategy to deal with entities that struggled to meet key deadlines. Like other Members, he expressed concerns about the supply chain particularly the payment that the CGS had made which was more than the original quotation. He asked how the Department dealt with this issue.

Mr Kula also expressed concerns about the fruitless and wasteful expenditure. He mentioned that according to the AGSA, senior management promised to investigate the DMR and the DOE. However, investigations [on fruitless and wasteful expenditure] were only done for the DMR. He then asked if the AGSA when it intended to complete these investigations, and what solutions it had to avoid similar mistakes from recurring. He also reflected on irregular spending by the MHSC due to not following competitive bidding and asked what measures had been put in place to ensure that this entity adhered to the stipulations of competitive bidding. Finally, apart from these issues, he commended the drop in irregular expenditure among the entities from R192 million in the previous year to R48 million in the current financial year.

The Chairperson acknowledged Mr Kula’s observations although he encouraged him to save some of his questions for the meeting with the entities [on the following day]. This was the only way he could obtain sufficient clarity on the matters he was raising. However, notwithstanding the fact that it was not compelled to answer some of these questions, he said the AGSA was free to respond to questions concerning other entities. He was particularly interested in the AGSA’s opinion on what ought to have been done by the DMRE, as well as the expected audit outcomes.

Responses
Ms Mmbadi agreed with the Chairperson that there were questions that could only be answered by the entities themselves, especially the one on consequence management and why certain investigations had not been done. She invited her colleagues who specialised in different branches of the AGSA to shed some light on some of the questions that had been asked.

The AGSA executive responsible for the MHSC said that the bulk of irregular expenditure identified in slide 21, which Mr Kula had raised was due to the extension of a building lease without the approval from the National Treasury. The other reason was the renewal of a contract also without approval from the relevant authorities. She said this contract was already identified as irregular expenditure in the previous year but the MHSC continued to finance it up to the current financial year. Finally, in response to Ms Phillips’ question, she replied that overspending on the monument was not included in the irregular expenditure category.

Ms Mmbadi responded to the question about unfinalised audits and explained that this did not mean entities had not submitted their annual financial statements to the AGSA on time. In fact, there were challenges between the audit teams and the management of those entities. She called upon her colleague to explain further on this issue.

Mr Odwa Duda, Acting Corporate Executive, AGSA, greeted everyone and explained that his responses were based on the CEF group, NERSA and SANEDI. For the CEF group, he said its financial statements were submitted on time, but finalisation delays were due to the auditing process itself. He explained that PetroSA delayed with additional information that was needed for the evaluation and auditing process. This was worsened by additional delays in the audit of performance information which consequently compromised the finalisation timeline. He pointed out that COVID-19 pandemic also played an important role in some of these delays. For instance, the CEF group had arranged board meetings in preparation to submit its financial statements but because several members fell ill this did not materialise. He said the pandemic had a similar effect on NERSA and SANEDI.

In response to Ms Phillips’ question, Ms Mmbadi replied that the AGSA was willing to provide the Committee with a report outlining the actual percentage of irregular expenditures on the budget. She also explained that the AGSA used the status of records review approach before financial statements were submitted to assist entities that were facing problems in the supply chain. She explained that the AGSA discussed new pronouncements that entities had to be on the lookout for to comply. Apart from this, she referred to checklists that entities could use before the procurement process was finalised. This helped in monitoring if all the legislations have been complied with before the final decision was made. However, she stressed that once non-compliance was recorded in an entity it was impossible to rectify it.

Ms Mmbadi said the excess payment that the CGS made was due to technical problems with the procurement process. She said the CGS required additional goods that were not listed in its initial contract. After being granted money to obtain these goods, the procurement department did not record this additional expenditure. As a result, it reflected as excess expenditure in the report, yet it was funding for the CGS specifically to procure additional goods. In response to the question about the implementation of [the new powers of the AG to identify and follow up on] material irregularities, she said the AGSA had planned a pilot [application of the law to several] entities, excluding the DMRE, that were specifically selected for the purpose of performing material audits. However, she stated that the final decision on which entities to include or exclude was going to be made in the next financial year.

Mr Kwena Mokgokong, Senior Audit Manager, AGSA, elaborated further on the reasons why there were delays in the audits. He confirmed that NERSA and the CEF Group submitted their financial statements on time but the AGSA encountered a few setbacks with the finalisation of the audits. He mentioned that one of the contributing factors was the challenge that the AGSA faced in contracting an entity to assist it with the auditing process. Other delays were due to changes made on audit fees and the COVID-19 pandemic. He said working remotely contributed significantly on the delays that were encountered in the auditing process. Due to a combination of these reasons, he said entities like NECSA did not submit their reports on time and this was the reason why its audit was not signed off on time. However, despite these challenges, the AGSA managed to successfully sign off the Nuclear Radioactive Waste Disposal Institute (NRWDI).

Further discussion
The Chairperson acknowledged the AGSA’s responses and asked if Committee Members wished to ask additional questions.

Mr M Mahlaule (ANC) said he wanted to follow up on the explanations that had been given for delays specifically for the NECSA group, but Mr Mokgokong had just shed light on that. He explained that since 2017 NECSA exhibited the same behaviour so he wanted clarity on possible reasons why they were not signed off in the current financial year. Mr Mokgokong’s explanation therefore, provided a sufficient answer for him.

Mr Mileham said he was not in the tendency of criticising the AGSA because he believed that they did an incredibly tough job in very difficult circumstances. However, he vehemently stated that it was unacceptable for the AGSA to not sign off audits despite receiving financial statements from entities on time. He said everyone was aware of the prevailing difficult times, and that Parliament was subjected to these same conditions but had timelines and deadlines to meet too. This was going to be difficult to achieve if the AGSA was failing to fulfil its mandate. He issued a warning to the AGSA and emphasised that Parliament was very critical of departments that submitted their reports late.

The Chairperson thanked the Committee Members for their contributions and said he also had a few questions but preferred to ask them when the Committee met with the DMRE and its entities. However, he wanted clarity on the improvements that were highlighted by the AGSA in the executive authority level of the entities. He asked how the AGSA was going to calculate assurances considering that the DMRE and the DOE had been merged, and that the same executive authority was responsible for each of these two entities.

The Chairperson also expressed concern about the reported regression of senior management in the entities. He said this posed a tremendous risk on many issues including turnaround time. He also asked the AGSA to explain what the implications of outstanding audits were. He explained that the Committee stood the risk mis-reporting the positive performance of entities according to the AGSA, yet outstanding audits had long term negative implications.

Further responses
Ms Mmbadi replied that for the entire financial year only one executive authority was responsible for activities in the DMR and the DOE. As part of the audit process, there was the compliance assessment that needed to be performed for the two entities. However, in fulfilling this assessment, the DMRE did not provide evidence that the executive authority did indeed perform its oversight responsibilities. This explained why there was only assurance on the part of the DOE.

Ms Mmbadi also pointed out that senior management was the first point of defence in the entities because its mandate was to monitor activities and to act swiftly on matters arising. Therefore, after looking at a few material statements provided by the entities in question, she said the AGSA felt that there were some delays that could have been avoided had there been senior management in place.

In response to the Chairperson’s question on the implications of outstanding audits, Ms Mmbadi confirmed that it indeed had a huge impact on what had been presented in the meeting. She said if all audits were completed, the positive performance reported in the current meeting could change into a negative one. For example, while the present report only focused on audits that had been finalised, a complete audit would include extra fruitless and wasteful expenditures by other entities thus, consequently, changing all that had been presented initially.

The Chairperson thanked Ms Mmbadi and the AGSA and said he looked forwards to hearing the views of the entities in the following meeting. He also praised the SADPMR for doing well. He emphasised that the Committee had to strive to ensure that all entities reached that level.

Minutes
Committee minutes dated 27 & 28 October 2020
The minutes were adopted without amendments or objections.

The Chairperson thanked Committee Members.

The meeting was adjourned.
 

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