Audit Outcomes DIRCO & African Renaissance Fund 2019/20; with Deputy Ministers

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International Relations

12 November 2020
Chairperson: Ms T Mahambehlala (ANC)
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Meeting Summary

Video: Portfolio Committee on International Relations and Cooperation

In a virtual meeting, Auditor-General South Africa (AGSA) gave a briefing on the on the 2019/20 audit outcomes for Department of International Relations and Cooperation (DIRCO) and the African Renaissance Fund (ARF). AGSA reported that ARF has obtained an unqualified audit opinion with no findings which is the same clean audit as for 2018/19. DIRCO received a qualified audit opinion on receivables. This is a new qualification as DIRCO was qualified in tangible capital assets, cash, and cash equivalents in 2018/19. DIRCO managed to address some 2018/19 audit findings on movable tangible assets and cash equivalents but still received a qualified audit with findings. DIRCO incurred R247 million unauthorised expenditure and R211 million irregular expenditure for 2019/20.

AGSA stated that DIRCO still lacks proper record keeping which was identified as an area of concern as well as risk management and intervention will be required for monitoring and compliance within the Department.

Committee members noted that the Department continues to have the same audit findings which meant it has not been implementing recommendations raised not only AGSA but also this Committee. Members pointed to the large unauthorised and irregular expenditure and asked if this was because no consequence management was applied. Members asked about DIRCO supply chain management practices and if the SCM unit is adequately skilled. They asked why ARF receives clean audits and DIRCO fails. Questions were raised about the annual financial statements which had errors which DIRCO could not rectify due to the lack of source documents. They asked AGSA if it has instituted consequences against DIRCO for the repeated qualified audit and when AGSA will invoke the Public Audit Amendment Act, which gives AGSA powers to hold the accounting officer personally responsible for irregular activity.
 

Meeting report

The Chairperson asked the Committee to observe a moment of silence for Auditor-General Kimi Makwetu who had passed on earlier today. She said the Committee is saddened by news and will remember the Auditor-General as someone who was committed to serving South Africa and unmasking maladministration within government. She thanked the AGSA team for availing themselves during such a difficult time.

DIRCO & African Renaissance Fund Audit Outcomes 2019/20
Mr Polani Sokombela, AGSA Business Executive, said the 2019/20 audit outcomes have remained unchanged compared to the previous financial year. ARF obtained an unqualified audit opinion with no findings which is the same as 2018/19. DIRCO received a qualified audit opinion on receivables. This is a new qualification as DIRCO was qualified in tangible capital assets, cash, and cash equivalents in 2018/19. DIRCO managed to address some of last year’s audit findings on movable tangible and cash equivalents but still received a qualified audit with findings. Financial statement preparation remains a concern for DIRCO as material adjustments had to be effected to the AFS submitted for audit. Compliance with legislation is another area of concern for DIRCO especially in supply chain management (SCM).

Process followed to clear qualification on 2018/19 Cash and Cash Equivalents
Material misstatements in cash and cash equivalents resulting in a qualification in 2018/19, were as a result of differences between balances in cash book and in the AFS. The root cause was a lack of proper reconciliations between the cash book and bank account statements which were not followed up.

Management reconciled the cash book to the amount in the AFS for 31 March 2019. The unexplained differences of R187 million (2018/19: R140 million) were then moved to Receivables. This resulted in a material misstatement under Receivables as it could not be audited. Management has now committed to perform regular reconciliations to prevent similar challenges in future.

Mr Thabiso Matladi, AGSA Senior Manager, spoke to the 2019/20 audit findings for DIRCO and ARF:

Credible Financial Reporting
DIRCO submitted AFS that contained material errors, and they could not correct all of them, as a result, they received a qualified opinion

ARF submitted AFS that are free from material misstatements.

Credible Performance Reporting
ARF submitted a performance report with material misstatements which were corrected during the audit. This was also the case in the previous financial year.

DIRCO submitted performance report which was free from material misstatements.

Disregard for compliance with legislation
ARF - No material non-compliance identified
DIRCO - Top three non-compliance areas:
• Procurement and contract management: contracts extended or modified without approval.
• Expenditure management: steps not taken to prevent irregular expenditure of R211 million
• Annual financial statements: Material misstatements in submitted financial statements.

Status of Internal Control
DIRCO Financial Performance Management and Governance still lacks proper record keeping and this was identified as an area of concern. There is also poor daily and monthly controls. Risk management remains a concern and intervention will be required for monitoring and compliance.

Financial Health
Although there are no going concern uncertainties for both DIRCO and ARF, DIRCO has unfavourable indicators. DIRCO incurred unauthorised expenditure of R247 million in 2019/20.

Irregular expenditure
ARF - No irregular expenditure incurred in both years
DIRCO - R204 million non-compliance in 2018/19 due to ongoing multi-year contracts.

Fruitless and wasteful expenditure
ARF - No fruitless and wasteful expenditure
DIRCO - R1.63 million non-compliance in 2019/20.

Supply chain management findings
ARF - No findings for supply chain management
DIRCO:
• Contracts extended or modified or deviations without appropriate approval.
• Award to bidders who did not submit a declaration.
• Service procured not in accordance with the transversal contract terms.

Root Causes of audit outcome
DIRCO:
• Slow or no response to improving key controls and addressing risk areas
• No basic financial discipline in performing detailed reviews of monthly reconciliations
• Ineffective action plan on compliance monitoring
• Inadequate SCM compliance monitoring processes.

Recommendations
To DIRCO and ARF:
• Implement timely audit action plan to address audit findings, especially in compliance with legislation.
• Ensure procurement has been reviewed by SCM Unit prior to approval or award
• Improve communication between missions and head office to avoid contradictions between the AFS and cash and cash equivalents, receivables, and tangible capital assets.
• Prepare monthly reconciliations between accounting records and fixed assets register and continue with 100% asset verifications annually
• The accounting officer should ensure a culture of consequence management is maintained.

To Portfolio Committee:
• It should request the accounting officer and the Minister to provide feedback on progress of its audit action plan to ensure improvement in the audit outcomes of the portfolio.

Discussion
Mr B Nkosi (ANC) said what AGSA presented today agrees with what the Department’s internal audit function has presented to the Committee. He asked if the key performance areas are clear at an organisational, functional and individual level in DIRCO. AGSA needs to explain receivables. The Committee has raised supply chain management with DIRCO before. He asked AGSA if the DIRCO SCM Unit has the required skill set and what the difficulties are in ensuring compliance with legislation.

Mr T Mpanza (ANC) said ARF receives clean audits yet DIRCO, of which ARF is an entity, receives qualified audits. He asked what ARF is doing right that DIRCO is not doing. ARF was able to address material misstatements as the audit process unfolded but DIRCO failed. He asked why DIRCO was unable to address the material misstatements. How long has DIRCO experienced the problem of cash on cash equivalents and why has there not been a solution? He asked AGSA to identify which missions are still experiencing this problem. DIRCO must come up with a solution to the multi-currency issue as this is one of the reasons DIRCO incurs unauthorised expenditure since compensation of employees abroad happens in different currencies. He asked if AGSA assists DIRCO with capacity particularly its finance unit.

Rev K Meshoe (ACDP) asked for an overall impression of the audit teams appointed in countries where AGSA audit team could not go due to COVID-19 and the budget implications of this. He asked for clarity on DIRCO being unable to rectify the errors in the submitted AFS. What happens when financial statements are unable to be rectified, is this reported to the Minister and are the AFS just left like that. He asked why recurring unauthorised and irregular expenditure continues to be a problem and if there is consequence management within DIRCO.

Mr D Moela (ANC) asked if the SCM Unit is staffed with capable and honest officials. The unit is not functioning properly because it might not have the required skills to comply with SCM practices. The Committee needs to analyse if everyone in this unit is qualified and placed correctly. He asked if ARF and DIRCO had different finance units. He asked if DIRCO was able to implement the 2018/19 audit recommendations.

Ms T Msane (EFF) said she is not shocked by the audit findings. Instead of getting better, the situation is actually getting worse. It is very alarming that DIRCO is issuing contracts to bidders without bidders presenting their declarations which is a basic requirement for any contract the state enters into. Legislation guides DIRCO on how to spend public money however it continues to ignore and contravene legislation.

Ms Msane asked AGSA when it will invoke the Public Audit Amendment Act, which gives AGSA powers to hold the accounting officer personally responsible for irregular activity. AGSA cannot allow these problems to happen every year without consequences. DIRCO continually having errors in its AFS is unacceptable and there needs to be consequences. If not, these findings will be identified again next year. R247 million unauthorised expenditure on compensation of employees is alarming. Has AGSA looked at the number of employees that are incorrectly placed. What reservations has AGSA expressed about unoccupied property held by DIRCO overseas?

Ms Msane noted that both Deputy Ministers are in the meeting and referred to the three-year insurgency in Mozambique with 430 000 people displaced and more than 2000 people killed. She asked why SADC has not invoked Article 6(1) of the SADC Mutual Defence Pact which states that an attack on a state party shall be considered a threat to regional peace and security and such an attack will be met with immediate collective action. What is SADC and the AU doing to address the conflict in Mozambique?

Mr M Chetty (DA) said DIRCO will continue to have unqualified audits because there is no consequence management within DIRCO. It is not the first time the Committee hears of these audit findings. The Director- General and Chief Financial Officer promised that they would address and fix these findings. He asked AGSA had they been able to go to all the mission and perform audits , would there have been an adverse outcome. He asked what observations AGSA had made on the New York land acquisition pilot project and the continued unauthorised rental. There is a will within DIRCO not to do things right because it fears that it would expose further mischief happening in DIRCO.

Response
Mr Sokombela, AGSA Business Executive, replied that DIRCO is doing very well with its KPIs. AGSA has not identified problems with the DIRCO Annual Performance Plan or its report on it. On receivables, DIRCO has not been able to perform proper reconciliation between bank accounts and cash books and these amounts have accumulated over the years. There is a long list of items that cannot be supported by documentation. AGSA cannot go into detail on receivables as there is no documentation. AGSA has raised this as a limitation. DIRCO needs to get the supporting documents for reconciliations. Irregular and unauthorised expenditure is an area of concern and the Committee has correctly identified consequence management as being the main cause. There have been investigations but no consequences. DIRCO’s accounting officer needs to implement consequence management. Material misstatements in DIRCO were picked up in the audit process but DIRCO could not address these because there were no source documents for some of these items. He said there is a limitation of scope, so AGSA would not be able to identify which missions are the culprits. There is a slow response from DIRCO on concerns raised by AGSA.

Mr Sokombela  replied that AGSA was left with no choice but to outsource overseas audits due to COVID-19. There were no budget implications. Supply chain management practices and the awarding of contracts without declarations is a concern to AGSA because the same challenges have been identified for the past decade. DIRCO has made progress in addressing findings and implementing recommendations. However there are still transgressions coming from supply chain management.

Ms Sangeeta Kallen, AGSA Deputy Business Executive, replied that AGSA follows a process to identify which prior year audit recommendations have been implemented. What has been implemented does not get raised in the next audit report. Vigorous processes were put in place by DIRCO management to identify tangible assets at all missions which was part of a clean-up effort. There needs to be proper document management and proper asset tracking. DIRCO needs to maintain monthly reconciliations to address assets in a sustainable way.

Mr Matladi, AGSA Senior Manager, replied most contracts awarded without declarations were for IT and storage units. ARF is a small entity which make it easier to identify challenges compared to DIRCO which operates in multiple countries. DIRCO needs to tighten its control and ensure there is effective consequence management. There also needs to be more compliance. DIRCO is currently busy with a skills audit and it needs to address all units which will give DIRCO an opportunity to address challenges

The Chairperson asked which contracts are extended without proper approval. AGSA recommended that the DIRCO finance unit should be capacitated.  She asked the Deputy Ministers what the role of the CFO is and if the CFO is doing an adequate job or if major shortfalls are identified. She asked the number of missions AGSA was supposed to audit but could not due to COVID-19. She asked what the problem with DIRCO’s suspense account is. Record and cash keeping in the missions seems to be a persistent problem and asked why this is the case. She asked AGSA to explain in detail what the irregular expenditure entails.

Mr Sokombela replied that the Chairperson had asked an important question about the role of the CFO. The CFO’s main responsibility is to prepare credible financial statements. The CFO is also responsible for supply chain management within DIRCO. He made a request to the Committee that DIRCO submit its audit action plan to AGSA and the Committee. AGSA was supposed to visit 22 missions but only managed to visit 16 and the audits of six missions were outsourced within those countries.

Mr Sokombela explained that the problem with the suspense account is that there are no supporting documents for what is in that account. There is a limitation due to lack of source documents which makes it hard to identify the money within the account. DIRCO needs to be asked why it is unable to provide source documents.

The Chairperson thanked AGSA team. The Committee will take these matters up with DIRCO and will request an audit action plan from DIRCO. She asked the Deputy Minister for input before the meeting adjourns.

Deputy-Minister Candith Mashego-Dlamini said she does not have anything to add but appreciated the presentation by Auditor-General SA. She said the audit outcomes and recommendations will be discussed with the accounting officer.

Meeting adjourned.

 

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