Western Cape 2019/20 Annual Reports & Audit Outcomes; 2nd Adjustments Appropriation Bill

Budget (WCPP)

01 December 2020
Chairperson: Ms D Baartman (DA)
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Meeting Summary

Video: Budget Committee, 1 December 2020, 09:00

The Budget Committee was briefed by National and Provincial Treasury on the 2019/20 Annual Reporting Process. National Treasury stated that the annual report was an important tool in the accountability loop and was thus primarily for accountability purposes. It ought to include information on critical factors to understand performance. It linked financial and non-financial information to show how resources and strategies influenced results.

AGSA reported on the 2019/20 Western Cape Audit Outcomes. Of the 20 auditees, 14 received clean audits as unqualified with no findings (70% of audits). Four received unqualified with findings audits (20% of audits). One received qualified with findings (5% of audits). One audit was outstanding (5% of audits).

With the recent passing of the outgoing Auditor-General of AGSA, Mr Kimi Makwetu, Members offered their condolences. Best wishes were extended to the new Auditor-General, Ms Tsakani Maluleke.

With staff having to work from home due to Covid-19, Members asked how data had been collected or whether it had just been a desktop study. Members wanted to understand the concept and the method of reporting the moving balance for irregular expenditure. There was a concern about the Western Cape irregular expenditure rising from R8 million to R281 million in 2019/20 due to a contract irregularity in Human Settlement. Members noted that that there had always been a somewhat nuanced explanation given by municipalities that irregular expenditure was "not a serious issue" and asked Treasury's view on this. Other questions included what criteria National Treasury followed about changing the targets set in the Annual Performance Plan, such as was happening with Covid-19, and what the legislatures should consider when it comes to evaluating these changed targets; what resources were needed to be able to start doing service delivery audits; if a compliance certificate was needed in the BBBEE reporting requirements for the Annual Report; and how National Treasury made an impact evaluation of the MTEF Provincial Budget when conditional grants were cut for the funds to go directly to the SAA bailout.

The Western Cape Second Adjustments Appropriation Bill [B7-2020] was adopted.

Resolutions included inviting the heads of the Departments of Transport and Public Enterprise to account for the budget cuts of R10.5 billion redirected to the SAA bailout which would harshly impact on the provinces.

Meeting report

National Treasury: Using the Annual Report as an Oversight Tool Presentation
Ms Lindy Bodewig, Chief Director: Technical Support Services at National Treasury, stated that the annual report was an important tool in the accountability loop and was thus primarily for accountability purposes. It ought to include information on critical factors to understand performance. It linked financial and non-financial information to show how resources and strategies influenced results.

Why is Governance Important
• Commitment by the department to maintain the highest standards of governance is fundamental to the management of public finances and resources.
• Users want assurance that the department has good governance structures in place to effectively, efficiently and economically utilise state resources, which is funded by the taxpayer.

The Governance Information
• Risk Management – risk management policy and strategy, risk assessments and new emerging risks.
• Fraud and Corruption – fraud prevention plan and how is implemented, whistleblowing mechanisms.
• Minimizing Conflict of Interest – processes implemented to minimize supply chain conflict of interest.

Matters to Consider
• Does the report include all relevant content?
• Is the information communicated simply and clearly?
• Is sufficient information provided on complex matters, such as COVID-19 impact on performance?
• Is the report original, or are key portions copied from previous reports?
• Is each measurable objective in the APP reported on in the report?
• Is the service delivery information consistent with the mandate and the budgeted programmes?
• Does management show commitment to address concerns of oversight bodies?
• Does it have sufficient resources to achieve objectives, if not what are the plans to address this?

Auditor-General South Africa (AGSA) on 2019/20 Western Cape Audit Outcomes
Ms Sharonne Adams, AGSA Corporate Executive, said of the 20 auditees, 14 received clean audits as unqualified with no findings (70% of audits). Four received ‘unqualified with findings’ audits (20% of audits). One received ‘qualified with findings (5% of audits). One audit was outstanding (5% of audits).

Of the 14 clean audits, all 14 remained unchanged: Community Safety; Cultural Affairs and Sport;  Premier; Economic Development; Environmental Affairs; GMT; Human Settlements; Local Government;  Provincial Parliament;  Provincial Treasury; Social Development; Transport and Public Works;  Cape Nature; Saldanha Bay IDZ. Of the four unqualified with findings audits: Education, Casidra; Gambling and Racing Board remained unchanged but Wesgro had regressed. Agriculture received a qualified with findings audit outcome and remained unchanged. Health had an outstanding audit.

Accountability and transparency enabled through credible financial and performance reporting:
Financial Statements
• Submission of financial statements by legislated date - 100% for both 2018/19 and 2019/20.
• Quality submission for auditing increased from 89% in 2018/19 to 95% for 2019/20.
• Quality of published financial statements unchanged at 95% for both 2018/19 and 2019/20.

Performance Report
• Preparation of performance reports unchanged at 100% for both 2018/19 and 2019/20.
• Quality submission for auditing increased from 58% in 2018/19 to 68% for 2019/20.
• Reliable reporting of achievements unchanged at 89% for both 2018/19 and 2019/20.

Compliance with Legislation
• Of the 19 audits, there were 16 ‘with no findings’ outcomes (84%). Three received ‘with findings’ (16%).

• Of the 19 audits, there were 15 ‘with no findings’ outcomes (79%). Four received ‘with findings’ (21%).

Most common non-compliance areas
• Management of procurement and contracts which regressed
• Quality of financial statements which remained unchanged

Irregular Expenditure Increased
Annual irregular expenditure increased from R8 million to R281 million. The figure was not complete as two auditees (11%) were still being investigated to determine full extent of irregular expenditure.
• 51% (R142 million) were expenses in 2019-20. R15 million was non-compliance in 2019-20. R127 million was expenditure on ongoing multi-year contracts.
• 49% (R139 million) were expenses in previous years only uncovered and disclosed in 2019-20.

Western Cape Provincial Treasury – Annual Report Process and Guidelines
Mr Aziz Hardien, Chief Director: Financial Governance and Accounting, Provincial Treasury, stated that an Annual Report presented information in an understandable and concise manner.

The 2014/15 National Treasury Guide for Provincial Departments notes additional requirements:
• The Accounting Officer must provide information on public/trading entities/enterprises in the Department.
• The Accounting Officer Report should cover operational/strategic plus financial perspectives.
• Specific content guidance for the narrative and tabular formats were provided.

The change to 2019/20 Guide is to Annexure D which template needs to be completed about documents attached in the entity's submission to the BBBEE Commission.

PFMA Exemption Notice
• In the Government Gazette No 43188 of 31 March 2020, National Treasury exempted for 2019/2020 compliance with deadlines in sections 8(1)(b), 8(5), 19(1)(b), 19(5), 40(1)(c), 40(1)(d), 55(1)(c), 55(1)(d) and 65(2) of the PFMA as well as regulation or instructions associated with these provisions.
• The deadline was extended by one month. If the lock-down is extended, compliance must be within two months after the deadline.

Audit Committee
Six Departmental/Cluster Audit Committees:
• Health
• Education
• Transport and Public Works
• Social Cluster (Social Development, Community Safety, Human Settlements, Cultural Affairs and Sport)
• Economic Cluster (Agriculture, DEADP, DEDAT)
• Governance and Administration Cluster (Premier, Provincial Treasury, Local Government)

The Audit Committees must provide oversight on:
• The effectiveness of internal control systems
• The effectiveness of the Internal Audit function
• The risk areas to be covered in the scope of internal and external audits
• Commentary on the Annual Financial Statements
• Any accounting and auditing concerns identified
• Compliance with legal and regulatory provisions
• The activities of the Internal Audit function, co-ordination with external auditors, internal audit reports, management responses to audit recommendations.

Irregular Expenditure – what is irregular expenditure
• Expenditure incurred not in accordance with applicable legislation.
• Such expenditure does not necessarily mean that money was wasted or fraud committed. It is an indicator of non-compliance in the process which needs to be investigated by management.

Management of Irregular Expenditure
• National Treasury Instruction 2 of 2019 further regulate irregular expenditure.
• PT Circulars and Transversal SOP issued to guide with interpretation and implementation of IE Framework.
• Investigation and Irregular Expenditure training in September 2020 by Provincial Treasury and Provincial Forensic Services to all departments and public entities.
• Progressive disciplinary training to all internal control units in November 2020, to assist officials with the implementation of consequence management.
• Condonation Working Committee (CWC) established within Provincial Treasury in line with NTI 2 of 2019, to assist MEC of Finance to consider all requests for condonation of IE from departments and public entities.
• Accounting Authority / Officer (AA/AO) to address non-compliance of policies, procedures, delegations.

The Provincial Treasury Condonation Working Committee (CWC) is in the process of addressing a current backlog of 602 requests for condonation of IE prior to 31 March 2021. Provincial Treasury has also requested National Treasury to consider introducing a materiality level for the condonation of IE to assign the responsibility to condone all IE of R10 000 and below to the AO/AA.

Mr R Mackenzie (DA) offered his sincerest condolences to the Auditor-General team on the passing of outgoing Auditor-General, Mr Kimi Makwetu. In the same breadth, he welcomed the new Auditor-General, Ms Tsakani Maluleke, and wished her a prosperous term in her new position.

With staff having to work from home due to Covid-19, he asked how data had been collected for reporting or if it had just been a desktop study. He asked for a copy of the set guidelines to get an idea if policies were correct. He sought understanding on the second item in the presentation.

Ms N Nkondlo (ANC) asked about the concept of irregular expenditure and the correct format Provincial Treasury followed. She found that when raising irregular expenditure at municipal level, there had always been a somewhat nuanced explanation – that irregular expenditure was not a serious issue - which notion she did not agree with. If competitive bidding was not followed, someone had received a tender in an unfair manner. She asked about public participation and how financial audits reflected the public's finances and voiced the public's concerns.

In slide 14 on performance information, she asked how continuous monitoring by Provincial Treasury was being done and could indicate the true performance information in the result changes.

Mr L Mvimbi (ANC) asked for more information on the irregular expenditure rising from R8 million to R281 million as it was a great cause for concern.

National Treasury response
Ms Bodewig replied that information on the reporting items would be sent to the Committee. She clarified that the 2019/20 financial year was almost at a close when the pandemic initially hit, and the lockdown impact would truly only be reflected in 2021. The guidance which they issued to Departments related to the 2019/20 financial year on things to consider going forward. The impact of the pandemic would only be felt over the next two to three years and would be something they kept on their radar.

She replied that public participation was indeed very important, however, it could not speak to the budget and performance information but certainly from a financial statement view, standards had been set by the Accounting Standards Board and National Treasury. The idea was to set financial statements and prescribe requirements which would address the needs of the public and certainly not Treasury’s requirements. It should be addressing what the parliamentarian / taxpayer / user of services would want to see when they picked up the financial statements. It was anything but a desktop exercise, as many different oversight structures were consulted, including rating agencies, users and even the Auditor-General on whether there was anything which they would like to see in the financial statements. A useful report and summary on the interest drawn and suggestions received could be given to the Committee.

AGSA response
Ms Adams thanked the Committee for the messages of condolences and stated that the Office of the Auditor-General appreciated it, especially whilst they were still dealing with the loss of the outgoing Auditor-General. At the same time, they welcomed their new Auditor-General and believed that she was ready to tackle issues which needed to be dealt with as vigorously as her predecessor. On Covid-19 she emphasized that as a result of the pandemic they navigated things in such a way which would see the safety of their staff being their first priority and as such various rules and regulations were implemented.

Secondly, to ensure business continuity, they established a close working relationship between themselves and the Departments and entities on the best way to navigate the audit. From an audit perspective, working remotely was the best possible solution along with the occasional on-site visits where needed. The gathering of information proved to be a challenge and took a bit longer than usual.  There proved to be very good cooperation from all Departments and entities. They needed four to five months to be able to complete the audit and give an opinion. When financial statements were submitted at the end of July, they knew that they were not in a position to sign off by the end of September as they needed about four to five months. The process was ongoing and they were planning to finalize the audit process by the end of January 2021.

Irregular expenditure was identified from the audit process where samples were selected for testing and they would look at the expenditure incurred. Irregular expenditure was any reported expenditure found to be non-compliant with the laws and regulations. Any concerns on possible fraud risk indictors would be reported in the management report to alert management to look out for possible fraud which could be occurring. None of the audit reports identified possible fraud risk indictors in 2019/20.

The previous matter about Agriculture is still before the courts.

Provincial Treasury response
Mr Hardien said that irregular expenditure is definitely not "much ado about nothing". Provincial Treasury has to look at the nature of each item of non-compliance to decide whether to condone it or not. For example, if an official stayed at a hotel and beforehand the quote was R1400, however afterwards the charge was R1500, the R100 difference would result in irregular expenditure as prior authorisation was not given for the R100 as it did not form part of the initial quote given and authorised by the Department. The irregular expenditure has to now be investigated by the department to check why it had occurred or where it had been missed in the planning process and how it can avoid this in future. It is usually unforeseen expenditure and there was no untoward behaviour by the official. In such cases, the Department is asked to look at its internal controls policy and accommodate for such price changes.

On the question of the R281m irregular expenditure, the large irregular expenditure identified in Human Settlements was a procurement and contract matter. That case has not been seen yet by the Condonation Working Committee (CWC). As it is a procurement contract matter, there will be a CWC sitting and the Department will be asked what the nature of the non-compliance was and what it is doing to rectify this. The CWC will either condone or not condone it. If not condoned, it will be sent back to the Department Accounting Officer who must report in the Department's next Annual Report what it has done to rectify this.  

On the R281m irregular expenditure (IE), he explained that there are three aspects to this: the IE balance brought forward from the previous year; the current IE expenditure for 2019/20, as well as previous years' IE that has only been identified in this financial year. The Provincial Treasury presentation broke the IE down per department and entity compared to the AGSA report that gave global figures. IE is usually due to non-compliance with laws and regulations in supply chain management.

He assured the Committee that there are examples for all forms of irregular expenditure that had been highlighted. It would be best for the Provincial Treasury to provide the Committee with the Irregular Expenditure Framework to understand the nature of the irregular expenditure.

On donor funds, every department has a donor fund policy on how to report on these.

The internal audit plan to deal with irregular expenditure was approved by the Audit Committee and was normally a three-year rolling plan. The internal audit unit and the internal control unit would ensure that there were adequate controls in place to reasonably catch all of the expenditure which may fall foul of compliance methods whilst not necessarily zooming into every transaction. These units provided adequate management and bolstered the governance of oversight and compliance.

Further questions
The Chairperson asked National Treasury what criteria they followed when considering the changing of the original targets set in the Annual Performance Plan, such as was happening with Covid-19, and what should the legislatures consider when it comes to evaluating these changed targets. Secondly, what resources were needed to be able to start doing service delivery audits especially in provinces that want to do this? AGSA had previously indicated that it cannot afford and does not have the capacity and resources to do this. The Committee had asked the Department of Finance and Economic Development to give a breakdown on the amount and capacity needed for National Treasury to be able to do the service delivery audits.

On the BBBEE requirements, if one provides the figures but not the compliance certificate then this is raised as a concern in the audit report. However, the certificate is expensive. So what is the way forward on that as National Treasury sets the standards.

The Chairperson asked for understanding on how the Provincial Budget is evaluated when conditional grants were being cut for the funds to go directly to the SAA bailout. She requested how that impact evaluation is done by National Treasury and its impact on the MTEF period.   

Ms Bodewig replied about BBBEE that they have had long discussions with the Department of Trade and Industry (DTI) which was responsible for the Act and the Codes. While there were expectations for everyone in the private and public sector to demonstrate compliance and report on that in their annual reports and financial statements, it did not mean that departments, public entities and municipalities had to get a certification to prove that they were compliant. Whilst in discussions with DTI, they had a look at the legislation and concluded in the Treasury guidance to Departments that they did not need to have a compliance certificate as it was it was not an active requirement but rather an interpretation.

On performance reporting, there had been discussions for some time on whether or not they should be doing more performance auditing for service delivery audits.  The challenge was that the system was not mature enough to handle those types of audits and a framework which prescribed those kinds of audits would be needed. Rather than doing it holistically for each Department they could instead focus on certain areas.

The estimate costs could not be decided; however, it would require specific skills to be able to look at the information and apply a consistent frame on how to assess the information which was being reported.

On the changing targets, from their own environment they were not allowed to change this holistically and had to really explain why they wished to change a target if it was over 5%. It was very difficult to argue changes as they would have to see the impact it had on the strategic plans within the province in working towards the goals of the National Development Plan.

On monitoring, almost every day for the past few months there had been a Medium Term Expenditure Framework (MTEF) meeting where they considered the impact of the lockdown over the MTEF, which included consideration of budget cuts and how to utilize fund from programmes to go towards SAA. It was an approach which was done collectively by looking at the performance of programmes and making decisions in terms of that.

Ms Adams replied that service delivery auditing was an important conversation topic which was still under discussion. She welcomed having a conversation with the Committee on service delivery audits to find a solution on the way forward in dealing with that. On the changing of targets, she explained it all depended on the timing. For example, if nine months had passed already, the Department would have to report on both the nine months and the three months in order to make up the 12 months.

Mr Hardien replied that irregular expenditure was highly linked to non-compliance with laws and regulations. There were definitely some internal controls which could be enhanced by Departments to deal with variations in expenses and could be accommodated in quotes themselves to state that quotes cannot vary by more than 10% from the original amount, which would take some of the expenditure items out of the frame of irregular expenditure.

Mr Hardien replied to the reporting question, saying what they had done was to provide Departments with a mandate to disclose irregular expenditure in a more transparent way and submit that to National Treasury. They have asked Departments to monitor and report on their irregular expenditure on a monthly basis, however, they were currently dealing with a backlog of three years.

Committee Report on Western Cape Second Adjustments Appropriation Bill [B7-2020]
The Chairperson took the Committee through the report on the budget votes.  The Committee Report approving the Bill was adopted. The ANC, in terms of Standing Rule 90, rejected the Bill in its entirety.

Mr Mackenzie stated that there were several issues relating to South African Airways (SAA) mentioned in the meeting and which would be debated on in the House later that day. The R10.5 billion given to SAA would harshly impact on the provinces. It was important for the custodian of SAA, being Minister Pravin Gordhan, to be invited and account and justify the need to once again bail out the airline.

Mr Mvimbi requested a resolution that Departments should indicate in their Annual Reports whether or not there was compliance with BBBEE requirements.

The Chairperson stated instead that a summary of the BBBEE reporting by the Department and entities should be in their Annual Reports. This would be enough to satisfy the suggestion made by Mr Mvimbi.

Mr Mvimbi agreed to the resolution made by the Chairperson.

Ms Nkondlo proposed that both the Departments of Transport and Public Enterprise heads be invited to account for the cuts to the Provinces in order to be redirected to SAA. The airline essentially fell under both departments and both are responsible to account for the bailout once again.

The Chairperson requested the documentation mentioned in the meeting today for the Committee to get a full understanding such as the instruction notes guidelines, irregular expenditure framework and others frequently referenced.

The resolutions were adopted.

The minutes were 26 November 2020 adopted

The Chairperson thanked everyone for the productive day. Members were wished well for their upcoming debates and the annual reporting season.

Meeting adjourned.


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