DCS Audit Committee & Internal Audit on mesures to detect and prevent financial irregularities

Meeting report

Chairperson Dyantyi opened the virtual meeting, welcoming the Members and the delegation from the Department of Correctional Services (DSC) along with the DCS Audit Committee. The delegation consisted of Ms Jane Masite (the Chairperson of the Audit Committee), Ms Anna Badimo (the Deputy Chairperson of the Audit Committee); Adv. Johannes Weapond, Mr M Mhlongo and Ms Keitumetse Mahlangu (Members of the Audit Committee for the DCS). The delegation was supplemented by Mr Arthur Fraser (National Commissioner: DCS), Mr Nic Ligege (Chief Financial Officer: DCS), Mr Joseph Katenga (Chief Deputy Commissioner: Strategic Management) and Ms Cynthia Ramulifho (Chief Deputy Commissioner: Remand Detention). The purpose of the meeting was for the Committee to receive a briefing from the DCS on the measures it has taken to detect and prevent financial irregularities and irregular expenditure. 

Adv G Breytenbach (DA) reported that Mr J Selfe (DA) indicated that he will be late for the meeting. She added that it was thanks to the ANC’s implementation of loadshedding, and that Mr Selfe will join the meeting once he has access to electricity again one day. 

Ms L Moss (ANC) stated that loadshedding has nothing to do with the ANC. 

Chairperson Dyantyi welcomed Ms Moss as a new Member of the Committee and thanked her for joining the meeting on the short notice that she received. He then handed over to the DCS Audit Committee for the briefing. 

Briefing by the Audit Committee (DCS) on financial irregularities
Mr Arthur Fraser, the National Commissioner of the DCS, stated that the Audit Committee is an independent body from the DCS and that the briefing will be presented by the Chairperson of the Audit Committee.

Background information
Ms Jane Masite, the Chairperson of the Audit Committee, stated that in terms of the Public Finance Management Act (PFMA), ‘irregular expenditure’ is defined as expenditure (other than unauthorised expenditure) that is incurred in contravention or not in accordance with any applicable legislation, including the PMFA, the State Tender Board Act 86 of 1968, or other relevant legislation that provides for public procurement by the government in general. Such expenditure does not necessarily mean that the involved money had been wasted or that fraud was committed. However, it is an indicator of non-compliance with applicable legislation that needs to be investigated to determine whether such non-compliance was intentional or due to negligence or an unintended error. If non-compliance had no impact and no negligence was proven, irregular expenditure can be condoned. If negligence is proven, disciplinary process is followed, and any losses are recovered from implicated officials. If the National Treasury does not condone the irregular expenditure and there is no person responsible or being held accountable for the irregular expenditure, then the accounting officer may write it off as irrecoverable funds.

The audit outcome for the DCS was qualified due to a failure to record the irregular expenditure in the financial statements, as required by the PFMA. This was because the expenditure was incurred in contravention of the supply chain management requirements not being detected and appropriately disclosed in the financial statements. Consequently, the Auditor-General of South Africa (the AGSA) was unable to determine the full extent of the irregular expenditure stated at R 4.39bn for the 2019/20 financial year.

The role of the Audit Committee
The Audit Committee has a non-executive status and assumes an advisory and oversight role for the Accounting Officer and Executive Authority. It does not perform any management functions or assume any managerial responsibilities. The Audit Committee considers any matters relating to the financial affairs of the DCS as well as its internal and external audits. Another responsibility of the Audit Committee is to monitor the qualitative aspects of financial reporting, the DCS’s processes in order to manage business and financial risks, governance processes, and its compliance with the applicable legal, ethical, and regulatory requirements.

The Audit Committee monitors the internal and external audit reports of the DCS on a quarterly basis. It then evaluates the Accounting Officers’ responses to the audit findings, and the DCS’s commitment to remedy the risks that are reported in the internal audit reports. The Audit Committee also monitors the responses employed to remedy audit findings made by the AGSA for the previous financial years. It reports to and provides recommendations on a quarterly basis to the Executive Authority to highlight specific risks that must be considered by the Accounting Officers. Matters that require the attention and intervention of the Executive Authority are also highlighted with specific recommendations. The Audit Committee is independent from the DCS and the AGSA, and it provides a complimentary oversight role to that of Parliament.

Synopsis of irregular expenditure and progress on investigations:
The amount of irregular expenditure, as on 31 March 2020, was calculated at R 4.39bn. The nature of the irregular expenditure included non-compliance by the implementing agent; the extension of the contract for nutrition services; the procurement of perishable provisions where contracts were not in place; the non-compliance with procurement processes; the non-compliance to supply-chain management protocols; as well as the non-compliance with the State Information Technology Agency Act 88 of 1998 (the SITA Act). 

The total number of irregular expenditure cases under investigation, as on 23 November 2020, was 891.Of these cases, 789 were finalised (89%) and 66 cases are still under investigation. However, 36 cases have still not been investigated (17 cases for the 2019/20 financial year and 19 for the 2019/29 financial year).

Consequence management for cases involving irregular expenditure has been effected in 78 incidents that carried the value of R 294.68 million. The measures effected involved final writing warnings being issues, suspension without salary, dismissal, written and verbal warnings issued.

Measures to detect and prevent irregular expenditure
Internal audits assist the Accounting Officers to execute their duties by providing independence assurance relating to the DCS’s internal controls, financial information, risk management, performance management, and its compliance with the applicable legislation. The internal audit methodology of the Audit Committee has been reviewed and approved, and the required training will be provided to the audit staff. A risk-based audit plan was developed and approved by the Audit Committee, including the conduction of supply-chain management audits to detect irregular expenditure. The internal auditors are regularly trained, and the internal control environment is regularly strengthened to identify deficiencies so that the Audit Committee can advise the management of the DCS accordingly. In addition, it is now compulsory for the Audit Committee to independently review bids exceeding R20 million before contracts are awarded. The Audit Committee also conducts follow-up audits on the implementation of the AGSA’s actions plans. Progress made by internal auditors are reported to the Audit Committee on a quarterly basis. 

The Audit Committee has undertaken a number of measures to improve detection and prevention of irregular expenditure. This includes a recommendation to strengthen the supply-chain management control environment by filling vacant posts and ensure that appropriately qualified personnel are recruited. The Audit Committee also assessed and monitored the extent to which the DCS’s control culture is adequate in terms of the importance of internal control, the management of risk to draw conclusions on the adequacy and effectiveness of the system of internal control. In addition, the Audit Committee advised that the AGSA’s findings on irregular expenditure be incorporated into the performance agreements of senior management. Quarterly reports on the DCS’ compliance with laws and regulations must be submitted to the Audit Committee, as well as quarterly reports on the measures implemented by management to address the findings raised by the AGSA in the external audit outcomes. 

Submission of quarterly reports on the investigations into irregular expenditure is advised. In cases of high-risk areas, the Audit Committee requested internal auditors to perform ad-hoc reviews – such as the Personal Protection Equipment (PPEs) tender review. It also established whether the DCS’ management has relevant policies and procedures in place to ensure adequate, effective and up-to-date internal control measures (such as compliance checklists, an irregular expenditure register, a compliance framework and a consequence management framework). The Audit Committee evaluated steps taken by the management of the DCS to encourage ethical and lawful behaviour, financial discipline and enhanced accountability for its use of public resources. The Audit Committee reviewed and evaluated the annual financial statements to determine whether it is complete and consistent with the available information. It also considered if the disclosures made in the financial statements are appropriate and in compliance with legislation and the AGSA. The Risk Management Committee is in place to support the Accounting Officers, and the Risk Management Unit is in place. Lastly, the Audit Committee provided recommendations to enhance the system of internal controls and advised the Accounting Officers and the Executive Authority regularly.
 
Conclusion and the way forward
The Audit Committee appreciates the challenges of the DCS. With the cooperation and commitment of its management, the DCS (despite its historical challenges) can be turned around. The support and involvement of the Executive Authority in monitoring the activities of the DCS is key in this regard.

Discussion
Chairperson Dyantyi indicated that Mr Selfe has joined the meeting. In response to Adv Breytenbach’s earlier comment on loadshedding, he stated that South Africa is good again now for providing access to electricity. He also asked the delegation from the DCS and its Audit Committee to respond to every Member’s questions and concerns individually before the next Member will be given an opportunity to voice their concerns.

Mr W Horn (DA) responded to Chairperson Dyantyi’s stating that electricity is an entitlement of every South African, and access should be uninterrupted for 24 hours a day when it is paid for. 

Regarding the briefing by the Audit Committee from the DCS, Mr Horn expressed that he was concerned to hear a presentation from an auditing committee that contains a statement saying that irregular expenditure does not necessarily mean that money has been wasted or that fraud has been committed. The statement might be factually true, but it remains a concern that the audit committee approaches its mandate from that premise. The presentation should rather have stated that because the AGSA has deemed the expenditure irregular, it could indicate the possibility of fraud or corruption and thus needs proper investigation. He advised the audit committee to change its approach and look critically into the matter of irregular expenditure. 

Regarding the money that was deemed irregular expenditure in terms of perishables procured without contracts in place, the Committee needs to be provided with specific and detailed explanation of what this entailed. What are the details of the relevant investigations that are being conducted and what has been uncovered? It is very probable that inflated prices were paid in procurement of these goods. What was the real market value of the perishables obtained and why were contracts not put into place? 

Concerning the 17 incidents that the audit committee found were indeed not irregular expenditure, further information is required because these incidents were deemed to be irregular expenditure by the AGSA. Unless the AGSA changes its audit opinion, these incidents remain branded as irregular expenditure and it is not acceptable for the audit committee to decide on its own that it does not amount to irregular expenditure. Over the last two financial years, there were virtually no investigations into irregular expenditure, and the Committee welcomes the progress. A bird’s eye view will still go a long way to highlight the bulk of the irregular expenditure in terms of monetary value that has not been properly dealt with. The Committee requires a detailed plan from the Audit Committee that outlines how it plans to conclusively address all of the incidents of irregular expenditure. 

Mr M Mhlongo, Member of the Audit Committee, stated that the Audit Committee agrees with Mr Horn’s concerns regarding the statement that the Audit Committee cannot decide on its own that what does not amount to irregular expenditure. He also responded that the Audit Committee will provide the requested documents. He agreed that the Audit Committee is making progress regarding its investigations into incidents of irregular expenditure and conceded that the progress can be improved. The presentation was prepared before the last meeting of the Audit Committee, and not all the discussions are incorporated. For example, regarding the money deemed irregular expenditure pertaining to implementing agents, the Audit Committee discussed the matter at length and made recommendations that must be implemented by the management of the DCS. In this case, the recommendations included that government departments must ensure that its own auditors do their job and that its contracts are reviewed to include penalty clauses for irregularities. These contracts should also ensure that the supply chains used are in line with the findings of the AGSA. On face value, the sanctions handed out to people involved in the reported incidents of irregular expenditure do not seem that harsh or like these sanctions would discourage such future behaviour. The Audit Committee will compile a revised plan in this regard to submit to the Committee; the plan will incorporate everything discussed and resolved at the last meeting of the Audit Committee. That serves as a deterrent for people in the future. It is paramount that these incidents of irregular expenditure are not repeated in the future. 

Ms Masite emphasised that the Audit Committee takes irregular expenditure incidents very seriously and these issues are continuously interrogated during its meetings. 

Mr Nic Ligege, the Chief Financial Officer of the DCS, responded to the question regarding the irregular expenditure involving the procurement of perishable goods. He explained that there are six managerial regions and a number of managerial areas under each region. 

He explained that perishable provisions are food items for inmates, but there are instances where there are no regulatory contracts because the agreements expired. When this happens, managerial areas attempt to put contracts in place through competitive bidding processes. The DCS has realised that there are instances of irregular expenditure where contracts were not reviewed, and due diligence not conducted. These issues brought about an absence of contracts, and managerial areas then withdrew bids and tenders because of non-compliance that was picked up internally. Procurement was then done using three-price quotations (or more quotations) for items such as bread, flour and other grocery items. 

New contracts are now provided for and they are aligned with the protocols for supply chain management. If purchases are done for a long period through this process without contracts in place for an aggregate of eight months, these purchases exceed R500 000, which is the threshold for a competitive bidding process. The AGSA reported that it is not in line with procurement protocols. The DCS has advertised a bid over five years on nutritional services (supply of perishable and non-perishable provisions) in December, which then covers all the baselines. It is intended that by 01 April 2021, the DCS will have secured contracts throughout the country for perishable provisions to avoiding the issue of splitting purchase orders. 

Ms N Maseko-Jele (ANC) appreciated the presentation by the Audit Committee. She agreed with Mr Horn’s comments regarding the approach the Audit Committee takes by presupposing that irregular expenditure does not necessarily mean that there were no fraud or corruption involved. She stated that she got the feeling that the Audit Committee is very new at its job, which is concerning because it is tasked with a lot of responsibility and granted extensive resources. How long has the Committee been in existence? She also asked the Audit Committee to present a report outlining the extent of wasteful expenditure at the DCS. An amount of R 4.39bn in irregular expenditure is a lot, and the situation must be rectified. “This is not a problem that we can afford a repeat of in the future.” How long has the Audit Committee work with the DCS? 

The issue of training not being attended (but paid for) is concerning. This is an unacceptable excuse by the Audit Committee that its plans are not consolidated (based on what was discussed in meetings of the Audit Committee) and presented to the Committee during this meeting. This excuse cannot be accepted. If the Audit Committee was deeply committed to making progress on the issues involved, it could have held its meetings a few days prior to having to present to Parliament to ensure that it can bring the required information before this Portfolio Committee. Not having done so shows a lack of preparedness and it appears as if the Audit Committee is covering up for the problems within the DCS. It would be appreciated if the Audit Committee can hold its meetings well before it comes before the Portfolio Committee to present a briefing. 

Ms Masite responded that the Audit Committee was established for approximately two years prior to this meeting. She referred to the statement made by the Audit Committee in saying that irregular expenditure does not necessarily mean that the involved money had been wasted or that fraud was committed. The statement was not intended to imply that the Audit Committee turns a blind eye to the seriousness of irregular expenditure. The Audit Committee has engaged extensively with the management of the DCS to obtain information on the progress on resolving this issue. It has even recommended to the management of the DCS that penalty clauses be incorporated into contracts in the event that the consultants are not delivering as expected. It is the duty of the Accounting Officers to ensure that the recommendations of the Audit Committee are implemented. 

Mr Ligege stated that regarding the issue of competitive bidding processes not being followed, there are instances that (because of a lack of capacity within the line of supply-chain management throughout the various regions and managerial areas) where bids are advertised as required by the law, calculations of preferential points are not done appropriately. This then results in incorrect rankings of suppliers who should have been awarded the bid – for example, because of an unconfirmed tax clearance certificate. This causes irregularities and non-compliance with the applicable protocols and legislation. The DCS has since introduced annual seminar-based workshops with all practitioners within the supply-chain management area, and some improvement has been a result. The supply-chain management manual, which is a set of standard operating procedures to guide practitioners and has checklists to ensure the requirements of making an award have been met, has also been updated. This ensures improvement in the due diligence process. The DCS has looked at the demand management plan and the quantities of resources that are required for when it is needed to source resources externally. The signing of contracts of certain values has been escalated to the head offices where legal practitioners are vetting the contracts before signing to avoid later legal disputes. 

Mr J Selfe (DA) referred to the R338.7 million in irregular expenditure spent on the extension of the contract for nutritional services. What was the nature of the extension of the contract? What steps did the Audit Committee do to encourage the DCS to avoid repeating these irregularities? It is only useful that the Audit Committee interrogates the irregular expenditure if it is able to change the behaviour of the institution that caused it in the first place. Has there been any change in the way the DCS spends its money?

Adv Johannes Weapond, Member of the Audit Committee, acknowledged that asking about what steps the Audit Committee is taking to prevent the reported irregular expenditure from recurring is an important question. The current measures that have been put in place involve correcting poor administration of contracts. The DCS must put proper mechanisms in place to ensure that proper planning is being conducted at least six months before a contract expires. This will ensure that there is sufficient time for tendering processes to obtain new contracts to ensure that service delivery proceeds uninterrupted. Instead, the DCS is reverting to extending the contracts that expired. Where irregular expenditure is incurred, the DCS is conducting a root-cause analysis to eradicate systemic errors. It is also important to note that the full list of findings is included in an audit action plan. However, some of the contracts that the DCS has entered into are complex because for the duration of the contract the irregular expenditure will be incurred across the various financial years. The Audit Committee exercises continuous monitoring over the DCS to ensure that consequence management is effected and that investigations are instituted. This also serves as a deterrent to ensure that future irregular expenditure is not incurred again by the DCS. The irregular expenditure that has been incurred must still be condoned by the National Treasury after it has been investigation, which is a process that may take some time to conclude than the normal process because of the high volume of transactions involved. 

Mr X Nqola (ANC) enquired about the list of members of the Audit Committee and their qualifications. This is important because it gives the Portfolio Committee an idea as to whether the Audit Committee is qualified for its mandate and to execute its work. He asked why Ms Keitumetse Mahlangu’s qualification is listed as a ‘legal’ qualification. What does this mean? What are Ms Mahlangu’s qualifications? One of the findings made against the DCS is a lack of consequence management which was also made in the AGSA’s audit outcome. If people are unable to perform or deliberatively fail to do so, there is nothing that the DCS does to correct or discipline its officials. The Committee cannot accept this state of affairs. The DCS must prepare a report outlining its record of consequence management and the measures in place to achieve this. 

The issue of non-compliance with legislation is concerning because it appears that the DCS has no regard for the law-making authority of Parliament if they simply disregard it. The DCS must be called to account for its breaking of the South African Law and its non-adherence to the regulations in place. The DCS’ lack of capacity in the Information and Communications Technology (ICT) sector is quite concerning and an update is needed from the DCS to report on how far it has come in upgrading its ICT infrastructure. The DCS must have the capacity to perform in a technological era.  The amount of irregular expenditure is embarrassing. If this amount is not decreasing, then the role of the Audit Committee is not clear. What is their role in assisting the DCS to avoid irregular expenditure on this scale? 

Ms Keitumetse Mahlangu, Member of the Audit Committee, stated that she does not know what information is before Mr Nqola in making his remarks. She added that she is an attorney by profession and has a legal background, having also served on several boards of directors. 

Ms Anna Badimo, the Deputy Chairperson of the Audit Committee, stated that the role of the Audit Committee is to exercise oversight over the DCS, to comment and provide recommendation on the gaps it notices. The audit committee wants the DCS to do better and increase its pace to keep up with the technological changes in the world. 

Matters of digitalisation and technological transformation must be taken seriously by the DCS to enhance its security and performance. These issues have become even more necessary given the COVID-19 pandemic, the national lockdowns and the working-from-home conditions. The DCS must adopt the latest technologies, and the Audit Committee does advise the DCS on these issues. However, it is up to the DCS to implement the recommendations made by the Audit Committee. 

On the lack of skills in the ICT sector, she conceded that it is a serious concern with the DCS. There have been engagements to put together a sourcing strategy to improve this. There is a dire need for an efficient and secure ICT environment, but this seems to be difficult to achieve because of challenges with SITA. 

Mr Ligege stated that he would like to clarify some issues relating to the budget of the DCS 2019/20 financial year, which ended on 31 March 2020. The DCS spent 99.5% of its budget for the financial year of 2019/20. There was no material impact on the expenditure of the DCS as a result of the COVID-19 pandemic. 

Mr Joseph Katenga, Chief Deputy Commissioner: Strategic Management, DCS, said that the audit committee can provide the Portfolio Committee with a detailed expenditure report before its next meeting with the Portfolio Committee. This will ensure that the Committee receives the required information and the DCS will be in a better position to respond to the questions and concerns raised by the Members. 

Adv Breytenbach stated that she had one question to ask, but that she will correspond with Chairperson Dyantyi in private after the meeting. 

Mr Horn referred to the R1.8bn deemed as irregular expenditure on perishables. He asked that the Committee be provided with a detailed breakdown of these expenditures before the next meeting with the DCS. This will enable Members to examine what perishables were procured and what the unit prices were of these perishables, per category (such as bread, rice, and milk). The Committee must be afforded the opportunity to determine whether the DCS got value for its money and whether prices were inflated. 

Ms Masite expressed that the audit committee is committed to good governance and is doing everything in its power to ensure accountability and transparency. 

Mr Katenga stated that if there are any questions that he has not been responded to or where more information is required, it will be submitted to the Committee in advance of the next joint meeting.

Closing Remarks by the Chairperson
Chairperson Dyantyi stated that Members are of the view that a better and improved plan has to be tabled to the Committee regarding the issues discussed in this meeting. As part of this plan, more specific details are needed as required by Members. The matters that have been raised with the executive authority and the management of the DCS must be outlined and submitted to the Committee for Members to examine the progress on those matters. A comprehensive list of the perishables, as referred to by Mr Horn, must also be submitted to the Committee. He stated that the DCS and the Audit Committee must submit the outstanding reports and summary of the issues a week before the joint meeting scheduled for 05 March 2021. 

The meeting was adjourned.