Measures to detect and prevent financial irregularities: DoD & DMV Audit Committees and Internal Audits

Meeting report

DOD on measures in place to combat corruption and fraud

The presentation focused on the measures in place to combat corruption and fraud. He told the Committee that the DOD, through the Inspector-General (IG), Directorate Anti-Corruption and Anti-Fraud (DACAF), was mandated to provide corruption and fraud (C&F) prevention services to the DOD. In order to execute its mandate, the DACAF inspectorate division was structured to provide awareness education, detect corruption and fraud (C&F), provide a whistle blowing capacity, analyse C&F trends, as well as serve as the nodal point for forensic audits into C&F.

The DOD had had a corruption and fraud prevention plan since1 April 2012. Incidents of C&F were reported from all level functions of the Department.

Through the Inspector-General, the DOD did detection investigations on reported incidents of C&F, with the provision that positively identified cases were handed over to the Military Police Division (MPD) for further investigation and prosecution.

As agreed by the DOD security cluster and the accountability management committee of the DOD, which was made up of all chiefs of services and divisions, the IG DACAF was to co-ordinate the introduction of a multi-disciplinary team to pro-actively focus on identifying C&F within the procurement environment, and for the MPD to continue with witness statements for the finalisation of the investigation.

The first multi-disciplinary team detection investigation was conducted in Simon’s Town from 2 to 20 March 2020, which had led to the opening of 22 criminal cases with the MPD and the commercial crimes court involving R87 million. This approach was ongoing with a team consisting of members from the defence inspectorate division, the defence intelligence division, the finance Division and the MPD.

The three forensic audits conducted during the 2020/21 financial year included the 1 Military Hospital repair and maintenance programme (RAMP) and refurbishment, which was finalized. An asset management contract awarded in 2015 was currently in progress, as was one involving the DOD catering school.

Corruption and fraud statistics on prevention, as well as the outcomes of investigations, were reported through the DOD Inspector General and furnished to the top management of the South African National Defence Force (SANDF). The DOD C&F nodal point forum, where all services and divisions were represented, had been established as a consultative forum to enhance the Department’s anti-corruption and anti-fraud drive, and to consolidate C&F statistics.

Sentences imposed by military courts on corruption and fraud offenders over the period from the 2016/17 financial year to the 2020/21 financial year were:

• imprisonment -- three;
• suspended imprisonment -- three;
• dismissal – eight;
• discharge with ignominy – one;
• discharge – 13;
• detention with reduction in rank – six;
• suspended detention – one;
• reduction to a lower rank – four;
• fines between R 1 000 and R 6 000 – 96; and
• reprimand - one.

The status report on irregular expenditure showed that two information communication technology (ICT) service and licences bids were not evaluated according to the criteria stipulated in the bid documentation, and cases were registered with the Military Police (CAS 09/07/2019), and the Special Investigating Unit (SIU) and the Directorate for Priority Crime Investigation (DPCI/HAWKS) were currently busy with the investigations.  The service provider had conceded that they had overcharged the Department by R41 million and had entered into a mutual agreement with the SIU to pay back the R41 million, and an acknowledgement of debt had been issued. The SIU was in the process of collecting the R41 million with interest.  An investigation was in process against the relevant role players.

Another case was non-compliance with the mandatory pre-qualifying criteria in the 2018/19 financial year, involving R105 000, where the director of the company was arrested and appeared in the Special Commercial Crimes Court, and was released on R 80 000 bail. The case had been postponed to 9 December 2020 for disclosure, and again postponed to 12 April 2021.

In conclusion, he said that the Department of Defence remained committed to the fight against corruption and believed that through proper stakeholder co-operation and the introduction of multi-disciplinary teams to proactively address corruption and fraud within the procurement environment, the DOD could be successful in combating corruption and fraud.

Discussion

Mr W Mafanya (EFF) was concerned about the incidence of corruption and fraud. He said there were a lot of issues taking place, and irregular expenditure had been referred to in the Auditor-General’s (AG’s) report. He said that the number of cases handled by the DOD does not aligned with the reports, because there had not been a probe to deal with fruitless expenditure. Big words were usually used, and they did not make sense. The fines of R1 000 to R6 000 were not harsh enough to combat corruption in the DOD. There was recycling of the same people, and this meant that there was no change. The DOD had to be disciplined and well managed, but it was not happening now.

Ms A Beukes (ANC) said that she was concerned about the corruption, and wanted to know the lessons or review processes to deal with the human resources (HR) plan, since it had been on hold for some time. She commented that there had been good process in the 2019/20 financial year, and wanted to know how this had been achieved, and why it was taking so long to finalise cases at the moment. She was pleased with the finalisation of 1 Military Hospital, and said that it had been a good move.

The Chairperson added that DOD was not providing an age analysis to the Committee so that they could access what the current situation was. The presentation had confused him, because there were instances where years had been mentioned, and in the next slide they were omitted. He wanted to get more information on why it had taken the DOD so long to complete the investigations, and if it had been due to a shortage of manpower or resources. The AG had told the Committee that the investigations by the DOD were taking too long and it was concerning, because more than 50% of the cases took more than three months to conclude. It was important to conclude cases on time, because the Department could not regularise irregular expenditure because some of the cases had not yet been concluded. The delays in the finalisation of cases in a way condoned the bad behaviour, and it would be difficult for the AG’s office to report on the irregular expenditure, because the cases were still pending.

The Chairperson also mentioned that the sentences being handed down by the DOD were too lenient, considering the charges that would be brought against their members. He wanted to know the nature of offences were one could be given a fine of R1 000, and asked the DOD to provide more information on this topic. He stressed that the Committee did not necessarily want the names of the offenders, but they wanted the statistics so that they could know what offences were being committed.

The Chairperson suggested that the DOD should separate their statistics -- for instance, from petty crimes and fraud, or disobeying direct orders from seniors. This was important so that the cases would not be grouped into one category, because there were different offences that were committed.

Mr T Mmutle (ANC) said that most of his concerns had been raised by previous speakers. However, his view was that the reason why the AG was failing to conduct its work was because of the lack of information. He asked DOD to explain what the reasons or factors were that were having an impact on investigations, because they were taking too long to complete.

DOD’s response

The DOD said the cases presented were an overview of a snippet of cases and maybe in the next engagement, the DOD could provide the information that had been requested. The concern over the absence of an age analysis had been noted, and it would be taken into consideration.

The DOD would look at the decisions taken by the courts.

At this stage, the DOD had a signal cutoff.

The Chairperson said that the Committee would ask the DOD to provide it with all the cases that they were investigating, together with the age analysis, and they would have to indicate which cases were ready for court. It was an urgent matter which needed to be dealt with. The Committee also needed to know on which cases were constantly repeat offences, and why there were constant repeats of such offences. He asked if the Members agreed to the suggestion.

Mr Mafanya agreed to the suggestion, and said that DOD acted as if they knew what the Committee wanted to know, but that was not the case. When the Committee looked at issues in its oversight, it tended to find different things, and this meant that the meetings ended up as talk shows, and there was no oversight. The lessons learnt must be that there was a difference in the presentations, and the Committee should not trust such presentations because they were given the same information all the time, and it was unacceptable.

At this stage, the DOD came back online.

It was difficult to hear what the DOD was saying because of connectivity issues. They said that they had taken into consideration the issues that had been raised by the Committee and would make further presentations that reflected the current state of cases being handled by the DOD.

There was again a signal breakdown again on the DOD side

The Chairperson said that maybe the AG should be invited to some of the meetings so that the questions could be answered in time, instead of leaving questions unanswered.

Mr S Marais (DA) said that it was important for the Committee to know what cases were handled by the DOD military courts so that they could have a better understanding, otherwise if they were specialised cases, it would mean that such cases should be referred to the NPA.

The Chairperson asked the DOD team if they could provide the Committee with all the cases of misconduct that were under investigation in the Department, and this also included fraud and cases that had financial implications. He said that the DOD still had time to investigate the matters that were raised by Committee Members.

He thanked them for their presentation.

There were signal issues on the Chairperson’s side.

Ms Beukes was made acting Chairperson of the meeting.

DOD Audit Committee on measures to prevent and detect financial irregularities

Mr Luyanda Mangquku, Chairperson: Audit Committee (AC), DOD, said the committee had been established as an oversight body, providing independent oversight over the governance, risk management and control processes of the Department.

Its responsibilities included reviewing and approving the annual internal audit plan, ensuring that it was risk-based and provided assurance on the effectiveness of internal controls, risk management and compliance with laws and regulations within the Department, and reviewing and approving the AGSA audit strategy annually to ensure that the audit process was effective. The AC met separately with the AGSA quarterly to discuss matters which the committee or auditors believed should be discussed privately, including discussing progress on investigations on material irregularities. On a quarterly basis, it monitored the progress of management in fully implementing AGSA’s recommendations, with specific attention to progress in investigating all irregular and fruitless expenditure, and implementing consequence management. It reviewed the DOD’s fraud prevention framework and related strategies in order to direct internal audit efforts and priorities, and assisted the Accounting Officer in determining the skills required to improve controls and to manage fraud-related risks.

Other measures to prevent and detect financial irregularities included reviewing the effectiveness of the DOD systems for monitoring compliance with laws and regulations and the results of investigations and follow-ups (including disciplinary action) of any instance of non-compliance, reviewing the process of communicating the code of conduct to DOD personnel, and monitoring compliance therewith.

Progress to date in implementing measures to prevent and detect financial irregularities were that the AC had met with the Secretary of Defence in the committee to get an update on measures implemented by the DOD to deal with cases of irregular, fruitless and unauthorised expenditure, and to institute consequence management in the Department; to obtain an understanding of measures taken to respond to and address the identified material irregularities at the DOD; and to discuss measures to resource and capacitate the internal audit function, especially in respect to filling the position of Chief Audit Executive and reconstituting the anti-fraud and anti-corruption unit within internal audit.

The AC also met with the Accounting Officer and the internal audit unit to understand their functioning within the DOD and their capacitation, with a specific focus on measures to capacitate the anti-fraud and anti-corruption unit, and to discuss the forensic investigations conducted and concluded in order to track management’s implementation of recommendations and consequence management.

Another meeting was with the AGSA to obtain understanding of whether they were receiving full cooperation from management regarding responses to cases of material irregularity, and to obtain progress updates on AGSA review of DOD’s Covid-19 expenditure, with specific focus on the Interferon importation issue, and agreed for their report to be shared also with the Audit Committee.

They had met with the Inspector General to obtain an understanding of their role and responsibility with respect to anti-fraud and anti-corruption measures at DOD, to obtain information on the progress of the investigations the IG was conducting, and to communicate the expectations of the Audit Committee in terms of presenting their quarterly progress reports on anti-fraud and anti-corruption plans. These would cover cases reported and being investigated, and finalised investigations and recommendations made, for the Audit Committee to track if consequence management was being instituted.

The Audit Committee was committed to employing all available provisions in its terms of reference to ensure that effective oversight was provided, to ensure that the Department complied with regulations, and designed and implemented effective internal controls that were capable of preventing and detecting all financial irregularities.

This involved providing oversight to ensure that where financial irregularities had taken place, management implemented effective measures to investigate root causes, and dealt with those responsible whilst implementing measures to address weaknesses identified in the control environment.

The Audit Committee looked forward to working closely with all assurance providers so that they collaborate their efforts in providing oversight and guidance to the Department, and contributed in the fight to prevent and detect all financial irregularities.

DMV Audit Committee on measures to prevent and detect financial irregularities

Ms Fungai Mushohwe, external member of the AC, said it was constituted as a statutory committee of the Department of Military Veterans (DMV) to fulfil its statutory duties in terms of the Public Finance Management Act (PFMA) and Treasury regulations.

She said the Department was faced with challenges that included recurring fruitless and wasteful expenditure, payments not made within 30 days, investigations into irregular and fruitless and wasteful expenditure not completed, a lack of consequence management and the use of manual systems which were prone to human error.

There was an intention for the Department to use the Logical Information System (LOGIS). This was a government transversal system used in the supply chain process for the procurement of goods and services, including capital assets. Once in place, LOGIS would assist the DMV to implement procurement and asset management internal controls. Despite paying for the system, LOGIS had not been in use during the current financial year under review, and this was a very big concern for the AC. Management had given an assurance that the system would be utilised in the upcoming financial year, starting from 1 April.

Ms Mushohwe said there were internal controls such as financial delegations, reconciliations, monthly reports to the management and executive committees (MANCO/EXCO), and quarterly reports to the AC. The AC reviewed these reports in the quarterly meetings, but she was concerned about the lack of capacity as cited by management, which may hinder the effectiveness of such controls. Management also said that the organogram was not fully responsive to the needs of the Department.

In terms of the AC intervention, there were regular engagements with the AGSA in order to be kept updated on issues they had identified, monitoring of the audit action and intervention plans, and approval of the internal audit plan which was meant to assist the Department with areas such as financial irregularities. Quarterly meetings were held with the DMV’s internal audit unit and its management. AGSA was invited to these meetings. A review of quarterly reports was prepared on both financial and performance information.

She said the AC was concerned that there was little progress in the implementation of consequence management, delays in utilising the LOGIS system despite paying for it, inadequate capacity with the IA unit, and slow implementation of the audit action plan.

Discussion

Mr M Shelembe (DA) raised his concerns about the LOGIS system which was to be used by DMV. He wanted to know why the system was to be used only in 2022, and if there was nothing that could be done to get the system running now. What were the reasons for the delays? Did the DMV have the capacity to run the system? The Committee required an explanation as to why the DMV had signed the contract without checking everything.

The Chairperson asked Members to ask questions to the audit committees and not the Department, as it would lead to a different discussion since the Committee was getting a briefing from the audit committees.

Mr Shelembe said that the audit committee had had engagements with the Department, and he wanted to know if the right questions had been asked by the DMV when they signed the contract.

Mr Marais asked why the Committee was told every year about the unqualified audit reports. The AG did not get clearance, which meant they could not get access to some of the information. He wanted to know if the audit committee experienced the same problems with the Department and if they did, how they were able to deal with the challenges. He said that the invoicing was the cause of short cuts and fraud at the moment, and he wanted a comment from the audit committee as to whether they could address the issue.

The Chairperson addressed the DOD audit committee, and said that the procurement system was an issue because the Committee had discovered that at one stage the CEO had not known about a R250 million contract. He asked the audit committee if they had experienced such a scenario. He also asked the audit committee to update the Portfolio Committee on the manual systems used by DMV, because it was concerning. He added that the audit committee should criticise the Department.

Responses

Mr Mangquku told the Committee that the objective of their presentation had been to share the building blocks on the way they were working, and going forward they would include the details requested by Members. Some of the early signs were that the Department was unique because there was a defence and civilian side, which meant that there was a delicate line when dealing with issues. In many organisations in the area of procurement, it was different with the DOD, because they were decentralised around the country.  One area that needed to be worked on was making sure that there was integration between the civilian and defence side, which would mean that there would be a standardised approach. The integration still required some work to be done. The audit committee had been able to meet the Chief of Defence, so that some of the concerns that they raised would be taken into consideration because once he sent an order to the other parts of the organization, they would listen because of his position.

The system in place at the Department was years behind, which meant an upgrade was required so that everything was centralised. Capacity within the internal audit committee was not at the level it was supposed to be, because one part was on the defence structure whilst the other focused on the civilian structure, and one of the issues raised was that there was a need to have a combined internal audit service. It meant that the internal audit system should work on their plans and ensure that they accomplished them.

Mr Mangquku said that in terms of tracking the plans, in the audit committee’s last meeting with the DOD. the management improvement plan was presented verbally instead of in writing, which was a great concern. The audit committee needed to have such information in writing so that it could have more discussion. It had told the Department that it required the information in writing.

Within the DOD, they did not have an independently chaired risk management committee, which meant they basically presented their progress to the audit committee and were assisted with looking at the risks and deliverables, together with making sure that the fraud risk registry was updated. It was one area that had not been presented by the audit committee, and they would go back to the Department to check on the progress and revert to the Committee with more information.

The audit committee had faced some challenges because of the sensitivity of information when it came to dealing with the DOD, and the AG’s office also felt that they had limited access. The audit committee had engaged the AG to see if they could get clearance or personnel that could be allowed to have access to information, but nothing had materialised yet and they did not have access at the moment. It was currently a challenge, and they would try to engage the Chief of Defence on the matter.

Mr Mangquku said that the audit committee had made sure that there were annual reviews, and the separation in the DOD when it cames to logistics, finance and procurement made it difficult for the sharing of information. There was a need to work on this so that there could be an improvement. The use of manual systems was of concern because it meant that the Department would always be behind, and there was a need to ensure that the new system was installed.

The Chairperson said that the audit committee was aware of the issues at the DOD, and they need to know that the AG and the Committee relied on their information and reports to Parliament. He asked if the audit committee would have another engagement with the Committee so that they could discuss the issues raised more fully.

He told the audit committee that they should criticise the Department, but remain within their jurisdiction, because it was shocking that the Department had made a verbal presentation. He was concerned about the two audit committees within the Department, because they did not work hand in hand.

The use of the manual system was very concerning because it meant that they were not up to date, and it had an impact on their work. He encouraged the audit committee to meet with the Chief of Defence before they had a meeting again with the Committee.

The audit committee should provide more information in their next presentation, as it would lead to better discussions. He released them from the meeting.

Mr Mangquku said that they would look into the matters raised by the Members.

Adv William Huma, External member: Audit Committee, DMV, said that the Department was currently reviewing its organisational structure, and once this process was finalised they would be able to address some of the issues, because the capacity would have changed. The LOGIS system was also affected by the lack of personnel, which went back to the capacity constraints, and once the right people were employed in the right positions, the issues would be resolved.

Ms Mushohwe told the Committee that the LOGIS system would be implemented in April 2021, and the Department did not have to wait until 2022 to use the system.

The Chairperson thanked the audit committee from DMV, but said that things were not going well in the Department, and the reports from the audit committees used not to be detailed. He encouraged the current audit committee to provide as much information to the Committee, because it was an important report.

Mr Huma committed to giving as much information as possible to the Committee.

The Chairperson released the DMV audit Committee.

The meeting was adjourned.