Western Cape Provincial Departments and Entities 2020/21 Audit Outcomes: AGSA & Provincial Treasury Briefing

Meeting report

Briefing by the Provincial Treasury

Mr Abdul Hardien, Provincial Accountant-General, Western Cape Provincial Treasury, informed the Committee that National Treasury provides an Annual Report Guide for national and provincial departments, and a separate Annual Report Guide for Schedule 3A and 3C Public Entities. The significant achievements, performance information, governance, human resources information and financial information are reported in the annual report. The publishing of financial and non-financial information promotes accountability and transparency on the efficiency and effectiveness of government departments, and improves trust and confidence in government service delivery. The reported information must be accurate and balanced, reporting the successes and explaining the shortcomings. He centred his presentation on four areas: performance information, governance information, human resources, and financial information.

The performance of a department or entity is evaluated in terms of assessing the level of service delivery against the Annual Performance Plan (APP) deliverables, including the extent of actual service delivery; assessing whether the performance information clearly show the department’s/entities’ achievements against performance targets identified in the Strategic Plans, Annual Performance Plans, budget documents and other long term plans; understanding reasons for deviations from targets; and, by reporting transparently, the oversight body is able to hold the institutions accountable.

On performance information, this is what the Auditor-General (AG) reports against predetermined objectives. Attention is drawn to the AGSA’s audit findings on the audit of the performance information. The overview of the performance of the department focuses on the service delivery environment. This provides an overview of the context and environment within which the department operated; provides a balanced overview of the service delivery environment; provides commentary on departmental services delivered directly to the public and problems encountered when providing these services, as well as what corrective steps were/are to be taken in dealing with such challenges; and describes any significant developments, external to the department, that may have impacted either on the demand for the department’s services or on the department’s ability to deliver those services. Progress regarding the Service Delivery Improvement Plan is provided on an annual basis within the Annual Report.

Key policy developments and legislative changes provide a description of any major changes to relevant policies or legislation that affected the operations. The Institutional Programme Performance Information assesses the efficiency and effectiveness in implementing the Annual Performance Plan. The information reported on in the Annual Report must align to the APP, and the performance information informs programme planning and improvement for the next financial year and encourages programmes to develop strategies.

The Institutional Programme Performance Information section provides a narrative on the significant achievements of targets for outputs and output indicators per programme. Also, it must comment per programme on its response to prioritising women, youth and persons with disabilities in its service delivery environment, challenges encountered by the department when prioritising delivery for these designated groups, and the corrective steps to be taken in dealing with such challenges.

Mr Hardien further indicated performance information focuses on devising strategies to address under-performance. Performance information monitoring is also in relation to standardised outputs and output indicators for sectors. Certain sectors with concurrent functions have approved standardised or non standardised outputs and output indicators that must be reflected in the Annual Performance Plan and reported on in the annual report. This must provide reasons where standardised outputs and indicators are not incorporated in the Annual Performance Plan and therefore not implemented and reported in the Annual Report.

Performance information reports on the institutional response to Covid-19 pandemic must report on the external and internal interventions that were implemented in response to the COVID-19 pandemic; they should reflect performance of COVID-19 interventions and highlight achievements of interventions funded through the various relief packages. Performance information links performance with budget. It provides a summary of the actual expenditure in comparison to the adjusted appropriation for both the current year and previous year. The information has to reflect the sub-programme level and must agree to the appropriation statement of the audited financial statements. The reasons for variations should be linked to the information discussed in the organisational environment and the service delivery environment. Departments are required to report on how expenditure contributed to achievement of outputs.

In addition, performance information looks at transfer of payments to public entities. This area should reflect information of services provided by the public entities, the transfer payments made, the actual amount spent from the transfer received as well as the strategic achievements, and comment on the monitoring systems or lack thereof to monitor spending on transfer payments. Where monitoring did take place, departments must provide details of difficulties experienced and what steps (if any) were taken to rectify such difficulties. This information must agree to the information included in public entities Annual Report.

When it comes to transfer payments to other organisations other than public entities, this section should reflect information on transfer payments made to other organisations, and include information on where funds were budgeted to be transferred but transfers were not made, as well as the reasons for not transferring funds. Transfer payments can relate to good and services, capital expenditure, transfers and subsidies and conditional grants.

He stated that performance information must, amongst other things, make commentaries on: progress made on implementing the Capital, Investment and Asset Management Plan; infrastructure projects that have been completed in the current year and the progress in comparison to what was planned at the beginning of the year and provide reasons for material variances (2% variance); infrastructure projects that are currently in progress and expected completion timeframes; plans to close down or down-grade any current facilities; progress made on the maintenance of infrastructure; and any developments that are expected to impact on current expenditure.

Mr Hardien also touched on governance information. He reported that risk management provides a description on whether the department has a risk management policy and strategy, whether the department conducts regular risk assessments to determine the effectiveness of its risk management strategy and to identify new and emerging risks, whether there is a Risk Management Committee that advises management on the overall system of risk management, especially the mitigation of unacceptable levels of risk, and whether the Audit Committee advises the department on risk management and independently monitors the effectiveness of the system of risk management.

Fraud and corruption provide a brief description of the department’s fraud prevention plan and how it has been implemented; mechanisms in place to report fraud and corruption and how these operate – e.g., whistleblowing and confidential disclosures by employees; how these cases are reported and what action is taken; as well as the processes implemented to minimise conflict of interest in supply chain management and process followed where conflict of interest has been identified.

Governance information also relates to portfolio committees and the standing committee on public accounts (SCOPA) Resolutions. The portfolio committees exercise oversight over the service delivery performance of departments, and provide commentary on the dates of the meetings and matters raised by the portfolio committee and how has the department addressed these matters. SCOPA Resolutions Indicate the dates SCOPA meetings were held, the resolutions specific to the department, the details pertaining to the resolutions, the progress made by the department with regard to each resolution and the status of the resolutions.

Internal audit and audit committees provide a brief description of key activities and objectives of the internal audit; they specify summary of audit work done, and key activities and objectives of the audit committee; they monitor attendance of audit committee meetings by audit committee members. The audit committee must provide a summary of the main activities undertaken by audit committee during the financial year under review, and record achievements of internal audit plan, staffing constraints and unresolved audit findings. They audit quality of the in-year management and monthly/quarterly reports submitted in terms of legislation.

Pertaining to BBBEE compliance, where there has been no or only partial compliance with the criteria, the entity should provide a discussion and indicate the measures taken to comply. Compliance to the BBBEE requirements is required by the BBBEE Act and as determined by the Department of Trade Industry and Competition.

Mr Hardien further talked about human resources. This section provides commentary on the status of human resources in the department, human resource priorities for the year under review and the impact of these; workforce planning and key strategies to attract and recruit a skilled and capable workforce; employee performance management; employee wellness programmes. It also highlights achievements and challenges faced by the department, as well as future human resource plans/goals.

The employment equity profile of employees covers the overall headcount, employees with disabilities, recruitment, promotions, terminations, disciplinary actions, and skills development. This section includes the number of posts filled plus the number of persons additional to the establishment.

Senior Management Services (SMS) Performance Agreements must be signed annually by 31 May.
Reasons and disciplinary steps for not concluding performance agreements for SMS members, by the required date, should be stated. SMS posts must be advertised within six months and filled within 12 months of becoming vacant. The number of SMS posts, filled and vacant is reviewed midway through the financial year (30 September) and the end of the financial year (31 March).

Employee Performance indicates distribution of performance rewards per race, gender and salary levels. The value of performance rewards must not exceed 1.5% of the total personnel expenditure. Performance rewards paid out in the period under review is for employee performance in the previous financial year, as the performance cycle runs concurrent with the financial year.

Lastly, he reported on financial information. Members were taken through graphs and tables illustrating the definition of audit opinions, audit outcomes of votes and entities from the 2016/17 to the 2020/21 financial years; departmental analysis, public entity analysis, and differences between Annual Reporting Guides for provincial departments and Schedule 3A/3C for public entities.

Although the Condonation Working Committee (CWC) is still in the process of addressing backlog of irregular expenditure cases relating to the Department of Health, all request for condonation of irregular expenditure from all other departments and entities have been addressed by the CWC. National Treasury has issued a Frequently Asked Questions (FAQs) to assist departments and entities with the implementation of irregular expenditure. The provincial treasury would continue to engage national treasury via its sub-committee to the Provincial Accountants Forum, in order to influence further reforms in this space. The provincial treasury, in conjunction with a small departmental working group, is in the process of developing a guideline dealing with disciplinary steps relating to irregularities. The guideline would ensure that consequence management is consistently implemented across departments and public entities.

Briefing by the Auditor-General

Mr Ashley Olkers, Acting Business Leader, Western Cape AGSA, reported that irregular expenditure was continuing to increase. Procurement findings persisted in the current year, resulting in irregular expenditure increasing further from R287.9 million to R328.9 million. The Department of Human Settlement audit outcome regressed due to various procurement findings reported in the audit report. As a result, the department contributed 87% (2019-20: 92%) of the province’s total irregular expenditure. The province’s irregular expenditure closing balance has increased significantly from the 2018/19 financial period largely due to the irregular expenditure related to the department of human settlements.

He said that the message from his office is that the province should clarify interpretation of complex legislative prescripts and departures through consultation with the national treasury, as this is one of the key reasons for the AG’s findings on supply chain management. These findings, among others, are also the driving force behind the increase in irregular expenditure. Therefore, dealing with it would address the two most significant issues for the province currently – the material findings on procurement and the growing irregular expenditure.

The AG recommended the province should strengthen the assurance provided by senior management in the area of supply chain management and address control weaknesses as soon as they are    identified. Leadership continued to rely on the audit process to identify key control deficiencies. It should maintain the strong controls in the area of financial and performance reporting. The department of education and Casidra should create credible action plans, and ensure the implementation of these plans are monitored at senior management level to address the control weaknesses around   performance reporting. It should maintain the effective functioning of oversight structures that oversee performance and governance at departments and entities.

On quality of financial statements, it was reported that five percent of auditees had no material findings because they corrected all misstatements identified during the audit; 100% and 95% have been recorded for quality of published financial statements and quality of financial statements submitted for audit, respectively; 95% has been achieved for the submission of financial statements by the legislated date. For the past three years, there has been no unauthorised expenditure. Fruitless and wasteful expenditure, which historically has been low, has increased but remained low. Non-compliance has remained relatively low.

Regarding supply chain management (SCM), 37% of auditees had no findings while 58% had findings during the 2020/21 period. The Western Cape Racing Board, Casidra and Wesgro recorded improvements in material findings from prior year. These auditees improved because senior management took steps to address compliance issues emanated from the previous year. The department of human settlements had four material findings on SCM.

A total of 14 auditees incurred irregular expenditure to the tune of R328.9 million. Top contributors are the provincial departments of health, education and transport and public works. The provincial department of human settlements accounted for 87% of the irregular expenditure in the province due to four procurement findings. The AG noted that irregular expenditure was not speedily dealt with, but indicated that departments are in the process of dealing with irregular expenditure balances. The department of human settlements submitted an application to the provincial treasury for condonation during November 2020.

Finally, the AG indicated there have been improvements in performance reporting. About 83% and 63% have been achieved during the 2020/21 period for quality of published performance reports and quality of performance reports submitted for audit; 16% of auditees had no material findings because they corrected all the misstatements identified during the audit.

Through an extraordinary collaboration between the public and private sectors, nearly 36.6 per cent of adults in the Province have been vaccinated. Through an extraordinary collaboration between the public and private sectors, nearly 36.6 per cent of adults in the Province have been vaccinated. Through an extraordinary collaborationbetween the publicand private sectors,nearly 36.6 per centof adults in the Province have been vaccinated.

Discussion
The Chairperson wanted clarity on arrows pointing upwards on slide 11, 12 and 15. She then expressed that she was pleased with the 92% achieved on unqualified and clean audits.

Mr Olkers responded the arrows should be considered from first year, year-on-year. The information starts from 2018/19 up to the latest financial period. On slide 11 there were 18 auditees and one was added to make it 19. Slide 12 indicates the total number of auditees that have been increasing over the years. Then information on slide 15 would be sent to the Committee.

Ms N Nkondlo (ANC) asked for clarity on why the AG was saying that irregular expenditure was not a result of not attending to consequence management; she also wanted to know what the root cause was, because irregular expenditure has been happening for the past three years. She asked for explanation on what irregular expenditure is and how to deal with it.

Mr Hardien explained that National Treasury has designated condonement of irregular expenditure to the Provincial Treasury. A department requesting a condonement from Provincial Treasury has to assert that consequence management has occurred. If consequence management has not been stated in the submission to Provincial Treasury, the Provincial Treasury would not even look at the submission. In every submission the department has to confirm the individual who was responsible for irregular expenditure or explain how it came about and indicate that consequence management has taken place. Consequence management could vary from a disciplinary hearing to a letter from the head of department to indicate the behavior is against the law and that the individual has been disciplined for such an action.

Mr L Mvimbi (ANC) remarked there seemed to be another definition of irregular expenditure besides the one that is legal, because now it has been indicated by Provincial Treasury that there is nothing irregular when you break your own internal policy. The AG’s explanation of irregular expenditure is based on the laws governing the country. There seems to be a disjuncture between the Provincial Treasury and AG, on irregular expenditure. Both the department and AG should indicate to Members the kind of definition they should go by, whether the one defined by law or by the provincial treasury.

Mr Hardien stated that the definition of irregular expenditure is very clear. It states that irregular expenditure is non-compliance with law and its regulations. Any submission that is received is subjected to the law – the major Act and its regulations. In cases where a policy of the department is contravened, the matter has to be dealt with by the department’s own internal processes. But if a law or regulation is broken, then that is classified as irregular expenditure, especially if there is money attached to it. For example, a department has to provide three quotations for an expense from service providers. Then the department receives two quotes instead of three. In law, it should have evaluated three quotations. The department can go ahead and choose the preferred service provider. But, because the law says three quotations and the department chose from the two that submitted, that is classified as irregular expenditure. So, when the department submits for condonation, treasury has to investigate this was done through an electronic system to benefit all service providers and that only two submitted. Then in terms of the law this is recognised as irregular expenditure, but in terms of administration where there has been value for money and no losses to the department, this is condoned because a service has been delivered.

Mr Olkers added there is a consistent system of measuring irregular expenditure against PFMA. The AG audits in the same manner as Provincial Treasury.

Mr G Brinkhuis (Al Jama-ah) wanted to find out how much details the Department could provide on expenditure reporting when it comes to eradicating inequality and alleviating poverty, because the expenditure of departments should contribute towards poverty alleviation and inequality eradication.

Mr Hardien explained that national treasury guidelines provide a framework for what the Department brings in, and it depends on what the department has got in terms of evidence. The AG has to confirm whether the presented evidence in the annual report is not conflicting with the annual financial statements.

Mr Olkers added annual reports provide information on service delivery. The concerned Member should approach the department for more information on the outcomes of the report. The AG verifies the accuracy of information from the department.

Ms M Maseko (DA) wanted to find out from the AG if there is a case where irregular expenditure has impacted on the end-user or service delivery. If that is not the case, she asked if there is a way of tightening the screws legislatively to avoid loopholes allowing irregular expenditure resulting from not following or digressing from internal policies of procurement or SCM.

Mr Hardien said the end-user would still get the service. Even if the department has not received the three quotations, the end-user would still get the service at the end of the day. When the provincial treasury looks at condonation, it ensures the department has paid for the service rendered and there must be value for money on top of that.

Mr Olkers also stated irregular expenditure does not mean service delivery has not occurred. Oversight should focus on what gave rise to irregular expenditure in terms of money spent. Sometimes irregular expenditure, administratively, refers to tax clearance certificates not submitted, and many other things. In other cases, it might lead to financial losses, while in some cases it might not.

Ms Nkondlo commented that Members are always trying to understand what is behind irregular expenditure. She said the explanation given would give Members a chance to interrogate departments individually. She now understands that irregular expenditure could be an administrative fault, and it may not result in the non-delivery of services. Bust she wondered how irregular expenditure of three years could be dealt with because three main contributors to irregular expenditure are related to procurement; she wanted to know what the real cause was.

Mr Hardien pointed out that, for example, irregular expenditure from the department of human settlements has been reported as resulting from non-compliance with regulations. For instance, in year one the department would go into a transaction and that would cover a multiple-year of expenditure. When the department is subjected to an audit, the auditors would say, at the end of the financial year, that the transaction was irregular. The department would then recognise that as potential irregular expenditure that would go into the financial statements. In the following financial year, the department would gather all the evidence in relation to the alleged expenditure. It would then make a submission to the Condonation Working Committee. Before making this submission, expenditure would have been incurred in the transaction. Depending on the veracity of the information supplied to the Condonation Working Committee, the provincial treasury would require more information or indicate the supplied information is sufficient. When the Condonation Committee meets, it would consider what resulted in irregular expenditure, if there have been losses to the department, identify reasons for non-compliance, and if somebody has been taken to task when it comes to consequence management, etc. If the Condonation Committee is satisfied with responses from the department, all recommendations would go to the head of treasury to apply his/her mind. When the Condonation Committee recommends a condonation or the head of treasury condones the expenditure, that subsequent expenditure on irregular expenditure would no longer be seen as irregular expenditure. Then the information would be corrected in the financial statements. So, in year one, you would have irregular expenditure. In year two, it would continue to reflect because it has been condoned; in year three the information would be removed from the financial statements, and there would be a narrative of condonation.

Ms Maseko remarked irregular expenditure has got different interpretations; she wanted to know if the interpretation of irregular expenditure posed a risk, because it looks like the department could make deviations. She asked when irregular expenditure would be completely eradicated, or if it is acceptable for it to be there in order for the department to do service delivery.

Mr Hardien made it clear national treasury indicated that in the municipal space 2024 is the target to bring down irregular expenditure to zero. As long as there are contradictions between what the Public Finance Management Act (PFMA) and Municipal Finance Management Act (MFMA) say, and any other laws that either support the PFMA or MFMA and a golden thread between these two pieces of legislation, there might be interpretation issues. It must be understood that in any transaction there are laws and regulations to be complied with. Once any chain is broken in that transaction, there would be a propensity of irregular expenditure. This process is reiterative. Before any legislation becomes law, there is a consultation process to eliminate different interpretations.

Mr Olkers added that, for Members to understand the causes of irregular expenditure, it is important to know or be aware that it does not have to result in a financial loss.

The Chairperson commented the legislative interpretation was posing a risk and wanted to know what the differences of opinion are and if this was an administrative matter or something happening at a different level.

Mr Hardien explained that, when a department transacts, it interprets legislation to mean a particular thing or what it wants to achieve. The department provides information to the AG who might then give his/her opinion or a different approach when looking at the law. But what happens most of the time is the AG and the department are always at loggerheads. The only way to resolve that is to get an opinion from the authors of the legislation. Guidance is also sought from national treasury when it comes to legislative interpretation.

The Chairperson asked if the AfriBusiness case has reached the courts.

Mr Olkers indicated he was not sure if it had gone to the courts.

Mr Hardien stated the matter was still under discussion and would ask the provincial office to provide the Committee with information in writing.

Consideration and Adoption of Minutes and Reports

The Committee adopted the following documents: Minutes of 30 September 2021, and the Draft Quarterly Report.

The meeting was adjourned.