DSBD, SEDA, SEFA 2020/21 audit outcomes: AGSA briefing

Small Business Development

10 November 2021
Chairperson: Ms V Siwela (ANC)
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Meeting Summary

Annual Reports 2020/21

The Department of Small Business Development (DSBD) maintained an unqualified audit opinion with findings. The main obstacles preventing it from a clean audit is compliance in the Black Business Supplier Development Programme (BBSDP) and Cooperative Incentive Scheme (CIS) incentives environment and a material adjustment in the provision note. DSBD management has a slow response in addressing compliance. There is inadequate implementation and monitoring of the audit action plan to address identified root causes for the repeat findings.

The Small Enterprise Development Agency (SEDA) regressed to an unqualified audit with material findings on compliance with laws and regulations. This is due to SEDA not having adequate controls to collect all revenue from long outstanding debtors and material adjustments made to the submitted financial statements due to material misstatements identified during the audit. SEDA had a slow response in improving critical controls and addressing risk areas. There is inadequate implementation and monitoring of action plans to address the root causes for repeat findings.

The Small Enterprise Finance Agency (SEFA) received a clean audit with no unauthorised, irregular, or fruitless and wasteful expenditure. Prior year irregular expenditure of R7.5 million was reported by SEFA as a result of internal control deficiencies identified in the management of SEFA investment properties. The irregular expenditure has been resolved through expired contracts, and new contracts were facilitated through competitive bidding in line with PFMA requirements. The new board in place for a year, was handling its governance responsibilities well.

Members were concerned about the underspending in the Spaza Shop programme, which has not been fully utilized by people in the townships and rural areas. They were concerned about the running of the Department. One member complained about the current Minister not attending Committee meetings. Members said that vacancies and acting positions were a perennial problem.

Meeting report

The Chairperson opened the virtual meeting and welcomed the Auditor General and SNG Grant Thornton delegations.

Fourth Term Committee Programme
The Committee Whip, Mr K Kunene (ANC), went through the programme for the five- week term.

Mr H Kruger (DA) Members commented on an outstanding small business petition about Telkom that had not been resolved and asked for it to be accommodated.

Mr J Jacobs (ANC) requested a feedback meeting on the economic recovery of small businesses.

The Committee adopted the programme. The support staff would insert the suggestions.

DSBD & SEDA 2020/21 audit: AGSA briefing
DSBD Director-General, Mr Lindokuhle Mkhumane, noted improvement in some areas of the Department and it had taken note of the findings and would address these. He was proud that SEFA could obtain a clean audit given the Covid-19 challenges.

Mr Kenny Mothlala, Auditor-General South Africa (AGSA) Audit Manager, noted a regression for SEDA from the previous financial year when SEDA received a clean audit but for 2020/21 had an unqualified audit opinion with findings on compliance and the submitted financial statements were not fairly presented.

The DSBD audit opinion has remained unchanged for the past two financial years. The main obstacles preventing it from obtaining a clean audit outcome remain compliance in the BBSDP and CIS incentives environment and a material adjustment in the provision note. 

Mr Mothlala commended the accounting officer and his team of the Department for submitting the performance report without errors and material adjustments. There were no material findings about usefulness and reliability of the reported performance information.

Irregular expenditure increased from R496 000 to R1 464 000 in 2020/21 due to procurement of vehicles from g-Fleet without following Supply Chain Management (SCM) provisions. The irregular expenditure was due to a transversal issue. No further irregular expenditure was identified during the audit process.

DSBD should continue maintaining preventative controls to prevent an audit regression.

Only 10% of the available funds for Spaza Shop Support were approved and disbursed, resulting in 5 276 cards being issued to spaza shop owners by financial year end. The impact of this initiative was more minor than envisaged due to low uptake and limitations in the approval process and compliance requirements. Similar initiatives funded by provinces such as Gauteng probably further reduced the number of applications.

All available debt relief funds were approved, supporting 1 144 SMMEs and protecting 16 544 jobs. However, the impact of this initiative was restricted due to limited financial resources, as only 3% of the applications for debt relief could be supported with the available budget.

AGSA recommendations for DBSD and SEDA:
The accounting officer /authority should: 
• Design and implement preventative controls to avoid project delays, high costs and failures. 
• Develop and closely monitor audit action plan to address root causes preventing a clean audit. 
• Effectively review internal controls on annual financial statements, annual performance report, and the control environment for supply chain management.
• Implement consequence management against transgressors. 
• Fill key vacant positions timeously.
• Post site visits should be undertaken in the BBSDP and CIS environment to ensure that the funds transferred are being used for the intended purposes by the Department. There should be a signed checklist for each site verified by the Department and SEDA. 
• Management at SEDA should implement processes to ensure that critical security updates, Disaster Recovery Plan, and frequent backup restoration tests are performed.
• The Minister should request the accounting officer provide feedback on the implementation and progress of action plans to ensure improvement in the audit outcomes of the portfolio.

AGSA Recommendations to the Portfolio Committee:
Monitor and regularly follow up with the executive authority and accounting officer/ authority on progress on the audit action plans put in place by Department and entities.
• monitor the vacancies to ensure the stability of leadership.
• monitor compliance with legislation requirements at DSBD and SEDA.
• follow up on mitigation controls in response to the cyber risk at SEDA
A culture of consequence management should be enforced in the portfolio.

Small Enterprise Finance Agency (SEFA) audit by SNG Grant Thornton
The SNG Grant Thornton presenting team included Ms Kelello Hlajoane CA(SA) (Director), Ms Luthendo Nelani (Manager) and Mr Lungelo Mfaba CA (SA) (Audit technical manager). They discussed the annual financial statements and the annual performance report (see document).

• There was a difference in the impairment of cash held in bank accounts with R8.2 million overstatements on impairment of cash and cash equivalent.
• Impairment provision: collateral overrides in the computation of the loans. This resulted in an understatement of R2.9 million.
• There was a R3.9 million overstatement on the provision of loans.
•There was a R2.4 million overstatement of management fees SEFA earns from its subsidiaries.
• An intercompany loan between SEFA and Khula Business Premises (KBP) had a R12,8 million understatement.
• A difference of R6.6 million was noted in an intercompany loan with Motseng Properties which was a property administrator for SEFA before establishing KBP. The difference results in an understatement of cash and cash equivalents.
• SEFA management considered the Covid-19 grant received during the year to be exempt from tax but the grant was taxable. An underpayment of provisional tax of R270 million was identified. Some penalties and interests had been applied.
• A lack of appropriate records was maintained for loans and advances.
• On the claims and premiums sections, there were inconsistencies in the referencing of the active indemnity covered clients.
• IT related matters included IT policies, backups and recovery as well as backup failures, disaster management recovery, service level agreements.
• Key positions have not been vacant for more than 12 months.HR best practices maintained. Currently there is a vacant CFO position, but filling of this position has been suspended.
• SEFA is still financially viable, it has a strong cash balance, although continues to be in a loss making position. Adequate shareholder reserves to absorb losses – Subordinated interest free IDC loan. Increased impairment provision by R 95 million.
• Expenditure and revenue management are still well managed.

Mr J De Villiers (DA) was concerned about the slow response by DSBD and SEDA in addressing compliance and improving internal controls, ongoing vacancies, financial statements with errors and lack of reviews and oversight of the financial statements, lack of internal control and assurance by SEDA, no IT governance, lack of systems control and the unreliable reporting (what you can take from the report is that you cannot believe in anything), complete regression in compliance, no consequence management as there is lack of accountability for officials when they do not comply and fill the vacancies.

He was not impressed by the running of the Department and the lack of accountability by senior officials who are not fulfilling their roles.

He asked about the Minister’s oversight over the Department, whether it was correctly done. Secondly, how would the Committee respond to how the Department is currently being run?

Mr De Villiers asked for clarity on the irregular expenditure of R1.4m while the other amount showed R1.7m.

Mr F Jacobs (ANC) thanked AGSA for the comprehensive report which paints a disturbing picture of SEDA. He was concerned about the SEDA cyber attack from 21 April to 1 June 1st which hampered providing adequate documentation for the audit. How may this be prevented from reoccurring in the future? He pointed to the audit report recommendations on the urgent need for management monitoring, evaluations and internal audit. Why were there no follow-ups?

He was concerned about the ongoing vacancies and the merger, which are challenges that have been previously raised in the committee. He agreed with Mr De Villiers about the lack of audit action plans and lack of follow-up.

Mr Jacobs acknowledged the challenge of the new arrangements responding to Covid regulations. He pointed to the small 3% of applicants who received debt relief from the Covid fund. He asked if DSBD had learned lessons from this.

He argued that the spaza shop programme was not reaching its target audience with a poor response from people in townships and rural areas. The message had not got across to the target audience.

Mr Jacobs asked DSBD about the R27 million which was meant to be spent on the Black Supplier Development programme and its lack of spending on cooperatives funding, which is so needed. He expressed his concern about DSBD's unwillingness to spend.

He suggested that in the next meeting, the Minister should answer questions about the running and operations of the DSBD. The Department’s failure to spend its budget adequately has become a concern, especially when South Africa is experiencing high unemployment. 

Mr Jacobs asked AGSA to share information about actions taken on the recommendations and consequence management involved in dealing with the recommendations.

He asked DSBD if there are systems in place to prevent cyber-attacks from occurring in the future since most of its activities will be conducted online.

Mr H April (ANC) thanked AGSA for the excellent report. He was concerned about the administrators who do not account for their actions and the lack of consequence management.

Mr April cautioned DSBD about the massive underspending, especially on the spaza shop programme. He was not convinced that there are no people in the townships or rural areas who are not willing to take full advantage of the spaza shop programme. He asked that this concern be taken to a political platform so it can be addressed through the Ministry. 

Ms B Mathulelwa (EFF) noted her disappointment that the Minister was not present at the meeting. This continues the trend of poor performance like the previous ministers but worse. She had a problem with the lack of spaza shops in the rural areas.

She talked about the poor direction and slow-paced movement by DSBD in addressing challenges. People did not benefit from the spaza shop programme, yet DSBD achieved an unqualified audit.

Ms Mathulelwa was concerned about the disappearance of the IMF investment, which was allocated for small businesses, "half of which was received by the President’s son", yet the Department received an unqualified audit.

Ms Mathulelwa asked about the unkept promises to the people in Gomora, Durban, and Isipingo and urged DSBD not to stop service delivery whenever it was time for elections. She was displeased by the way this Department is operating.

The Chairperson said that questions directed to DSBD will be answered at a later stage. Questions not directed to AGSA will be dealt with later. She reminded Members that the Auditor-General's role was to empower them with oversight as a Committee.

AGSA response
Mr Mothlala replied to the two questions directed at AGSA. On irregular expenditure, the 1.7 is the combination of the two amounts. On debt relief, R530 million was approved for debt relief but R316 million was disbursed by the end of 31 March 2021, the rest was disbursed thereafter.

The Chairperson noted that most questions asked by Members were directed to DSBD and not AGSA. She reassured the Committee that DSBD would answer their questions at the 17 November meeting. The Auditor-General's role in this meeting was to present the audit findings and recommendations. He asked the DG if he wanted to add anything.

DSBD comments
DSBD Director-General, Mr Mkhumane, said he would wait until the following week when they present the DSBD Annual Report. On consequence management, the Department been imposing consequence management and money was recovered from officials who did not show up for flight and hotel bookings. Based on the PFMA, National Treasury only condones irregular expenditure once they are guaranteed that consequence management was implemented, and DSBD has been implementing consequence management.

The uptake of the instruments will be addressed next week. The audit report was up to the 31 March 2021 and is not up to date. DSBD has provided regular updates on the progress of the disbursements of funds. DSBD has continuously updated the access guidelines and some of the requirements have even been relaxed to enable informal businesses to access funding.

DSBD could not compromise on some items such as registration. Taxpayers' money cannot be given to people that are not willing to be registered. He acknowledged that South Africans do not run most spaza shops in townships and rural communities. 

Finally, AGSA has been assisting in investigations about fraudulent activities in a DSBD programme for the past few years. It conducted a forensic examination and nine officials were suspended and five were dismissed. Consequence management has been imposed. 

SEDA response
Dr Matshediso Ndlovu, SEDA Board Chairperson, thanked AGSA for the excellent presentation, highlighting the challenges and the agreed-upon plans to prevent the audit findings from reoccurring. SEDA did not experience a complete regression and the audit opinion is still unqualified with findings on non-compliance with some laws and regulations.

Dr Ndlovu pointed to the concern about vacancies and said that a moratorium had been agreed on. She argued that it was not about people not doing their jobs, but SEDA struggled with limited capacity. There are some actions to deal with this and internal discussions are being held to solve the ongoing problems. 

She promised to report on recruitment progress in the upcoming meeting. The AG was satisfied with the consequence management of SEDA. She talked about some of the improvements that have been made from the previous year but agreed more could have been done on consequence management. She urged the Committee also to note the progress made and not solely focus on regression. 

Dr Ndlovu reassured the Committee that SEDA would be able to give a detailed briefing on the audit action plan that has been put in place to put Members at ease. 

Further discussion
The Chairperson reminded Members that another meeting was scheduled with SEDA to deal with its annual report in more detail. She appreciated the response from SEDA.

The Chairperson expressed her happiness about proper advice of the SNG auditors and appreciated the SEFA leadership, especially the board.

Mr De Villiers congratulated SEFA, acknowledged its work in moving in the right direction, and thanked the SNG auditors for the clear report.

Mr April thanked the auditors for a clear and concise report that answers questions and anticipates what Members wanted to ask. He noted the platforms to address the recommendations that the Chair has clarified. They should look at the advice given to the Portfolio Committee by AGSA which came with the report.

The Chairperson asked for a round of applause for SEFA's improvement and good performance.

Members congratulated SEFA.

The Chairperson said DSBD will deliver its Annual Report next week, which will include responses to the audit report.

She thanked the presenters and participants and talked about this year being a learning period and assured Committee members that people will be more familiar with their work next year.

Committee minutes from 1 September 2021 were adopted.

Meeting adjourned.

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