SABC, Compensation Fund, PMTE 2020/21 Audits: AGSA briefing

Public Accounts (SCOPA)

09 February 2022
Chairperson: Mr M Hlengwa (IFP)
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Meeting Summary

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Annual Reports 2020/21

The Committee met on a virtual meeting platform with the Office of the Auditor General for a briefing on the 2020/21 audit outcomes of several entities: Property Management Trading Entity (PMTE), the South African Broadcasting Corporation (SABC), and the Compensation Fund. The audits for Alexkor and the Unemployment Insurance Fund (UIF) were not finalised and therefore not discussed.

The general audit outcomes for the entities were not favourable. They shared many deficiencies which ultimately resulted in their poor performance. The SABC, for instance, obtained a qualified audit outcome due to irregular expenditures - a problem that had been going on for the past two years. The Property Management Trading Entity also recorded a stagnant performance, and a qualified audit opinion, for the fourth consecutive financial year. The AGSA reported that the SABCs financial statements were reported not to have been prepared in accordance with the prescribed framework of Public Finance Management Act. This was a recurring problem with many of the entities.
The Compensation Fund exhibited poor performance in most of its drivers of internal control. The AGSA highlighted that there was deficient leadership and poor execution of plans.

The Committee expressed deep concerns about the state of affairs with the entities in question. There were questions around the implications of the SABC as a going concern. The Committee was also concerned about when the financial report of Alexkor was going to be finalised. Clarity was sought about whose responsibility it was to safeguard assets, specifically the Beitbridge border fence.

The Chairperson said it was shocking how the leadership in the Compensation Fund maintained office. The institution had been performing dismally for the past decade under their leadership. He called for effective consequence management.

Meeting report

Opening remarks
The Chairperson welcomed the Committee and the Auditor General of South Africa (AGSA) team to the meeting. He explained that the AGSA team was going to provide four presentations on the Property Management Trading Entity (PMTE), the South African Broadcasting Corporation (SABC), Alexkor, the Unemployment Insurance Fund (UIF) and Compensation Fund, as well as the 2020/21 Annual Reports and Financial Statements. He then handed over the meeting to the AGSA team and suggested that it begins with the Alexkor presentation.

Briefing by AGSA

Mr Andries Sekgetho, Business Executive, AGSA, greeted everyone and invited Mr Fumulani Rabonda, Deputy Business Executive and caretaking Head of Unit responsible for Alexkor, to proceed with his presentation. However, due to technical challenges prohibiting Mr Rabonda from doing so, Mr Segketho suggested that other reports proceed ahead of Alexkor.

The Chairperson agreed and invited the unit responsible for the SABC audit outcome to proceed with its presentation.

SABC 2020/21 Audit outcome

Mr Segketho explained that the SABC was part of the units under his responsibility as Business Unit Leader. The SABC did not attain a favourable audit outcome for the year under review. It obtained a qualified audit due to its inability, in the previous financial year, to adequately disclose and deal with its opening balance of irregular expenditure. This had been going on for the past two years. During this period irregular expenditure had become a significant problem for the entity as it amounted to approximately R5 billion. In investigating these irregular expenditures, the AG looked at the area of irregular expenditure disclosed by management to ascertain whether or not it was complete, reliable or accurate. This process revealed that the SABC’s opening balance concerns lacked sufficient supporting documentation. There was lack of sufficient supporting evidence for the old contracts that the entity engaged in, thus, it was difficult to satisfactorily test the balance of the opening balance of irregular expenditure.

On the emphasis of matter the entity was classified as a going concern. This was primarily because it incurred a net loss of R530 million and net cash outflows from operations of R690 million for the financial reporting period to 31 March 2021. These conditions indicated the existence of material uncertainty on the entity’s ability to continue as a going concern. However, despite the declining revenue and high cost base, the company operated in a competitive environment. The AG recommended the implementation of a turnaround plan on revenue generation and the continuation of sustainable cost reduction measures.

The entity’s financial statements were not prepared in accordance with the prescribed framework of the Public Finance Management Act (PFMA). The material misstatements of the cash flow statement and disclosure items identified by the auditors in the submitted financial statements were corrected, but the uncorrected material misstatement of irregular expenditure resulted in the financial statements receiving a qualified opinion. Appropriate measures were also not taken to prevent irregular expenditure as required by the PFMA. Poor consequence management was another factor as there was insufficient evidence that appropriate steps were taken against officials who had incurred irregular expenditure as required also by the PFMA.

The SABC was qualified in the current and prior financial years due to the incomplete disclosure of irregular expenditures. Management initiated the process to identify irregular expenditures from 2018 to 2021. However, this was still work in progress and the process was set to continue to the next financial year. Apart from this, there was a notable drop in irregular expenditure in the 2020/21 financial year.

There were several internal control deficiencies identified by the audit team. These included poor bid evaluation mechanisms, weak contract management controls, inadequate review and monitoring procedures to prevent irregular expenditure and inadequate implementation of consequence management towards non-compliance with stipulated legislations. The audit team also identified that most of the fruitless and wasteful expenditure in the current year emanated from interest on late payments of R7 million and also the rental of the unoccupied space of R11 million on a contract that was signed in November 2016.

The audit team designed a turnaround plan to help SABC attain financial sustainability and to re-establish an effective process to support its core operations. In March 2021, the AG received feedback from the entity about the overall progress of this plan. It was reported that 67% of it was achieved, 22% in progress, and 11% abandoned and no longer being pursued by the entity. Recommendations were then made to both the entity and the Committee. To the SABC, the AG recommended that the entity conclude on the process of identifying possible irregular expenditure from the previous years, ensure effective implementation of the turnaround plan and strict monitoring thereof, implement irregular and adequate review controls over financial and performance reporting and enhancing consequence management. To the Committee, the AG recommended follow ups on SABC’s management on effective implementation of the audit action plan to address the qualification of irregular expenditure, and to follow up on the effective implementation of the turnaround plan.

Discussion

Mr S Somyo (ANC), in the capacity of Acting Chairperson, thanked Mr Segketho for his presentation. He said although there was evidence of positive movement, there were still some areas that needed attention. He then invited Members of the Committee to discuss the AG’s report.

Mr A Lees (DA) greeted everyone and asked if the AGSA was happy that the SABC was a going concern. If it was not classified as a going concern, what were the implications for the board in terms of the legal requirements that needed to be followed?

Mr Segketho replied that the going concern principle had a process that it followed. He explained that by the time the AG issued its audit reports, usually on the 31st of July, it looked at the entity’s management financial statements, key ratios and drivers, the revenue, the expenses, the liabilities and the assets to assess whether the institution would be able to sustain itself for the foreseeable future. In terms of auditing standards, the foreseeable future is defined as the period until the next audit cycle. Thus, informed by this process, the AG was satisfied that the going concern principle was met at the time the financial statements were signed.

However, there were still other unfavourable indicators. That is why the report noted issues with material uncertainty because the ratios indicated a decline in terms of the resources. This certainly posed a problem in the long term. He said when the audit was conducted, the implications for the board would have been to start certain processes. Some of which are clearly outlined in the Companies Act 71 of 2008 like the liquidation process that must be conducted by a designated board.

Mr Somyo thanked the AGSA and said that its report highlighted key areas that needed the Committee’s attention. These were to be address when the Committee invited these entities to the meeting. He added that Mr Lees’ question related to other entities. He then handed the meeting back to the AG team for another presentation.

Alexkor Audit outcome

Mr Fumulani Rabonda greeted everyone and said due to unfinalised statements for the financial year ending on 31 March 2021, it was difficult to carry out an audit. For that reason, unfortunately, there was no presentation for the audit. There were many delays on the audit process which started in July 2021. Since the audit could not be conducted, there were multiple adjustments to the project. He also pointed out that Ngubane Assurance, Tax and Advisory Company was the firm commissioned to audit Alexkor. The AG’s role was to oversee and support this audit.

Discussion

Mr Lees expressed concern about the state of affairs in Alexkor. While it was known that the company was in a state of disaster, based on his visit to Alexkor seven years ago, the current situation was worse. It was shocking that the entity had 67 versions of financial statements. The question about going concern and director obligations was probably real and serious for Alexkor. He then asked if Ngubane Assurance, Tax and Advisory Company could shed more light on the reasons for the delays.
 

Mr Megan Naidoo, Head of Assurance, Ngubane Assurance, Tax and Advisory Company, greeted everyone and clarified that it was not 67 versions but roughly six to seven versions of the financial statements. He said he was going to be in a position to sign off the financial statements by the end of February 2022. Currently the company was at the very back end of the three risk management procedures. These were the review conducted by Ngubane Assurance, Tax and Advisory Company, quality control, and the review of its findings by the AG. In terms of delays, many changes to financial statements consume a lot of time and lengthen the risk management process. He also addressed the question about the going concern. Although financials had not been finalised, Alexkor made notable profit in 2021 - much better than the 2020 financial.

Mr Somyo said the last statement was still dependent on the finalisation of financial statements. It is only then that a clear picture would be drawn to track the gains being referred to.

Mr Lees asked if the report with the finalised statements was going to be presented to Parliament.

Mr Naidoo replied that he was not sure if that was going to be possible.

Mr Somyo asked who was responsible for arranging a meeting with Parliament.

Mr Rabonda explained that once the auditors signed off the financials, shareholders, after Annual General Meeting (AGM), arranged with the Minister who, in his capacity, booked an annual report with Parliament.

Department of Public Works Portfolio (Limited to PMTE and DPWI) 2020/21 Audit outcome

Ms Corne Myburgh, Business Unit Leader, AGSA, greeted everyone and outlined the key areas that were going to be covered by the presentation. She pointed out that the Department of Public Works and Infrastructure (DPWI) audit outcomes had not improved in the past five financial years. They remained financially unqualified with findings on predetermined objectives or compliance with laws and regulations. The audit outcomes of the PMTE on the other hand also exhibited stagnation in the past four financial years as shown by its continuous qualified audit opinion. However, there was progress by the trading entity in resolving the qualification of its immovable asset register in the 2020/21 PFMA audit. In the past four years, this had been a contributing factor to the entity’s qualification. The PMTE was also successful in resolving the classification of assets under construction.

Despite such instances of progress, the stagnant performance of the entity was attributed to the management’s inability to implement proper record keeping controls effectively to ensure that complete and accurate information was accessible to support financial and performance reporting. For instance, some supporting evidence from the audit differed from reported achievements while in other cases the auditing team was unable to obtain sufficient audit evidence.

The Department continued to receive unfavourable audit outcomes on a number of work opportunities reported in the Expanded Public Works Programme (EPWP) system. The reported numbers were not consistent. They differed from supporting evidence and in some instances work opportunities created were not reported, thereby, resulting in under-reporting.

The Department had notable misstatements in its annual financial statements. Consequently, this resulted it attaining an unqualified opinion. In addition, the financial statements submitted for auditing by the trading entity were not prepared in accordance with the prescribed financial reporting framework.

The irregular expenditure of R 5 253 000 incurred by DPWI in the 2020/21 financial year was a result of salaries of employees that were appointed irregularly in the prior years. The irregular expenditure incurred by PMTE was a result of non-adherence to the PFMA, Treasury Regulations in awarding of contracts as well as the Irregular appointment of officials by the trading entity 

In terms of Asset Management, the trading entity lacked a strong control system that could safeguard assets. Non-compliance ultimately resulted in material irregularities. Some construction components were left unattended and exposed to harsh weather conditions. Similar to the SABC, the trading entity lacked an effective consequence management system. There was no evidence to confirm financial misconduct committed by officials. Disciplinary hearings were not held.

There were notable deficiencies in internal controls for both the DPWI and the PMTE. For the DPWI, the Director General was on suspension and undergoing disciplinary processes. The accounting officer did not implement all appropriate actions in response to material irregularities. Consequence management recommended after investigation reports was not implemented in certain instances. Further, other investigations that were reported to be in progress in the previous year were closed without clear indication of the outcomes and recommendations.

For the PMTE, the management did not properly review the details of the leases that were recorded on ARCHIBUS. This resulted in significant differences on the leases disclosed in the annual financial statements. The management’s review and monitoring of compliance with laws and regulations was ineffective. This resulted in material non-compliance findings on expenditure, procurement and contract management. Despite this outcome, management did not take effective steps to assess, evaluate and disclose all irregular expenditure in the annual financial statement.

The AG made recommendations to enhance management and monitoring systems, accurate recording of financial records and well as consequence management.

Discussion

Mr Somyo thanked the AG for the presentation and said it was detailed and extensive. It dealt with important issues affecting government property and the ability to maintain an appropriate budget for the sustainability of such buildings. He invited Members of the Committee to discuss.

Mr Lees welcomed the presentation and asked for more clarity on the last points of the presentation. He said the figures referred to in the presentation were not in the document shared with the Committee prior to the meeting. He pointed out that there seemed to be a concern around the ability of either the Department or the entity to safeguard assets. Was this concern raised with the Department and with the entity? He asked this in light of the burning down of one of the country’s prime assets in the previous month - an example of an asset not properly safeguarded. Similarly, the damage caused to the Beitbridge border fence was a result of inadequate safeguarding. Was it the responsibility of the Department or the entity to safeguard assets?

Ms Myburgh replied that the details requested by the Committee were included in the AG’s general report issued towards the end of 2021. However, arrangements were going to be made to ensure that the Committee obtained a copy. The Department and the Accounting Officer were responsible to safeguard assets that were under their control and in the PMTE asset register. In the case of the Beitbridge border fence, it was under the control of the Department of Defence. She then invited her team to explain this further.

Mr Siyabonga Mhlanga, Accountant, AGSA, said that it was the responsibility of the Department of Defence to safeguard the Beitbridge border fence since military personnel were the one on the ground patrolling the area. However, the PMTE was the custodian of the fences as it was recorded in its books.

Ms Aphendule Mantiyane, Assistant Manager, AGSA, said the issue of safeguarding assets was communicated during the 2021 audit period.

Mr Lees asked for more information about the date when the notification for safeguarding assets was issued. He asked for clarity on the responsibility of safeguarding the Beitbridge border fence. Did the entity and the Department of Defence have a formal agreement?

Ms Myburgh replied that she was not sure about the exact date when the notification was issued but suspected that it was before October [year not mentioned]. She confirmed that the PMTE was responsible for the Beitbridge border fence because it was included in its asset register.

Mr Mhlanga said although there were uncertainties about the actual date of when the issue of safeguarding assets was raised, this matter was raised as early as the 2020 financial year. A follow up was then made in the 2021 financial year. He added that there was no official document stipulating that the Beitbridge border fence was the responsibility of the Department of Defence.

Ms Myburgh asked the Committee if the AGSA could get back to it with clarity on matters that were raised, concerning the dates and the agreement between the entity and the Department of Defence.

Mr Somyo agreed, and thanked the AG team for its response. It was now upon the Committee to read more on these matters. Mr Lees had raised the relevance of the report in question in terms of the current condition of the assets and departmental plan for maintenance and their contractual relations.

Compensation Fund 2020/21 Audit outcome

Ms Kgabo Komape, Business Executive, AGSA, said the UIF audit was not yet finalised. Its financial statements were submitted after the Compensation Fund.

Nonetheless, the AGSA had done some work on it and submitted a draft report. What was left was the finalisation of the audit. However, one of the biggest challenges encountered by the AG team in the UIF was the R57 billion of the Temporary Employment Relief Scheme (TERS). It was too big and the auditing team had to consult some of the companies to obtain a clear picture of where the money was supposed to be channelled. Once this audit was finalised, findings would be shared with the Committee immediately. 

The AG was extremely worried about the compensation fund. For that reason, it engaged the leadership of the Fund, including the leadership of the department around the contents, and presented the material irregularities and losses due to poor transparency in reporting. The included the ability to retrieve information data was the biggest challenge to for the fund.

Ms Michelle Magerman, Business Unit Leader, AG, said the Compensation Fund had received an adverse audit opinion for the past 5 years. This remained a growing concern. For the 2020/21 financial year, the entity did not correctly account for revenue from non-exchange transactions in accordance with “GRAP 23” standards. It incorrectly reversed revenue recognised in the prior year against the current year revenue from non-exchange transactions without verifying the employers who submitted returns on earnings in the current year. It also did not raise the revenue estimate for all the employers who met the criteria to be assessed in the current year. Therefore, it was difficult to determine the extent of the understatement of revenue from non-exchange transactions and statutory receivables.

The AG team was also unable to obtain sufficient audit evidence that benefits had been adequately accounted for relating to all claims in the current and prior year. Management did not keep adequate records to substantiate the figures recorded in the financial statements. It was difficult to confirm benefits paid by alternative means, as the public entity's records did not permit. Further impediments were faced in obtaining sufficient audit evidence for payables from non-exchange transactions for the previous and current financial years as management had not maintained adequate records to support the figures disclosed. It was difficult to confirm payables from non-exchange transactions by alternative means as the public entity's records did not permit.
 
Ms Magerman said the auditing team struggled to obtain sufficient audit evidence for the investments in associates for the previous and current financial years, as management did not implement strong internal control systems to maintain proper accounting records and supporting information. It was difficult to confirm investments in associates by alternative means as the public entity's records did not permit.

The auditing team was unable to obtain sufficient appropriate audit evidence to confirm whether all irregular, fruitless, and wasteful expenditure for the prior years had been recorded, impacting the closing balance for the current year. It was difficult to confirm irregular expenditure by alternative means as the public entity's records did not permit. The entity also insufficiently prepared, and disclosed, the net cash flows from investing activities as required by the “GRAP 2” standards. This was due to multiple errors in determining cash flows from investing activities. The auditing team was therefore unable to determine the full extent of the errors in the net cash flows from investing activities.

The annual financial statements submitted for auditing were not prepared in accordance with the prescribed financial reporting framework. They were also not supported with complete records. In addition, material misstatements were identified on various accounts and, in some instances, supporting evidence was not provided. There were further deficiencies in expenditure management and consequence management as shown in the presentation. The audit revealed that there were contracts that were extended and modified without approval of a properly delegated official as required by Section 44 of the PFMA and Treasury Regulations 8.2.1 and 8.2.2.


The Compensation Fund exhibited poor performance in most of its drivers of internal control. The report showed that there was deficient leadership and poor execution of plans. The AG then recommended methods, as shown in the presentation, to enhance performance in lacking areas.


In conclusion, Ms Komape said the Compensation fund was not benefitting from the governance structures, the audit Committee, or the internal audit team because it was not providing these committees with complete information to facilitate adequate analysis which could result in appropriate recommendations.


The Chairperson thanked the AG for the presentation and opened the floor for discussion.

Discussion

Mr Lees said one of the indicators of the poor state of conditions with the UIF was its system. He said doing returns on its system was a nightmare. It did not send out notices to alert people that their returns were due and he feared that there were many innocent employers across the country who had given up and stopped paying returns. He said it was surprising that the Public Investment Corporation (PIC) was not mentioned in the report besides being known for “very bad investments”. Was it possible that investments had been made but lost through corrupt means and not recorded properly?

Ms Komape explained the different levels of interaction between the Compensation Fund and the PIC. There were listed and unlisted investments. Listed investments were those made to listed companies and these were easy to follow through. Unlisted investments on the other hand were those made to unlisted companies and these were difficult to monitor. It was difficult to ascertain whether the investments were still worth the money deposited. Although the AG could not conclude that there were funds stolen, it identified a pattern of impairments with investments made to unlisted companies. To overcome this, the AG recommended that the Compensation Fund tighten its Service Level Agreement (SLA) with the PIC. Instead of waiting for the year to end to get sets of financial statements, a tight SLA would enable it to test whether its invested money was gaining or losing value during the course of the year in order to make an informed decision.

The Chairperson described the state of affairs in the Compensation Fund as a horror story of 10 years. It was shocking that the people who were responsible for this collapse still held office. He warned that in the absence of consequences, crisis was going to prevail. He suggested that leadership in the Compensation Fund had to be changed. This was largely based on the suspicion that it benefitted directly from corrupt activities surrounding the institution.

Mr Lees asked if the Fund could provide a detailed report of all its investments before it appeared before the Committee.

Closing Remarks

The Chairperson thanked the AGSA for its insightful report. He expressed the Committee’s appreciation for the work that it did. He also thanked the Committee for its participation.

The meeting was adjourned.
 

Present

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