CEF Group, NECSA, SADMPR audit Outcomes & Annual Reports

Meeting report

Briefing by Auditor-General of South Africa

Mr Fhumulani Rabonda, Deputy Business Executive, Auditor-General of South Africa (AGSA), said that although it had taken the Committee to reach out to AGSA to report on the Central Energy Fund (CEF), they aspired to be committed to their stakeholders, specifically Parliament. He therefore apologised for the delay and hoped for an improvement in the future.

Ms Dorothy Rampopo, Deputy Business Executive, AGSA, said that the consolidated audit of the CEF was delayed due to issues involving the financial statements for PetroSA, which was a significant subsidiary, and the entity could not finalise its processes of submitting them to AGSA to audit the consolidation.

Mr Msizi Mavundla, Senior Audit Manager, AGSA, briefly touched on the amendment made to the Public Audit Act. A material irregularity was defined as any non-compliance with, or contravention of, legislation, fraud, theft, or a breach of a fiduciary duty which was identified during an audit performed under the Act that resulted in, or was likely to result in, a material financial loss, the misuse or loss of a material public resource, or substantial harm to a public sector institution or the general public. To allow for the establishment of capacity and processes, AGSA would follow a phased-in approach to identify material irregularities (MI’s)in 2020/21, based on the type of material irregularity to be identified and reported, and the auditees where it would be implemented. For 2021, there was no auditee selected for MI implementation in the mineral resources and energy portfolio.

Group audit outcomes of Nuclear Energy Corporation of South Africa

Mr Mavundla said that AGSA had looked at the Nuclear Energy Corporation of South Africa (NECSA) as a whole, including Pelchem, among others. NECSA’s outcome had remained stagnant with a disclaimer audit opinion, with material findings on compliance and predetermined objectives for the 2020/21financial year. This was due to senior management’s slow implementation of the action plans from the previous years in a timely manner, which had contributed to the entity not improving its audit outcome, especially in the areas of financial and performance information. It was advised that moving forward that there should be:

- improvement of internal processes and record management, and consequence management in dealing with historical balances of irregular, fruitless and wasteful expenditure at the entity.

- development of an effective action plan for entities that would ensure basic control activities were implemented and monitored to improve the audit outcomes.

The financial position of the group remained very concerning due to the company and group having recorded losses for the past four years. The total liabilities exceeded total assets at the 31 March 2021 year-end. NECSA was technically insolvent and illiquid. This had resulted in multiple material uncertainties that cast significant doubt regarding the entity's ability to continue as a going concern.

NECSA had submitted financial statements that contained material misstatements, mainly due to inadequate preparation and reviews and improper application of international financial reporting standards. Certain material misstatements could be corrected by management, but some could not be corrected. NECSA had not corrected the material findings. The method of calculation and source information for achieving the planned indicators were not clearly defined for the reported achievements against the annual performance plan before re-tabling.

The findings on compliance with key legislation was only 9% of findings for NECSA, whereas in 2019/20 it was 27%. The findings included that the financial statements were not submitted in the prescribed period as required by legislation. Some of the goods, works or services were not procured through a fair, equitable, transparent and competitive procurement process, as required by legislation. Effective and appropriate steps were not taken to prevent irregular expenditure. There was no evidence that suggested that disciplinary actions had been taken against the officials who had incurred irregular expenditure. Effective and appropriate steps were not taken to collect all the revenue that was due.

The irregular expenditure decreased from R34 million to R32 million. This was not a substantial decrease. Fruitless and wasteful expenditure decreased from R2 890 000 to R174 000, which was a substantial decrease.

There were three root causes:

- slow response from management to address the audit findings;

- lack of proper action plans to address the audit findings; and

- no consequences for poor performance management

Recommendations for NECSA

• accounting authority should strengthen preventative controls to identify non-compliance and lack of improvement on the audit outcomes;
• accounting authority must thoroughly review developed action plans to ensure they address root causes;
• accounting authority must continue to do their work through audit committees to ensure management implements and enhances review processes for the annual financial statements (AFS); and
• monitor performance and consequence management.

Audit outcomes for South African Diamond and Precious Metals Regulator

Ms Belinda Beddie, Senior Manager: AGSA, presented the audit outcomes of the South African Diamond and Precious Metals Regulator (SADPMR). It had obtained an unqualified audit opinion with findings on compliance and predetermined objectives for the 2020/21financial year. This was due to instances of material non-compliance in the areas of expenditure management, procurement and contract management, and material misstatements identified in the financial statements submitted for auditing. AGSA recommended that:

- there should be a combined assurance at all levels;

- governance structures and leadership should ensure that actions were taken to address the significant internal control deficiencies;

- the accounting authority needed to enforce accountability and implement consequence management in a timely manner for any transgressions identified.

The financial health of SADPMR was good. However, the impact of COVID-19 had affected economic conditions and the industry in which it operated. The entity also depended on government grants, licences and service fees for the continued funding of its operations. The entity had submitted financial statements that contained material misstatements, mainly due to inadequate preparation and reviews, and improper application of the Generally Recognised Accounting Practice (GRAP) standards.

There were material findings, and only some were corrected. The method of calculation and source information for achieving the planned indicators were not clearly defined for the reported achievements against the annual performance plan before re-tabling. The areas of material non-compliance reported included:

- material misstatements identified in financial statements submitted for auditing;

- ineffective steps taken to prevent irregular expenditure;

- some goods and services being procured without obtaining the required price quotations; and

- some contracts were extended without the approval of a properly delegated official.

Irregular expenditure had increased from R172 000 to R16 million. The entity did not have a bid specification committee, resulting in irregular expenditure. Fruitless and wasteful expenditure had decreased from R16 402 to R3 000.

The three root causes included:

- management did not put in place adequate controls to prevent non-compliance with procurement legislation.

- management did not implement adequate review and monitoring controls over the preparation of financial statements; and

- management was not effective in developing and monitoring the implementation of action plans.

Recommendations for SADPMR

• accounting authority should strengthen preventative controls to identify non-compliance;
• accounting authority must thoroughly review developed action plans to ensure they address root causes;
• accounting authority must continue to do their work through audit committees to ensure management implements and enhances review processes for AFS; and
• monitor performance and consequence management.

Adv Thabo Mokoena, Director-General (DG), DMRE, said that the presentation by the entities was not a detailed input, they only highlighted the challenges.

Briefing by NECSA

Mr David Nicholls, Chairman of the Board, NECSA, did the introductory comments for the presentation.

Mr Loyiso Tyabashe, Group Chief Executive Officer, NECSA, said the corporation had received a disclaimer audit opinion. A total of 63 findings had been raised by the AGSA. He confirmed that the issues identified were being dealt with.

Ms Precious Hawadi, Chief Financial Officer, NECSA, said certain matters could not be resolved. This included employees not verified in the prior year, and historical opening balances. 55 of the findings were being worked on currently. There were three items resolved for irregular expenditure. One had to do with a contract for which the service provider had not submitted an International Organisation for Standardisation (ISO) certificate, and a R2.8 million contract had been cancelled. The second issue was an amount of R3.5 million that had to do with specific services from Telkom. The third issue had to do with one contract which, if it had been cancelled at that time, would have amounted to fruitless and wasteful expenditure, so this issue was still being addressed.

Ms Hawadi had some connectivity issues, and Mr Tyabashe took over.

He said a balance sheet rehabilitation was currently being embarked on through some identified projects, such as the uranium recovery project. The income statement had a negative trajectory and was neither acceptable nor sustainable. There was a strategy in place to reverse this path.

Performance programme area

There had been a 57% success rate, and several of the measures had not been met. The performance of the programmes had not been optimal. There was a revised strategy for change. The recovery strategy was based on:

- financial recovery and sustainability;

- research and innovation;

- profitable commercial enterprises;

- business continuity and efficiency; and

- talent excellence and a high-performance culture.

Ms Hawadi said that there had been a significant improvement in the organisation's profit position.

Briefing by SADPMR

Mr Abiel Mngomezulu, Non-Executive Board Chairperson, SADPMR, apologised for the late tabling of the report. He informed the Committee what the presentation would be about.

Mr Cecil Khosa, Chief Executive Officer, SADPMR, discussed the results of the annual performance report. Several of the output indicators not achieved during quarter one were due to the COVID-19 pandemic and subsequent implementation of the national lockdown. The strategic plan and the annual performance plan had been adjusted in accordance with the Department of Planning, Monitoring, and Evaluation (DPME) and Parliament directives, and most of the targets were achieved. Out of 22 performance targets, 17 were achieved. Measures had been put in place to address the areas of non-achievement.

(A breakdown of the non-achievements can be found on slide 9-10)

SADPMR’s head office had relocated to a new office, which provides better and safer facilities for exporting, importing and trading in diamonds. However, contractual negotiations for the relocation of the SADPMR to the new office block at the GIDZ were still ongoing. The entity had also had to deal with litigation and contractual matters.

There were 48 males and 69 females in employment.

Financial statements

Ms Busisiwe Mahlungulu, Chief Financial Officer: SADPMR said that the revenue recognised for the year was R121.1 million. The in-house revenue generated was R45 million, compared to the budget of R56.6 million. The decrease in revenue generated from the sale of services was due to fewer diamonds traded at the Diamond Exchange and Export Centre, and the impact of the lockdown regulations as a result of the COVID-19 pandemic. The actual expenditure for the year under review was R105.9 million compared to a budget of R102.4 million. The actual expenditure on the budget was less due to the COVID-19 pandemic, which resulted in fewer business activities as a result of the restrictions.

Mr Khosa said that SADPMR was disappointed with its audit outcome. He emphasised that there was an agreement with National Treasury that it was not important for SADPMR to have a bid specification committee.

Discussion

Mr K Mileham (DA) asked if the actual annual reports had been made available. If not, could they be made available? He asked for an update on the entities' status as a going concern. The irregular expenditure at NECSA was identified by AGSA as amounting to R32 million, with the majority sitting in Pelchem. The cause of irregular expenditure appeared to be a supply chain management (SCM) issue. He asked what was being done to address SCM issues. This had been an ongoing issue for several years.

The weighted average of utilisation and weighted average of availability for key performance indicators (KPIs) appeared to be significantly below the target, the reason being equipment. This was a nuclear plant and equipment, so there should be no reason for a failure of maintenance at the plant. He asked for clarity on why these particular targets were not achieved and what was being done to address this. He was worried about the going concern status. The current ratio of the entity was 1.9 to 1 and had declined to 1.45 to 1. This was getting worse and not better. There was an ongoing concern about the sustainability of NECSA as an entity. The current liability had jumped from R652 million to R995 million. Was the entity sustainable?

How could the Committee trust the revenue projections that the entity was making as being reliable when it was so off from the last projections that the Committee saw?

Ms P Madokwe (EFF) addressed the issue of no consequence management. No one had been held accountable for mismanaging entities. NECSA as an entity had been receiving questionable audit results for the past two or three years. The reason for this included no consequence management and management being slow in implementing the recommendations made to them, among others. There needed to be an investigation to determine who was responsible, and they had to be held accountable. The worrying outcomes in the previous years and the failure to improve had been put entirely on the management that had not been acting, and not having consequence management. She asked what NECSA was doing to display a level of consequence management. Were any investigations being put forward? She asked for a breakdown of what happened to people who did not do the tasks that they were supposed to do. She asked for clarification about employees not being verified. What was the Department doing to collaborate with institutions of higher education to ensure that at the end of the academic year, a number of skills were produced to help with skills shortages?

What was the annual target to fill those skills? Had a programme been implemented to help -- something similar to the Accelerated Schools Infrastructure Delivery Initiative (ASIDI) programme for teachers. Was anything being done to market and educate young people in high school for career paths?

She asked SADPMR what it meant when they claimed the late tabling of the report was not their making. There were two crucial vacancies, and she wanted to know how long those positions had been vacant, and if there was a timeline to fill them. The local beneficiation of minerals was an issue. South Africa tended to export, rather than process raw materials. As raw materials were exported, so were jobs. What were the plans for the local beneficiation of minerals, and what were the targets? She asked if the entity's new office building was being rented or being bought. If it was rented, why did SADMPR choose that option? She commended the gender balance of staff and the representation of more females in employment. Was this representation evident at the level of executive management? There were more males for internships. She asked what the reason for this was, and if anything was being done about it.

Mr J Lorimer (DA) asked the SADPMR what had happened to cause a decline in revenue due to adverse market conditions. He wanted clarity on what had happened in these markets.

Mr M Wolmarans (ANC) said no decision was being taken by the Department of Health, and it was disregarding other offtake. He was worried because this was the same type of issue from previously where there was something outstanding. He demanded an explanation of what was being done about this.

This was the same issue from years ago. What was being done? Specifically, what was NECSA, the Department of Health and the Department of Mineral Resources and Energy doing about this matter? This was a concern. There was a government entity that needed to do business with another government entity. He suggested that agreements that would help both entities for service delivery should be narrowed down and make them profitable.

There had been a regression for the SADPMR as far as outcomes were concerned. The irregular expenditure had been due to not having a bid specification committee -- was there currently a bid specification committee? He asked for details of what issues had been resolved, and how they were resolved.

Ms V Malinga (ANC) commended the 116 findings being reduced to 63 findings. However, this was not enough. More should be done to reduce them. NECSA had been declared insolvent, but they had not attempted to clarify this.

SADPMR contracts had been extended without approval, but they had not explained this. Treasury had said NECSA did not need a bid specification committee, so why was AGSA still picking this up? She asked if SADPMR and NECSA would be sustainable without grants.

Mr S Kula (ANC) said it was unacceptable for entities to not respond to questions being raised. The decrease of irregular expenditure from R34 million to R32 million was commendable. However, it could still be lower and needed to be addressed.

He hoped that NECSA would respond to the issues that had been raised by AGSA on how they would go from an unqualified audit outcome to a qualified audit outcome. What was NECSA doing about the issues that had been identified in previous audits that had not been dealt with? How did it plan to move forward? Their financial health was unsatisfactory and unacceptable. How would NECSA rectify its financial position? AGSA had identified the management level as an issue, such as senior management being unable to respond to challenges. NECSA must inform the Portfolio Committee as to how they would ensure that senior management responded to challenges.

He said that the focus should not only be on the negative but on the positive as well. He commended NECSA for its decrease in irregular expenditure. However, they should inform the Committee on how they planned on decreasing it further. He was also happy to know that three staff members had received their PhDs.

The financial position of the entity and its revenue stream and expenses were of concern. How did the entity plan to grow its revenue and cut its expenses? He agreed with Mr Mileham’s comment about the revenue projections of NECSA. The performance of programmes was not acceptable. He asked how the entity planned to improve its performance.

He asked when the Regulator planned to appoint a permanent chief financial officer (CFO). He asked about the employment equity statistics and how the entity planned on hiring people with disabilities. There was no balance when it came to internships -- there were three women and seven males. Internships were not available for every province. Limpopo accounted for about 60% of internships. What about the rest of the country?

The Chairperson commended AGSA for stating that they were a reliable accounting authority. He referred to the AGSA slides on the audit outcomes of NECSA and SADPMR.

There had been a slow implementation of action plans from previous years. These action plans were not implemented in a timely manner and had contributed to no improvement in audit outcomes and financial performances. The root causes identified were also not identified in the recommendations. The level of accountability needed to be seen. There was no mention of consequence management; entities had to be held accountable. The recommendations for both entities were the same. NECSA and SADPMR were two completely different entities, so h did not understand this and asked for clarity. He wanted to know what happened when entities complied with the recommendations and still did not achieve good financial results. He asked AGSA to inform the Committee if entities were not meeting deadlines.

The NECSA’s presentation of its annual report had been delayed because of COVID-19 reasons. However, SADPMR could not get their information on time. He asked NECSA to show the Committee if there had been any consequence management. Contracts could not be reversed. NECSA should inform the Committee who was responsible for those contracts. There needed to be a report that set this out, including what action had been taken, the cost of the contract, how much had been lost, how much was recoverable and how much was outstanding. He asked how many people were still employed by the entity, and that this information be made available within the next 30 days. He requested the same from SADPMR on what wrong things were done, what actions were taken, and what levels the employees were on.

Why could NECSA’s findings regarding the unverified employees in the previous years, not be resolved retrospectively? He asked for clarity because he did not understand this.

The SADPMR offices in Gauteng cater for Limpopo, Northwest and Mpumalanga, but the Free State was too far. He asked for clarification on this. Of the 22 targets, only 17 were achieved. However, it was not clear where the 17 targets were coming from.

The revenue strategy was implemented and not developed, but it was said that SADPMR had developed a strategy to maximise revenue. It then said that the strategy was not approved. How was the strategy developed and implemented if it had been approved? The signed performance agreements and workplan-facilitated targets were not achieved. This was as a result of the suspended employees, and an employee on extended sick leave. He asked for clarity on both these matters.

There was no justification for not meeting the outcome indicator. When it came to senior management, males were 40% of the workforce, but when it came to skilled positions, there were only five females and seven males. He was concerned that there was not a single accounting officer in the department and its entities. For internships, there were seven people coming from Limpopo. He asked SADPMR to look into this -- what about the other provinces?

He was concerned about the operating expenditure of R18.2 million. This was expenditure on different areas and procurement activities taking place. There was no reflection of expenditure on the movement from the old building to the new building. What did 'non-cash expenditure' mean?

AGSA’s response

Ms Rampopo said for NECSA there was an issue of its status as a going concern. The entity was struggling with issues of financial health. No financial health issues had been identified for the SADPMR. AGSA had communicated to the entities that there had to be an area of consequence management to hold people to account in order to reduce non-compliance issues. It would also help to apply diligence to the financial statements received.

The outcomes were not necessarily resonant with the MI definition. There was a phased-in approach. This MI approach was not applied to these two entities. Material misstatements were identified when the financial statements were received. The entity must address this. The finance division had the responsibility of ensuring that there were no material misstatements when the financial statements were presented.

AGSA had noticed an improvement in management -- for example, providing responses and information. The recommendations made were aimed at the slow response and implementation of action plans. These recommendations were made to the entity to strengthen preventative controls and credible action plans. Therefore, each finding had a recommendation on what needed to happen. Information was then made available to them, and they needed to come up with their own action plans.

SADPMR had the same non-compliance issues as NECSA, and therefore the recommendations for the entities were similar in nature. NECSA’s action plan would be different from the action plan for SADPMR. NECSA’s actions plans would address the issues of limitations, from AGSA not being able to give an opinion. Management needed to design a tailored expectation on how they were going to ensure in future that financial statements were supported by underlying records, and effectively audit those records. SADPMR's action plans would be tailored to the methods of non-compliance and how differences would be corrected.

Mr Rabonda assured the Portfolio Committee that the information requested would be made available.

NECSA’s response

Mr Nicholls responded regarding the going concern issue. He said that of the R32 million for irregular expenditure, Pelchem was responsible for about R24 million. The projections made in May 2020 in relation to where NECSA was now, was fundamentally a function of the shutdown that had had an impact on cash flow. There were three large cash flows going on. The first was the decommissioning cashflow, which was shut because there was nobody on site. The second one was external costs, and the third was the training of artisans. The training of physical courses was stopped. The income budget this year was R35 million, and about R3.5 million was spent because training could not take place.

In October 2020, COVID-19 was indicated to have had an impact on the income stream. The initial loss was over R200 million, and even with the R400 million loss of income, NECSA had still managed to stay close to the original estimate.

The decisions by the Department of Health had been an ongoing discussion. For the HIV medication, the active ingredients would be the same cost as it was overseas. They hoped to move from being an importer to a manufacturer. This was a self-funding activity. There had been a discussion with the Department of Health over the last year. Responses from various departments were slow. On the technical side, NECSA was ready for these activities. The vast majority of liabilities were, in fact, decommissioning liabilities from previous programmes. There was currently no significant bank exposure. He said that without a grant, the entity would not be sustainable. Most of the activities were related to state activities and were not commercial activities.

He said the report on consequence management would be made available within 30 days.

Ms Hawadi said the current ratio was negative, and therefore NECSA had to be intentional about what they were going to do to change and ensure that the numbers that were presented were credible. The budget was locked on to focusing on critical expenditure, like personnel and production. To deal with vacancies, NECSA had used its resources to optimise its performance, and this had reduced expenditure. Revenue streams had been expanded. Negotiations with suppliers had taken place to reach favourable terms, and they were now affordable.

The cancelling of contracts deemed as irregular expenditure did not result in fruitless and wasteful expenditure. Three items had resulted in irregular expenditure as a result of the process. One item was Telkom, involving about R3.5 million, the second was Adams & Adams, involving about R2.5 million, and the other item also involved R2.5 million. An ISO certificate was supposed to be provided in order to ensure there was no fruitless and wasteful expenditure, and once the invoices had been paid, there would be a process of condonation to ensure it rectified that situation. Internal audits were being done on all items to determine if there had been any loss to the entity. It had been established that there was no loss to the entity, but the issue was around the process that had been followed.  

Telkom provides a unique service, so NECSA had gone out to tender, and the results showed AGSA that Telkom provided a unique service. Adams & Adams manage the intellectual property (IP) of NECSA, which is a unique item, but the issue was maintenance fees. The auditors felt that NECSA should go to the market. There would be an early audit in March, and the intention was to re-engage with the AGSA to show evidence as to how they had addressed the issues identified.

AGSA goes on site and verifies employees to determine if they exist or not. There was a timeline for this. They had verified that the 12 employees they were trying to verify did exist. The challenge, however, was that they had been cut off in the audit, so it could not be corrected after the timeline, regardless of the fact that the issues had been resolved. The slow responses in regard to the six findings were because of opening balances with sample sizes in the thousands, where the entity had to respond within three days. There were timeline issues in trying to respond to auditors.

NECSA had been working on its financial position to ensure that it made it to the financial year-end. This included negotiating with suppliers for more favourable payment terms and ensuring a follow-up on debtors. Inventory accounts were being monitored. NECSA would look at its financial statements to ensure that they were in compliance.

Mr Tyabashe said the nuclear entity was healthy and safe. There were clear action plans for recovering the adverse audit outcomes and revenue streams. There were outreach programmes for nearby schools for skills development.

NECSA was being repositioned not only as a research institution but as a beneficiation institution because raw materials in the form of uranium were processed into cancer detection and therapy medications. Calcium fluoride was beneficiated into fluorine.

He said that the information requested by the Chairperson would be made available within 30 days.

SADPMR’s response

Mr Mngomezula said the tabling of the annual report was delayed due to COVID-19 restrictions. He confirmed that all vacancies had been filled. The vacancy of the CFO would be filled by the third week of March, in order to get everything done. There was an education committee. The disciplinary process would be fast-tracked in order to inform the Committee.

Mr Khosa said that there was a collaboration with higher learning institutions. There were long-standing programmes with the Tshwane University of Technology (TUT) in the area of jewellery making. Raw materials were processed locally to increase job opportunities. The current policies and legislation placed limitations on how one could go about this. The building of the new offices was a government project for the growth and development agency aimed at promoting local beneficiation through jewellery. It was being rented.

There were four females in senior and executive management, and the goal was to appoint two more females. Internships were advertised nationally. There were not many applications with the relevant qualifications. The regulator depended to a large extent on the health of the industry. The market was very tight when there were problems in India with their currency. India’s financial institutions were not giving out loans. This put a lot of strain on both the producers and manufacturers. There was a reduction in performance that affected SADPMR. There was the procurement strategy, a bid specification evaluation committee, and a bid adjudication committee. For an entity to be self-sufficient, there had to be consideration of the legislation. Resources were offered to clients to avoid unreasonable travel affecting operational expenditure. Provinces like the Free State had many mines, but trading activities did not take place.

There was a target to ensure there was a document aimed at addressing the revenue challenges identified. The signing of performance agreements had begun in that financial year, and employees had been on suspension from 25 May, with the due date of those agreements at the end of May. The legal team had said that since the employees were on suspension, this would create a legal challenge on how they would be assessed. The performance assessment had been postponed until they return. SADPMR was looking at the nature of the non-compliances, which were minor -- such as late submissions of police clearances. Clients were allowed a bit of time. The operational expenditure was mainly on conducting inspections.

Ms Mahlungulu covered the aspects of operational expenditure. The office lease amounted to R4.4 million. The legal costs amounted to R1.9 million. Audit fees amounted to R1.8 million. Security costs amounted to R1.2 million. Non-cash and abnormal expenses were an item of R3.1 million, which referred to other gains and losses. The findings mentioned were related to irregular expenditure. The three main findings were the provision of the legal fees and the other two related to disclosure notes on the financial statements. This was related to the budget statement and an error in the cashflow.

Adv Mokoena confirmed that there were two female accounting officers.

The Chairperson thanked the entities for their presentation and said he hoped that in the near future the entities would have a good financial outcome.

The Committee adopted the minutes of its previous two meetings.

The meeting was adjourned.