Department of Human Settlements on measures to address findings in 2020/21 audit opinion

Meeting report

Briefing by Department of Human Settlements

Mr Francois de Wet, Chief Financial Officer (CFO), Western Cape Department of Human Settlements (DHS), briefed the Committee on the material findings on compliance and material misstatements in the annual financial statements for the 2020/21 financial period.

He reported that the audit outcome of the Department had regressed from unqualified with no findings to unqualified with findings in the 2020/21 financial year. The material findings were mainly related to material non-compliances identified during procurement and contract management and material corrections to the financial statements, which had led to non-compliance with section 40 (a) and (b). The Department had incurred irregular expenditure of R284.55 million, as it had not followed a proper tender process, resulting in bids with biased specifications, procurement outside the scope of the contract and allowing other organs of state to make use of a contract without following the prescribed procurement requirements.

Specifications in their nature restricted other potential suppliers from responding to the tender invitations, as the specifications stated that bidders that did not have an office in the Western Cape would not be considered for tenders. The specifications were drafted in a biased manner, as they did not allow all potential suppliers to offer their services. No malice or negligence could be determined. The Department did not suffer any losses, so no disciplinary actions were considered.

He also indicated awards were made to suppliers whose tax matters had not been declared in order by the South African Revenue Service (SARS). It had been identified that these awards were made in terms of the Departmental emergency procurement policy, supply change management (SCM) delegation C3.5. However, this did not imply that governance must not be heeded. In these cases, tax compliance had not been taken in consideration. Oversight should be considered an internal control deficiency, and did warrant disciplinary action. An official within SCM had been identified who could be responsible for the oversight, and would be subjected to disciplinary action. Additional controls were implemented in November 2021 to address the recurrence. Two more cases were identified in the 2021/22 audit, but they were related to appointments done before implementing the additional controls.

He further reported that payments to the security company were irregular, because the security services were not for the Department's properties. The services delivered fell outside the scope of the contract between the DHS and the security company. No malice or negligence or financial losses could be determined. No disciplinary action was considered. The provincial treasury had not condoned the irregular expenditure as they did not consider it irregular. They had advised the acting Head of Department (HOD) to reclassify it and remove it from the register.

The KPMG report dated 10 August 2018, issued to the Office of the Premier, indicated the payments were irregular because the suppliers had commenced work without a valid contract from the DHS. It indicated that the Department of the Premier (DotP) could consider corrective action on the grounds of potential negligence. This was never actioned, and the case had since been closed.

Mr De Wet said all the findings by the Auditor-General of South Africa (AGSA) had been taken up in the governance action plan (GAP). Progress with the plan had been reported on by management to the audit committee, the minister and the provincial treasury. There were still findings in the 2021/22 audit due to the short time that management had to implement corrective measures. It could be confirmed that most of the transgressions/repeat findings in the 2021/22 financial year audit had been incurred before the additional controls that were put in place in November 2021.

Material misstatements on current assets and current liabilities that the auditors identified in the submitted financial statement were corrected and/or the supporting records were provided subsequently, resulting in the financial statements receiving an unqualified opinion. The correct distinction between current and non-current payables had been correctly interpreted and implemented by the Department in the 2021/22 audit.

Discussion
Mr A van der Westhuizen (DA) wanted to know how the issue that contractors should have an office in the Western Cape to be considered for a tender was going to be resolved going forward. He also wanted an explanation for why security had become a problem for construction contracts and who had decided that the KPMG report should not be actioned or followed up.

Mr De Wet said the provincial treasury was dealing with having an office in the Western Cape. It was not seen as irregular expenditure, but it had to be disclosed. Eventually, it had been disclosed so that it could be removed as irregular expenditure from the financial statements, so when the Department presented its 2020/21 financial statements to Scopa, it could be seen how the matter had been disclosed so that it did not reflect as irregular expenditure.

On the tender that was out of scope for the security company, he said the Department had employed Red Ants, but had not included the City of Cape Town and the Department of Transport and Public Works. During the lockdown, there had been a lot of land invasions, and the City of Cape Town and the Department of Transport and Public Works had requested to make use of the Department's agreement to expand the contract to accommodate the two state entities. The contract had then been expanded, but the AG had ruled it as irregular expenditure. It was then submitted to the provincial treasury for condonement, which did not see it as an irregular expenditure and had indicated the Department was not in transgression. That was why it had been allowed to continue with the contract. The acting Head of Department therefore had to remove it from the register.

Regarding the KPMG report, he said the DotP had appointed KPMG because of a whistleblower. The contractors had gone on to a site without the necessary documents or contracts, and KPMG had found the HOD had acted improperly. The DotP had not taken action, which was why the case had been closed.

The Chairperson wanted to know if that was the end of the case.

Mr Van der Westhuizen asked the Committee to be given reasons why the Department of the Premier had not pursued the matter. He added that it was important to agree with the AG to change the finding that outside contractors must have offices in the Western Cape and not attach disclosures in their documents. The Western Cape should also change its regulations to allow outside contractors to do business with the province. He wondered if this would be an ongoing occurrence, with the same finding and condoning it.

Mr M Xego (EFF) asked if the condonement by the DotP was not going to create a perception that no rectification was needed when there had been a finding, and asked if this was going to be a norm.

Ms M Maseko (DA) asked if there were no loopholes in the policy, because there must be a reason why it had been condoned.

Ms Phila Mayisela, Acting Head of Department, Western Cape Department of Human Settlements, gave an explanation for all the concerns raised by the Members.

The matter of the framework found wanting in terms of the buyers was not going to be a recurring issue. In the specifications, it was indicated that service providers from the Western Cape would be considered and preferred, but out of the hundred bidders, only two service providers who were not from the Western Cape had been appointed. No payment was made to those consultants. The AG then evaluated the entire population on that basis, after which the Department submitted a motivation to the provincial treasury for the irregular framework. The outcome had been that it was condoned. This was something that was not going to recur.

Referring to suggestions that the Western Cape wanted to be a country within a country, she said the Department had ensured that in all its subsequent bids, section 217 of the constitution -- which talks of fairness, equity and transparency -- was adhered to to give everybody equal opportunities across the country. It did have its challenges in terms of delivery for the service providers who came from outside the province, especially regarding turnaround time. This was also not going to be a recurrence.

Regarding the KPMG matter, it was not a condonation per se. There was a report commissioned by the DotP which had made recommendations, and no action was taken on the recommendations by the DotP. The Department of Human Settlement was not in a position to give the rationale behind the recommendations not acted upon because the decision was taken independent of the Department.

Resolutions

The Committee resolved it would request to be sent a report in writing by the Department of the Premier on why it had not taken action following the KPMG report, and why the internal audit committee had not been involved in this matter before engaging an external service provider.
.
Adoption of minutes

The Committee considered and adopted the minutes of 8 June.

The meeting was adjourned.