Compensation Fund on issues contributing to its audit findings over the recent financial years; with Deputy Minister

Meeting report

Deputy Minister’s introductory remarks

Ms Boitumelo Moloi, Deputy Minister of Employment and Labour, acknowledged the importance of the constitutional oversight role of the Committee. and indicated her Department’s willingness to cooperate with the Committee in its oversight work.

She said there were some changes of functions at the Compensation Fund (CF). The challenges at the Compensation Fund were so systematic that the improvement would be a tedious process.

The Fund's long-term goals would ensure that recommendations contained in its audit action plans were being implemented, and milestones would have to be monitored and translated into visible progress and outcomes.

She stressed that the Fund needed more skills and resources such as accounting and auditing skills. About 20 skilled personnel had just been recruited to the Fund to increase its capacity. Those skilled professionals would also be expected to train their co-workers so that there was a skills transfer.

Compensation Fund on issues contributing to its audit findings

Mr Vuyo Mafata, Commissioner, Compensation Fund, updated the Committee on the Fund’s progress in addressing the consistent disclaimer audit opinion given by the Office of the Auditor-General (AG).

The interventions of the Fund mainly consisted of:

• Bringing skills into the office of the Chief Financial Officer;
• A clean audit action plan; and
• Reviewing the organisational architecture of the Fund.

More details of the interventions were explained in the presentation slides attached.

Discussion

Mr O Mathafa (ANC) asked the Compensation Fund whether it believed it was capable of providing social security for those who had been injured or deceased during work. He observed that the AG had been repeating audit findings throughout the years, but the organisation still carried on, with no improvement.

He asked what the budget implication would be to rope in the private sector for assistance, and if there was a budget set aside for such a move, how this item would be classified.

What were the cost implications for implementing the audit action plan, and where would the funding be sourced? He requested a timeframe with clear indicators to measure the effectiveness of those interventions to be able to track the progress that the organisation planned to make.

Ms D Peters (ANC) questioned whether the Compensation Fund was worthy of its original mandate. She disagreed with and questioned the Fund’s decision to add twenty skilled professionals. She believed the Fund should have had those skills already and questioned whether the public gets value for the money spent on this. She found it unacceptable that officials employed at the Fund could not perform the duties they were paid to do whilst the Fund had to spend extra money to pay for additional support from outside the Fund.

Ms Peters also enquired about how much the Fund had budgeted for, and where to find the funds to implement its audit action plan, especially for the proposed investment in the information communication technology (ICT) system and specialised skills.

Had the Fund investigated and recovered the funds lost due to fraud? If the Fund had done so, she needed a progress report.

She urged the CF to speed up its improvement so Members would be able to see a different audit opinion in the 2022/23 financial year.

She wanted to know what had transpired in the interactions between the AG and the Fund. She suggested that the Fund should build its own internal audit team.

She asked for an update on the claims that the Fund had not been able to honour, the distribution of such unpaid claims over the nine provinces, and the reasons for those unpaid claims. She was aware that some of those who got injured in mines were still not being compensated, and there was also difficulty in getting employers to register domestic workers on the Fund.

Mr X Qayiso (ANC) shared his colleagues' concerns, and asked the Commissioner, considering the Fund’s repeated disclaimer audit findings, whether it was still in a position to deliver its mandate to provide social security for injured and deceased employees.  

To what extent were eligible workers able to launch their claims and be compensated? What was the Fund’s backlog in processing claims?

Commenting on the organisation’s adverse audit findings, he was uncertain whether the Fund was still able to meet its financial and operational obligations.

Mr Z Mlenzana (ANC) noted the widening gap between the increasing number of non-payments or delays to beneficiaries and the perpetual under-spending at the Fund. He wanted an explanation from the Commissioner.

He asked for an indication of how the workforce at the Fund was structured, whether or not the employees were eager to do their work, and whether they were dedicated and passionate about taking care of the beneficiaries.

He asked for a timeframe by when all these outstanding issues could be settled.

The Chairperson interjected, and asked Mr Mafata how big the Fund was.

Mr Mafata responded that as of the end of June 2022, the Fund’s total asset size was about R104 billion.

The Chairperson remarked that it was unacceptable for the Compensation Fund to have such a big fund, but to have such audit findings. He suggested there was a need to have a proper meeting with the political heads of the Fund and the AG’s office.

Given the nature of the organisation that had to manage such massive funds, he wanted an explanation on why the Fund had not appointed people with the necessary skills in the first place.

He wanted to know when the Fund had received its first adverse finding, and when it had received its first audit disclaimer. He was pessimistic about the chances of the Fund having a better audit opinion in the current financial year, and predicted that the Fund would more likely be given another disclaimer.

He asked whether the Fund’s information technology (IT) system was fit for its purpose.

He enquired about the Fund’s governance structure, such as its risk management and internal audit functions.

The Chairperson wanted an indication of how the database of the Fund fared compared to those of other similar institutions, such as the Unemployment Insurance Fund (UIF) and the South African Revenue Service (SARS). He was concerned that only 300 000 employers were paying their dues out of the 700 000 who had registered, and wanted to know how much money had been lost in this process.

What was the Fund doing to improve and reduce its backlog of payments to beneficiaries?

The Chairperson wanted the Fund to indicate how it contributed to the Economic Reconstruction and  Recovery Plan (ERRP), economic inclusion, black economic empowerment (BEE) and the empowerment of women, youth and rural businesses.

Compensation Fund's response

Mr Mafata said he had no doubt the Compensation Fund was able to fulfil its mandate, and was worthy of it. For the last seven years, the total number of registered claims were estimated to be around 900 500. Most of the claims, amounting to R12.6 billion, were on medical benefits to pay healthcare providers for treating injured workers. R6.4 billion had been spent on compensation and occupation, and a total of R19.2 billion had been spent on benefits in the last five years.

Mr Mafata explained the budgetary implications of the AG’s audit action plans. The Compensation Fund was funded from the levies which employers contributed on an annual basis. In the submission the Fund makes to the Minister, it also includes a section indicating the services procured to augment the Fund’s capacity. For this financial year, R22 million had been put aside as a secondary resource for that purpose. The fund for the appointment of external service providers came from the operational fund. Since a large part of the audit action plans were recommendations focused on developing, implementing and monitoring controls, as well as the investment in a large amount of technology, the Fund had to use a panel of service providers to augment its own capacity.

The Fund anticipated that the audit outcome for the year ending in 2023 would be different to a disclaimer. It had also decided to delay its audit process to implement some of the control measures to get a better audit outcome for the 2022/23 financial year. Although the Fund may not get a clean audit, he assured Members that there would be an improvement.

Mr Mafata said the Fund was one of the first types of social security measures to have provided compensation for COVID-19 to essential workers.

He said the Fund had been structured in a way that did not allow it to attract the right skills. Since 2015/16, it has realised that it needed to reconfigure its organisational structure and bring in necessary skills, such as clinical skills, to meet the needs of injured workers.

The Fund was fully cognisant of its mandate to help injured workers to return to their full normal functions. If this could not be achieved, it should provide the maximum effort to rehabilitate them to the best condition, and develop skills programmes to help them increase their chances of employment.

Mr Mafata said there had been major improvements at the Fund. It was also pushing to amend legislation before the National Assembly to ensure that injured workers were receiving adequate treatment, to assist them in returning to their normal capacity.

Referring to the enquiries regarding fraud and corruption, he said the investigation was an ongoing process. From time to time, he had observed that medical providers, claimants and outside parties preyed on beneficiaries. Part of the Fund’s restructuring included establishing an anti-corruption unit that focused on investigating such cases, to bring those people to account. The Fund also advocated an assurance of ethical conduct by staff members, making them aware of the consequence of unethical conduct. He confirmed that the Fund had laid charges with the police and the courts against those who had been caught in fraudulent activities.

Although he confirmed that the AG’s office was very helpful in assisting the Fund in understanding audit work, there had been ongoing disagreements. He pointed out that the task of verifying employers’ earnings was a huge one. In the past, all those processes were done manually. The Fund had to sift manually through 150 000 to 200 000 claims annually, excluding medical claims submitted by healthcare providers, which could amount to eight million claims annually. To increase the Fund’s efficiency, it was decided to take those processes online in 2014. However, the AG’s view was that the Fund must obtain physical invoices, but medical practitioners were now all submitting claims electronically. The Fund was bewildered, as it had invested in new technology and developed new systems as per the AG’s requests, but the AG still required physical invoices. The Fund was determined not to go into paper again.

Mr Mafata assured the Committee that the Fund had a capable internal audit team, and the AG relied on its internal audit work to make recommendations. The system being implemented currently was informed by its internal audit findings, so the Fund was getting value for the money it had spent on external service providers.

He explained why the current outstanding claims were unable to be processed. The Fund migrated from its old system to the new one in 2019, when there were 1.7 million claims. On an annual basis, there were 99 000 claims. 111 000 claims had been submitted, but the Fund had not decided on some due to outstanding information. The Fund’s client services office had had to make follow-up calls with recipients. There was a process which required the employer’s report and a report from the medical facility before the Fund could accept liability for the claims. It usually was a lengthy ongoing process, because the Fund would need the progress report and the final medical report, which usually came only at the end of a 24-month period. It required the applicant’s final medical report before the Fund could make an informed decision on the submitted claims.

Mr Mafata said the Fund was extremely concerned with the large number of employers who were not paying their dues. It was also thinking of strategies to reach out to domestic employers. The Fund was working with other non-governmental organisations (NGOs) that work with domestic workers to figure out how to reach out to their employers.

He gave an assurance that the Fund was highly solvent and liquid.

He said there were three core business units at the Fund -- the unit which dealt with medical claims, the rehabilitation and return to work programme unit, and the unit that dealt with the registration and assessment of employers. Most staff members worked very hard, but there was a minority who were mischievous. When those mischievous employees were caught, the Fund dealt with them decisively. The majority of staff members understood and worked towards the Fund’s objective, which was to bring justice and social security and provide compensation for any workers injured in their occupations.

Mr Mafata said the Fund had decided not to appoint permanent employees to perform the functions currently performed by external service providers, because the challenges it faced required only temporary capacity. The Fund had no intention to use those service providers on a long-term basis.

He was working collaboratively with the Public Service Commission (PSC) and the Department of Public Service and Administration (DPSA) to review the CF's organisational structure. He pointed out that the Fund was being constrained by not being able to attract the needed skills. The remuneration it offered was considered uncompetitive compared to those in the private sector, such as Med Scheme and Discovery. That was why the Minister of the DPSA had suggested the organisation should have an architectural review, and it was still in the process of finalising its organisational architecture. He also explained that the Public Service Act bound the organisation in terms of remuneration, and hence was unable to offer competitive salaries to attract those much sought-after skills from the private sector. The result was that the Fund did not have skills such as IT skills, which had emerged to become more and more important in a digitalised world. He emphasised that the Fund’s network security was a concern. The healthcare environment was highly risky, and a not-so-robust system would have many loopholes for opportunists to commit illegal activities such as fraud.

Mr Mafata confirmed that the organisation had a fully-functional risk management unit and internal audit units. The DEL also supported the organisation in certain functions.

The Chairperson requested Mr Mafata to clarify the organisation’s line functions, and to whom the organisation reports.

Mr Mafata clarified that the Fund reported to the Director-General of the DEL, thus making the DG the accounting officer of the Compensation Fund. The board of the Fund was an advisory board to the Minister, and the Fund also interacted with the advisory board.

He acknowledged the challenge that the number of registered and compliant paying employers was significantly lower than those of the SARS and UIF. He attributed that to the definition of employers in terms of the legislation. The legislation required that employers register with the Fund only if they employed a person. Furthermore, the close association between the UIF and SARS implied that UIF benefited from the compliance measures that had been put in place by SARS.

Mr Mafata said the Fund was speeding up its efforts to increase the Department’s capacity in the inspection and enforcement unit. The organisation was now fully funding the Department's occupational health and safety inspectors, and had recruited about 500 more inspectors over the last two years. The organisation had created a payroll audit within the inspectorate which could assist the organisation’s inspections. It was working with the Companies and Intellectual Property Commission (CIPC) database to detect cases where employers were registered, but not registered for the Compensation Fund. Some of those measures were still at an early stage, and he asked Members to be patient to see any noticeable outcome.

He reiterated the Fund’s commitment to benefiting small, medium and micro enterprises (SMMEs) and rural residents. The Fund had earmarked R1 billion for the SMME sector to ensure that people living in rural areas had access to economic opportunities and were empowered.

Mr Julian Soupen, Chief Director: Compensation for Occupational Injuries and Diseases (COID) Services, Compensation Fund, noted Members’ concern that the uptake to get the domestic sector to register had been poor. So far, the Fund’s database showed that only 734 domestic work employers had registered for their employees. It had done advocacy sessions in both local radio and print media, urging employers to register. Of the six claims the Fund had received, it had paid three of them, accepted the liability of two -- as the Fund was still awaiting outstanding information to process -- and one claim applicant was still receiving treatment.

He said that 280 199 employers had submitted their returns on their earnings, of which the organisation had assessed 274 465 (98%). There were also 5 734 claims currently under assessment, accounting for 2% of the total claims.

Follow up questions

Ms E Ntlangwini (EFF) wanted to know the ratio of the 500 inspectors per employer and the number of cases that each inspector dealt with daily.

Ms N Hlonyana (EFF) referred to Mr Mafata’s remark that the majority of the employees at the Compensation Fund were diligent and committed people, whereas only a minority were mischievous, and asked him to confirm if the mischievous ones were those who were involved in fraud that had been uncovered this year, and if there had been any subsequent consequence management. She did not understand why the Fund was still troubled by fraud if the new system which could detect and prevent it was in place.

She asked for a breakdown of the registered workers by sector.

Mr Mlenzana enquired about the magnitude of the corruption-related cases and the relationship between material irregularity and corruption. Did the Fund have any cases where it had been unable to make follow-ups because those who had been caught in wrongdoings were no longer employees?

He asked the Fund to identify some causal factors for its under-performance, since he did not understand why the organisation was undergoing an organisational restructuring process.

The Chairperson asked Mr Mafata what, in his opinion, the ideal structure of the Fund should be.

Since the number of employers registered at the Fund was less than half of those registered at SARS and UIF, how much in levies could possibly have been lost? Did the organisation have a plan to deal with those delinquent employers?

Follow up responses

Mr Mafata said he did not possess the information on the ratio of inspectors to employers, but would submit that information later. He estimated that the ratio could be quite low and not ideal.

He agreed that members may be correct that some of those mischievous employees were more likely to commit fraud, but there were a large number of external parties and syndicate perpetrators. Those cases were always being referred to law enforcement agencies. Because of the slow progress of the law enforcement agencies in dealing with those cases, the Fund was also working with the State Attorney to identify the bank accounts of those syndicates and perpetrators to recover the losses.

He said that if a Fund official was caught for misconduct, the official would be subjected to Compensation Fund’s disciplinary process, and then the criminal process would follow.

He said the performance indicators of the Compensation Fund were contained in its annual performance plan. The indicators were guided by the turnaround time process, the registration process and the time to pay claims, etc. The Fund’s operational plan would follow the performance plan, which would also have key indicators to measure performance.

He highlighted the Fund’s weak network security, and indicated its continuous efforts to improve controls. The Fund had started a large number of projects to improve its network system.

Mr Mafata reiterated that the Compensation Fund’s risk management unit had identified potential risks, and had come up with mitigating plans such as enhancing its internal system to address and mitigate risks. Nevertheless, he urged Members to understand the limited skills and resources such as ICT, and slow network through the State Information Technology Agency (SITA), which were major constraints to the Fund’s capacity. He pointed out the crucial role of ICT being an enabler of business in the 21st century.

Given the difficulty in offering attractive remuneration packages, the Fund had to rely on external service providers. However, this also created a conundrum: how much of the information would be exposed to external service providers.

Responding to how much the organisation had lost because of employers’ non-registering and non-compliance, he referred Members to the extremely low compliance rate of below 50%. The revenue which had been collected for the year that ended in March 2022 was about R9.4 billion, but Mr Mafata was certain that the number should have been higher and would have probably been R15 billion had 75% of employers been compliant.

The Chairperson asked Mr Mafata whether an employee may end up suffering because their employers did not register with the Fund.

Mr Mafata did not think so, pointing out that employees always had the option of coming to the labour centre and registering a claim if they got injured at work. The labour centre would then send an inspector to the employer to deal with the matter. An employer under that circumstance would be compelled to complete the registration process.

Ms Hlonyana expressed her frustration at the insensitive response, and asked Mr Mafata how an affected worker would be able to do all that if they were on their death bed.

Mr Mafata clarified that workers and their surviving dependants were entitled to compensation. Should the case be that the affected worker could no longer do such things, their family members could still go to labour centres and enforce the process.

The Chairperson thanked Mr Mafata for his responses, and emphasised the importance of the Fund's effort to improve its audit findings. He urged the Fund to improve and get the organisation back to respectability.

Committee matters

The Committee minutes of 2 September could not be adopted because there were not enough Members on the virtual platform.

Mr Mlenzana suggested Ms Hlonyana should be a permanent member of the Committee so that she could vote, and the inconvenience of not being able to adopt a report would not recur.

The meeting was adjourned.