Of the 21 Western Cape departments and entities audited by Auditor-General South Africa (AGSA), 17 were clean audits (81%), three were unqualified with findings (14%) and one regressed to qualified with findings (5%). Wesgro was unable to correct all misstatements in the submitted AFS and received a qualified opinion.
The Provincial Treasury took the Committee through the Annual Report process for government departments and public entities. It detailed the information required in an Annual Report and outlined the oversight role of the Committee in processing these Annual Reports.
Committee members asked for details about the irregular expenditure of the top three Western Cape auditees responsible for this: Department of Human Settlements R221m; Provincial Education Department R58m; Community Safety R22m. Why there was no consequence management for Wesgro’s non-compliance. They asked about the outcome of the court case about the Casidra 2017 and 2018 audits which AGSA had taken on appeal. They asked why for Wesgro there was a finding of non-compliance rather than material irregularity. Human Settlements had been the only auditee identified with a material irregularity and they asked why a certificate of debt has not been issued to its accounting officer. They asked why Wesgro’s audit status had declined. There were also questions about when performance auditing could be implemented in the Western Cape now that it had a handle on compliance.
Western Cape 2021/22 Audit Outcomes
Ms Sangeeta Kallen, AGSA Business Unit Leader for Western Cape, noted that of the 21 departments and entities audited by Auditor-General South Africa (AGSA), 17 were clean (81%), three were unqualified with findings (14%) and one regressed to qualified with findings (5%). Wesgro was unable to correct all misstatements in the submitted AFS and received a qualified opinion.
All auditees submitted on time and 95% had quality annual financial statements (AFS).
Financial health of the 22 auditees was reported as follows: Good 62% (13); Of concern 38% (8); Zero requiring intervention. No unauthorised expenditure has been reported for the past three years. Fruitless and wasteful expenditure increased over the past three years but remained low with a total of R585 000.
Non-compliance remains relatively low as only three auditees had material findings. Irregular expenditure was incurred by 10 auditees totaling R330 million. Human Settlements accounted for 67% of the irregular expenditure mainly due to procurement findings. The next two were Education and Community Safety.
The quality of the published performance reports was met by 81% of the auditees. Of the remaining 19%, AGSA found either the achievement reported was not reliable or the performance indicators and targets were not useful.
Supply chain management (SCM) showed a huge improvement with 15 auditees compliant, five having findings and only one having material findings.
2021/22 Annual Report oversight
Mr Aziz Hardien, Western Cape Treasury Chief Director: Financial Governance & Accounting, briefed the Committee about the detailed information required in an Annual Report under the following headings:
Part A: General Information
Part B: Performance Information
Part C: Governance
Part D: Human Resource Management
Part E: Financial Information
He distinguished between the information requirements for provincial departments and public entities.
Mr Hardien outlined the oversight role of the Committee in its processing of these Annual Reports:
• Evaluate all information included in the Annual Report by understanding the Department Strategic Plan, Annual Performance Plan (APP) and Estimates of Provincial Revenue and Expenditure (EPRE).
• Evaluate the performance of the department against its predetermined objectives and actual achievements.
• Evaluate the financial statements and ask questions to confirm all revenue, expenditure, assets and liabilities have been included and reported on
• Evaluate the audit report by the Auditor General, and reflect on key messages delivered by AGSA
• Follow up on prior SCOPA resolutions and identify if it has acted on those resolutions
• The Committee may ask for additional information not specifically disclosed in the Annual Report to ensure its oversight responsibility is carried out.
• At the end of the Public Accounts process, the Committee will produce resolutions which must be given effect to by the organ of state.
Mr Hardien spoke to the way forward for the Provincial Treasury:
• Continue to drive a culture of compliance, good governance and performance
• Focus on an integrated approach and process optimisation to realise value for money
• Strengthen responsive planning and budgeting
• Continue to drive fit for purpose appointments with experienced and competent departmental officials.
• Further talent management implementation to ensure future fit officials with a view to 4IR.
• Systems and data enablement identified as a key lever to improved decision making and foresight.
• Further institutionalization and roll out required in terms of combined assurance.
He noted the increase in legislative interpretation and implementation challenges which had led to an increase in irregular expenditure.
Mr R Mackenzie (DA) referred to the Human Settlements, Education and Community Safety which were the top three departments incurring irregular expenditure. Did their audit reports from the last three years show the same findings? He asked why AGSA accepted the Human Settlements Accounting Officer's explanation of the 2020/21 material irregularity and why no one was held accountable for its R5.9m FLISP error. Why did Education had no support documents for the R58m irregular expenditure? He asked why there has been no accountability for Wesgro’s non-compliance and if the Casidra court case had been resolved.
Ms Kallen replied that the continuation of procurement and contract management audit findings did continue. For Human Settlements, it was under the Finance Linked Individual Subsidy Program (FLISP). There were also procurement errors in the tender requirements for two contracts which had mandatory sub-contracting which was not clearly stipulated. There was buyer specifications but they did not allow potential suppliers to participate. Also payments to suppliers were irregular because work was started without a valid contract. These were the areas that had been picked up in previous years and there was a continuation of this.
For Education, support documents were not the issue but the finding was about the source information for measuring the planned indicator. That was not clearly defined. For example, what they found as support information did not match what had been defined in the planning documents by Education for the indicator and target. This does not allow confirmation so one ends up reporting on something that was not supposed to be reported. This was particularly on the use of textbooks: accessibility of textbooks versus physically having textbooks in the hands of learners.
For Human Settlements, an audit action plan was implemented in the previous financial year for the irregular expenditure findings. However, this plan did not assist in remedying some of the areas such as around tax compliance monitoring. AGSA recommended that Human Settlements should be more robust on tax compliance monitoring. Tax compliance monitoring happened, but it did not happen at the right time. The other was on the conditional grant transferred to municipalities as it did not obtain the necessary approval from National Treasury. This was more of an interpretation issue that resulted in non-compliance. It was important for AGSA to ensure that the Provincial and National Treasury understand this interpretation.
For Education, the irregular expenditure matter was around uncompetitive procurement and procurement non-compliance. It was not the same as the previous period.
Mr Riaan Venter, AGSA Senior Manager: Product Champion, replied that the underlying documentation in Education is a complicated matter for the indicator dealing with pupils retained from Grade 1 to Grade 9. You have a nine-year gap between your denominator and numerator. There were strong concerns around the transfer of learners in the middle, and the concern was whether you include them in the denominator or numerator. The real problem was the denominator. The data on pupils was never audited before. As there is a gap of nine years, the documentation is not available and that has resulted in the limitation.
The way irregular expenditure reporting works is that AGSA looks at the same non-compliance in the prior year and current year. In the case of Community Safety, there was no such prior reporting. It was just new non-compliance.
He pointed out the MI (material irregularity) process is a legal process. When legal people look at it, they would look at the legal actions that can be taken in order to be successful if it is challenged in a court of law. In this case, the FLISP non-compliance dates back to 2012. The people who took the decisions back then were now no longer around. That is why a decision was taken that nobody would be held accountable because even the national department was involved in the decision-making and policy. The principle is that when people are no longer working in a department, no action is taken against them. The other point is that AGSA had to see if it was practical to get the money back. It is not one large amount, but many small amounts which had to be individually recovered. Therefore the cost of recovery would not make it feasible to take that process forward. The response from the Human Settlements department was taken for consultation with the AGSA legal unit and that is how the matter got to be resolved.
Mr Ashiq Allie, Senior Audit Manager: AGSA Western Cape, replied that the Casidra court case matter has been resolved [SCA confirmed set aside of qualified audit report for 2016/17 and 2017/18]. After the court case, AGSA and the Department of Agriculture had a technical consultation process to see if there were any changes to the Casidra AFS. There was only one noticeable change. All accounting matters have now been resolved by the court case.
Ms Kallen replied that non-compliance had been identified at Wesgro. The matter had been elevated in the audit report. It does need to meet the MI definition which requires it to be indicative of non-compliance. Secondly, AGSA would look if the non-compliance showed financial loss. That analysis did not bring that non-compliance into the MI space as there was no financial loss.
Mr L Mvimbi (ANC) said AGSA indicated 100% compliance by departments on the timely submission of financial statements but how was the situation on the performance audit. Now that the province had a handle on compliance, it was high time for a plan to implement performance auditing of government institutions. AGSA found non-compliance not material irregularity at Wesgro. Human Settlements was the one department identified with a material irregularity. He asked why a certificate of debt has not been issued for the MI.
Ms Kallen replied that AGSA is embarking on a public sector culture and behaviour shift strategy. The detail underneath that strategy is to understand what the impact of the department and entity is and its linkage to their mandate and meeting the needs of the ground. AGSA is embarking on this journey of connecting the dots when it is doing the audits on the money spent by departments and entities. That is connected to performance reporting. It is important in the public sector to see if the targets and indicators are linked to the mandate of departments and entities and linked to the needs on the ground. This is then linked to the processes and systems in that environment. This is how AGSA would like to see the mandates fulfilled and see value for money to ensure delivery of service on the ground. Before one ends up with a certificate of debt, an MI should be first issued to the accounting officer/authority to respond. Generally, the recommendations when it comes to MI would be asking the auditee to investigate the extent of the MI that has resulted in financial loss, quantify it, see if money is recoverable, and stop the potential financial loss in the future. That would be the implementation of internal control.
Mr Hardien clarified that the Wesgro audit qualification did not attract any significant loss. It only meant technical adjustments had to be made to the financial statements, specifically to Property, Plant and Equipment (PPE) – but no PPE missing. Wesgro had failed to adjust for the duration of the use of PPE assets. Nothing had gone missing that required having someone to account for loss. Wesgro has implemented an audit action plan and Provincial Treasury has evaluated the plan and found comfort in the corrective actions to address the 2021/22 audit shortcomings. Bilateral meetings with Wesgro are held to ensure the vetted audit action plan is monitored on a quarterly basis by Provincial Treasury and assistance will be given to it to address all the accounting and supply chain matters identified.
Ms C Murray (DA) asked for details on Wesgro’s qualified audit status and why it has declined.
Ms Kallen explained that the audit report found that consequence management had not been taken when irregular expenditure had previously been identified and elevated. That is an area that needs to be taken up with Wesgro to determine what had failed. From AGSA's analysis, when internal control deficiencies were identified, Wesgro had the chance to clear the material irregularities by developing an audit action plan. The plan was developed but it was not implemented timeously. What was done was not adequately reviewed. Wesgro was required to identify and quantify the error that had occurred in estimating the life of the assets and ultimately do the year-end reporting. AGSA found that specifically for procurement, contract management and irregular expenditure, Wesgro did not implement preventative controls. A very important concept for differentiation is detective controls versus preventative controls. Detective controls in the environment pick up non-compliance after it has happened whereas the power of preventative controls flag potential non-compliance before it happens. AGSA has found leadership instability during the financial year at various levels and this filtered through in closing the loop on consequence management. It is the responsibility of leadership and oversight to ensure consequence management is taking place.
The Chairperson asked for the top two things the province should continue doing well and two things it needs to focus on seeing that soon there would be the Annual Report presentations by departments. The Committee tries to identify trends across the departments to ensure loopholes and consequence management are tightened up across the province.
Ms Kallen replied that the message AGSA gave in the previous 2020/21 cycle to the Western Cape was to continue with the good financial governance practices and a good control environment. One message on procurement and contract management is to have a continuous review process across the board, especially when it comes to potential new areas and specialised spend. It is good to have oversight on these processes to ensure you do not have non-compliance. The second message would be to ensure performance information targets and indicators are supported from the beginning to the end in the environment. If changes are seen in the middle of the financial year, those changes should be diligently documented and cascaded to all those gathering the information.
The Chairperson remarked that during the 2022 budget workshop she had asked how much it was going to cost AGSA to do performance auditing for the Western Cape government and if AGSA would be allocated budget for performance audits. She reasoned it does not make sense to want to do performance auditing when AGSA does not have the money to carry out that work. Secondly does any legislation need to be reviewed for recovering smaller amounts of money that seem to too costly or not feasible to recover?
Ms Kallen replied that it is important to identify and set the scoping on performance auditing. If we look at the performance auditing principles around efficiency, effectiveness and cost-effectiveness, it is important to understand there are lots of processes in the auditing of state procurement and contract management which gives you a level of comfort on that. The intention behind the culture shift strategy is to start delving into the full value chain, If the mandate of the department is specific and the need on the ground is identified and the performance targets and indicators are set in a manner that would ultimately meet that need and monitor this over a five-year period to see if the spend has met the needs, that is how they would interpret how they have met the needs of the citizens. When it comes to budgeting, the budget office would need to cost it and present it to the Committee in the legislature. This would be a big exercise because it would need to be scoped per department. The conversation around this has been started with the provincial government, especially on areas like “project start and project close.” It would also be important for the provincial treasury to weigh in on this conversation as well.
The PFMA is clear in ensuring the accounting officer/authority safeguards the assets of the department. If there is potential financial loss or financial loss has occurred, state resources would be utilised to recover the money. If the resources would be more than the recovery, a feasibility analysis would need to be done as it is the principle that underpins everything.
Mr Mackenzie asked why Wesgro’s audit action plan was not implemented and why there was no consequence management. He asked for clarity on the Human Settlements figure.
Ms Kallen replied that the Human Settlements figure was about how household income of beneficiaries was incorrectly calculated resulting in invalid beneficiaries qualifying for the housing subsidy or subsidies paid at incorrect amounts. This ultimately caused an overpayment to a beneficiary. How did it occur and come into the system? When the matter was followed up with the accounting authority, it was found that there was no clarity in the making of decisions and in conversations with the national department. It was not an isolated case where AGSA could hone it down to a specific step.
With Wesgro, the matter was identified and flagged the previous year and the extent was not vast as identified in the current year. When the audit was completed in the prior year, management prepared an action plan to address the audit findings. The timing of implementation of the action plan did not allow them to address the issues by the time they had to submit the financial statements for audit. AGSA found that the prior period they needed to identify coincided with the year end reporting and did not get adequate review. When it comes to non-compliance sitting in that environment, consequence management refers to irregular expenditure and the PFMA is clear that when irregular expenditure is identified, it is the responsibility of the accounting officer to investigate it and take the necessary consequence management on that. There were instances when consequences did not take place and the cause was identified to be instability at leadership level during the financial year and that affected various levels of oversight. The action to address irregular expenditure was not yet implemented by the time AGSA got in.
Ms Julinda Gantana, Deputy Director-General: Governance and Asset Management: Western Cape Treasury, agreed with Ms Kallen’s observations on Wesgro. The assessment from her side pointed to instability at leadership level. There were lots of changes that affected the workings of Wesgro, and it is better for the Committee to have a conversation with the entity itself. The Department of Economic Development has also added support to Wesgro. There is a new CEO and acting CFO to take care of the business of the entity.
Mr Hardien noted that when the Wesgro audit report was released, Provincial Treasury had a meeting with the CFO and CEO to understand what went wrong in the current audit.
The Chairperson asked if one year would be enough for AGSA to scope the departments so that in the next year there is the same statutory meeting to tell Members how much it would cost to implement a performance audit for the Western Cape. How much time would be required for scoping?
Ms Kallen replied that it would depend on the expectations and it is important for AGSA to identify and define what the expectation would be because a performance audit could be implemented, but it is important to understand the extent to which it would be implemented. Performance auditing could be an extensive and penetrative process in the environment. It is better to understand what the expectation is per department. That exercise would require AGSA to engage every department. Further, AGSA would have to look at the skills and experience required for that. It is also important to understand the risk you have to mitigate. It is difficult to stated the duration of scoping, but it would be better for AGSA and Provincial Treasury to develop a proposal to be presented to the Committee so as not to exclude assurance role players in the environment.
Ms Gantana added that Provincial Treasury and the Department of the Premier were engaging AGSA on this matter on a regular basis. It is possible to put heads together as there is a scheduled meeting to discuss the way forward. A draft report would be tabled to the Committee at the beginning of 2023.
The Committee resolved it would request the Provincial Treasury and AGSA to attend the first Budget Committee next year and present the costs and process to be followed in the implementation of the performance audit in the Western Cape.
The Committee adopted the minutes for 20 September 2022 and a quarterly report (April - June 2022).
The meeting was adjourned.
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