Small Business Portfolio Audit Outcomes

Meeting report

The Chairperson said the purpose of the meeting was to be briefed by the Auditor-General of South Africa (AGSA) on the 2021/22 performance and audit outcomes of the Department of Small Business Development (DSBD) and the Small Enterprise Development Agency (SEDA).

She handed over to Mr King Kunene, the Committee Secretary, to conduct the consideration and adoption of the Committee's 2022 fourth term programme.

Committee's fourth term programme

Mr Kunene clarified that the fourth term started on 11 October and would end on 2 December. The term prioritised the budget review and recommendations report where the Committee would analyse the performance of the entities and the Department. This week had been reserved for getting briefings from the various auditors.

 Mr F Jacobs (ANC) reminded Members that the Committee had agreed to focus on legislation in the last quarter. He wanted to know when and how the secretariat would factor in the legislative processes. He requested two or three sessions in the programme dedicated to implementing the decision on the legislation. He then moved that they adopt the agenda for the fourth term.

Mr V Zungula (ATM) suggested that the secretariat consider having a balanced programme that included oversight of the entities, one or two sessions which dealt with the legislation, as well as other meetings with the departments and entities. He requested that they meet physically at least once a quarter in one of the meeting rooms in Parliament.

Mr H Kruger (DA) said he agreed with what the previous speakers mentioned and asked that the secretariat take a day or two to look at cooperatives, which he described as the Department's "orphans", as there was no discussion involving them and no strategy planned. He requested the Chairperson look at a study tour, where cooperatives had been implemented successfully and created many jobs.

Mr Jacobs requested that the secretariat consider the township economies. Given the appointment of the new Gauteng premier and the new Member of the Executive Council (MEC) in Kwa-Zulu Natal (KZN), and with the new focus on township economies and ensuring that South Africans own spaza shops, the Committee needed to engage in topical debate around township economies. This too should be included in the programme.

Mr D Mthenjane (EFF) interjected to request that the Committee be briefed about load shedding, as it posed a problem for small businesses. Small businesses continued to file complaints about load shedding.

Mr Sibusiso Gumede, Committee Content Adviser, responded to all the questions raised and took the Committee through its programme, starting the following day. Since the Department would be present the following day, he invited Members to engage with them on their questions and concerns, particularly on issues of legislation.

He noted that the suggestion for the DSBD to consider coming up with a Small Enterprise Ombudsman had not yet been implemented. He advised the Committee to bring this issue up with the Department and get a clear idea of when exactly the bill would be tabled.

On 26 October, there would be a briefing by the Banking Association of South Africa (BASA). The Department was trying to rope in the banking sector, but the banking sector kept rejecting government's initiatives. Here was the perfect opportunity for the Committee to understand the BASA’s point of view. There was a National Treasury programme that had been announced at the beginning of the year, but the uptake was still very low. Here, the banking sector could tell the Committee where they had gone wrong. One of the issues brought up was the 30-day payment, for which National Treasury was responsible. The credit guarantee schemes that keep faltering must also be responded to by National Treasury, and the Committee must bring this up with them.

On 2 November, there may be two presentations because National Treasury would be divided into two sessions because there were so many issues, such as the Procurement Bill.

On 23 November, there was a plan to invite the Public Service Commission (PSC), which also worked on the 30-day payment of invoices to small enterprises.

On 30 November, there would be a full-blown session where the PSC would be invited to talk about the 30-day payment. The South African Informal Traders Alliance (SAITA) had been invited to speak on issues of informal trading. On the cooperative issues, they had been divided into two. The Cooperatives Development Agency (CDA) was currently doing work involving corporative financial institutions. There was a group working with National Treasury and the World Bank. There had been a session during the fifth Parliament where the Committee had invited apex bodies, and it had suggested that they see only one apex body. Was there an apex body that represented cooperatives or not?

The Department has been invited to present a performance report on 23 November. He advised Mr Kunene to swap the agendas for November 23 and 30. He also advised him to remove "Customised Enterprise and Supplier Development Solutions" on 16 November. On that day, Dr Anthony Costa, accompanied by Mr Nkosi, would be present to discuss issues of "red tape."
 
Concerning legislation, Members would remember that they took a resolution to run with the Business Act. They had spoken to the Department, which had taken them through their activities. Mr Gumede had asked the DSBD to provide everyone with a project plan. The Bill would be referred to Parliament in April 2023, which was an improvement from April 2025. They must stick to this project plan and not deviate. The Department would provide a timeline tomorrow about the tabling of the National Small Enterprise Act.

The Chairperson stressed the importance of sticking to the timeline and goal for April 2023. She suggested that Mr Gumede deal with other administrative issues in his own time, and said all the Members anticipated tomorrow’s meeting. She asked that everyone refer to this programme outline from time to time.
 
Ms B Mathulelwa (EFF) strongly suggested that all Committee meetings be done physically in person, and virtual meetings be done away with, as they were a huge inconvenience.
 
Mr Kruger complained that there was no good communication between the Committee’s support staff. It seemed that although programmes were drawn up, they were not aligned with what the Committee wanted to achieve. He proposed having a strategic planning session within the programme to discuss the way forward. Time was not on their side, because next year, everyone had to prepare for the upcoming elections.

The Chairperson responded that they could not leave the meeting with a programme that had not yet been adopted. According to the House rules, this was illegal. Let everyone stick to the rules.

Mr H April (ANC) disagreed, and said the pressure of adopting a programme just for the sake of adopting a programme did not sit well with him. He was not happy with this at all.

The Chairperson clarified that no one was being pressurised. Since they had weekly meetings, they could refer to those issues which worked within the meeting. If the Committee felt there were issues to be dealt with, they were at liberty to do so from now moving forward.

The Members clarified that they were now clear on this, and Mr April said he was happy.
 
The programme was adopted.

2021/22 audit outcomes for small business portfolio

Ms Aphendule Mantiyane, Senior Manager: Small Business, AGSA, presented the audit outcomes for the DSBD and its entities, the Small Enterprise Financing Agency (SEFA) and the Small Enterprise Development Agency (SEDA). The DSBD and SEFA had received clean audit outcomes, and SEDA had received an unqualified audit with findings. Their financial reports had been submitted on time and the guidelines were all adhered to. All the institutions had submitted credible statements. The Department did not provide services for which fees were charged, and no negative indicators were noted under revenue management.

There were no negative indicators relating to expenditure management across the portfolio, but the irregular expenditure of R5.4 million at SEDA resulted from non-compliance with supply chain management (SCM) processes. Included in the current year's expenditure was an amount of R4 979 849 paid in 2015 that was investigated and concluded in 2022. Five cases of non-compliance with SCM processes were investigated, and recommendations submitted to management for implementation after the conclusion of the investigation in 2022.

Feedback on investigation

Ms Sithembile Dube, Office of the AGSA, said the AG had approved the investigation at the DSBD in 2018. A letter of engagement in respect of the investigation was signed on 23 March 2018 with the former Director-General (DG) of the Department. The investigation focused on the 2015/16 and 2016/17 financial years.

The scope of the investigation included:

Compliance of the DSBD to the guidelines and standard operating procedures
(SOP) of the Black Business Supplier Development Programme (BBSDP) and
Cooperative Incentive Scheme (CIS);
The validity of the processes followed in awarding incentives to grant
applicants;
Confirmation of the authenticity of suppliers and quotations;
Verification that goods and services were actually delivered/received; and
Monitoring and reporting processes followed by the DSBD subsequent to the approval and payment of the incentives to the beneficiaries.

The findings were predominantly due to non-adherence to the BBSDP guidelines and the SOP in processing, evaluating, adjudicating and recommending grant applicants for approval of the incentive schemes. The findings also pointed to inadequate internal controls, monitoring and oversight in
the awarding of incentives to grant applicants.

The non-compliances were related to:

Application files containing no evidence that inspections had been performed before submission of the applications to the adjudication committee for approval, in contravention of the BBSDP guidelines.
Applications were accepted and approved despite the application amounts exceeding 30% of the applicant’s previous year turnover (according to the financial statements), or there was no evidence to substantiate the 30% previous year's turnover requirement, in contravention of the BBSDP guidelines/SOP.
Applications did not contain the required documentation relating to the requirement for copies of identity documents (IDs) of key managers, directors, shareholders and a list of employees of the entity, in contravention of the guidelines. Officials had submitted these applications to the adjudication committee and were approved without the required documentation.
Applications did not have the financial capacity to fund 50% of the total cost of equipment applied for, as their current liabilities greatly exceeded current assets. Furthermore, the diagnostic reports prepared by the NFS financial services firm, in most instances, did not indicate how the applicant’s 50% contribution would be funded.
Claims were paid without the requisite documentation.
There were grant applicants with a turnover above R1 million, but they were not registered for VAT.

Ms Dube said AGSA had noted multiple instances where preferred service providers quoted above R1 million did not include VAT in their quotations. They also failed to provide their VAT registration number on their quotations. These quotations were accepted by the BDOs. One supplier was registered for VAT according to the South African Revenue Service (SARS) website, but did not charge VAT on their invoice. During the investigation, they identified that directors of multiple companies had applied for and received grants exceeding the R1 million threshold.

A draft management report was compiled and issued to the Accounting Officer (AO) on 22 February 2019 and discussed with the AO and the Executive Authority on 28 February 2019. The same day, the AGSA discussed the investigation and findings with former Minister Zulu. The DSBD management responded to AGSA's findings and recommendations on 19 and 25 March 2019. A final management report, incorporating management's responses, was issued to the AO on 25 April 2019.

SEFA statutory audit for year ended 31 March 2022

Ms Kelello Hlajoane, Director, SNG Grant Thornton, said the overall audit outcome for SEFA was an unqualified audit opinion.

She said they had identified an overstatement of management fees resulting from management not accounting for changes in the related operating expenses which formed the basis of the calculation of management fees.

She referred to the difference in the inter-company loan between SEFA and Khula Business Premises (KBP). In their review of the SEFA group annual financial statements and also through the related parties audit, they noted that the balance of the inter-company loan in SEFA amounted to R404.9 million, and R417.7 million in KBP.

Concerning housekeeping matters, a payment of R5 000 had been identified which was incorrectly allocated to a customer.

Concerning rights over the bank accounts included in KBP, she said there were bank accounts included in the trial balance of KBP which were in the name of SEFA and Motseng Properties.

Motseng Properties had been a property administrator for SEFA before the establishment of KBP, and these were accounts that belonged to SEFA. The difference resulted in an understatement of cash and cash equivalents in the books of SEFA.

During their substantive tests of detail over the grants, they had performed a recalculation of the grant income that would transfer from the deferred grant liability to grant income during the year on a sample basis. They had noted a judgmental difference of R5 million, which would result in a decrease in the grant income recognised in the statement of profit and loss and comprehensive income. Management had processed an adjustment of R7.6 million after the re-performance of a detailed calculation.

Discussion

Ms Mathulelwa began by reminding the auditors of a small business from Mount Frere that appeared on the database of supported small, medium and micro enterprises (SMMEs). Money was involved, and the owner indicated the grant had been approved. However, the auditors had not bothered to investigate this ‘daylight fraud,’ and she asked if there could be a report in this regard to prevent it from recurring in the future. The Minister was gallivanting around the country, handing over materials to ‘cadres’ in the name of informal trading, openly and without consequences. She believed that audits must be part of the handover process, because officials were exploiting this for their own corrupt purposes.

Mr Jacobs began by acknowledging the Department’s improved audit outcomes, and said the Committee should acknowledge the improvements and not just point out all the negative issues. He had three points to make. The first was the waiver regarding the R2 500 000 which had been given to a beneficiary, but had been found to be for a third party rather than the beneficiary. What could be done by the Department to ensure that when the was an inheritance for a beneficiary, that they did not sell it, because there were people who were issued with Reconstruction and Development Project (RDP) housing which they were not allowed to resell within the first five to ten years of issue. The second issue was that in the last audit, the Committee requested regular updates when officials were involved in corruption schemes. The AG had recommended that the Committee should not see this public report due to the lapse of time. This sounded like a cover-up -- the Committee needed to know, and those who were stealing must be named and shamed.

The audit found five issues. These were that duplicate amounts, and names of key managers were not disclosed, management did not review supporting documents to ensure accurate and valid information, achievements as per the annual performance were not supported by schedules, and the number of crafters supported through crafter programmes was incomplete. Would the AG please explain?

Mr Mthenjane directed his questions to SEFA. He was disturbed that an amount of R5 000 had been wrongfully issued to someone. This was wrong, and there needed to be transparency and accountability. Unless this was done, the problem would recur in the future. They received complaints every day about SEFA. Small businesses would say that when they applied to SEFA, their applications were not even answered with an acknowledgement, which was unacceptable. SEFA must please respond to applicants, because it is frustrating for poor people. SEFA was not good at all.

Mr J de Villiers (DA) commented that he found it unacceptable that when the Committee had requested an investigation during the fifth Parliament, the AG of South Africa had responded by saying that too much time had lapsed, and therefore it could no longer be conducted. This was unacceptable and did nothing but raise more questions. Was there a cover up here?

Mr G Hendricks (Al Jama-ah) commented that the constituency offices of different political parties had increased the footprint of SEDA and were trying to mobilise the government branch. Al Jama-ah had also done the same, so now it had a better understanding of how things worked. All the people who received grants from SEFA had to pay a fee, and the SEFA officials slipped in another application form. He had reported this to the director of SEDA, and the director had responded that once the application was sent to SEFA, it was out of their hands. He said he could not wait for SEFA to be wiped off of the face of the Earth.

Mr April was concerned about some of the issues raised as they particularly affected the young black underprivileged people in the country in these harsh economic times.

The Chairperson requested the AG to respond to all the questions and concerns raised, and those relating to the Department would be dealt with the following day. She would then summarise after everyone had spoken.

AGSA's response

Ms Mantiyane referred to the case of the beneficiary, and said she was unclear as to whether this took place in the Department or with SEFA. However, if it was with the Department, during a risk assessment, this matter had not got to their attention. She requested permission to return and find out what had transpired during this time.

There were some questions where she was unsure if they were related to the Department or SEFA, but in the case of the DSBD, the issues were weighed against the materiality thresholds. There seemed to be a challenge between SEFA and SEDA in terms of support that was provided. She acknowledged that when applications were made, there were instances when SEFA would not be able to give the necessary support, so she recommended that the two institutions work together to remedy this.

Ms Aletta van Tromp, Business Executive: Investigations, AGSA, commented specifically on the investigations side. In the instance of the waiverages, these were actually misrepresented by the beneficiaries so they that received the funding from the Department, but never bought the assets. This meant there was a misrepresentation in the application. She said the management report had already been issued on 25 April 2019. After looking at the waiverages, it had been found that the assets were on the premises of a different third party. Hence the recommendation that inspections were critical, as well as the involvement of the variation committee. This was an important aspect on their side.

Sadly, there was no programme in the department requiring one to take a sample of the beneficiaries who had received grants in the last year and go back two years to inspect how many of those businesses were still operational. She strongly advised the Committee to adopt this approach too.
She emphasised that the purpose of the AG when issuing a public report was not to name individuals, so whenever they issued a public report, it was a very summarised version. This was done in order not to impact subsequent or ongoing criminal investigations.

Regarding work reform, the Department had been able to go through successful disciplinary processes because the work had been completed. A public report would not name and shame individuals. If Members wanted to see a detailed report, they would have to request this from the Department, which had been given a final management report. This would equip the Committee to play an oversight role. They [AGSA] had no problem with sharing the presentation in Word form with the Committee. The Committee could consider this as opposed to the public report.

Ms Simthandile Sisa, Chairperson of SEFA Board, clarified that the R5 000 had been a payment made towards a loan which had been misclassified. She hoped this was now clear to everyone. Findings were assessed against materiality, and no material findings were found.

She stated firmly that SEFA did not tolerate corruption at all. They were disturbed to hear these allegations being made against them. She requested the Committee work with the entity to deal with such instances and quoted the toll-free number to report corruption and fraud. SEFA did not ask for fees or payment; if anyone witnessed them doing this, it must be reported immediately.

Mr April agreed with what Ms Sisa had said, and thanked her for quoting the toll-free number. He encouraged Members to continue to report fraud and corruption.

Closing remarks

The Chairperson suggested that the AG update the Committee on their investigations as they were ongoing, rather than towards the end of their term, because these matters were serious and they needed to try and eradicate corruption.

She reminded the Department of its responsibilities. The AG’s findings and recommendations must be adhered to, and she suggested they follow up on them. The executive authority must make sure that she monitors the accounting officers, and the accounting officers must make sure systems are in place and that the recommendations of the AG are being adhered to so that in the next financial year, so these issues do not recur.

Committee minutes

The minutes of the meeting that took place on 28 September were considered and adopted.

The meeting was adjourned.