DSD Audit Committee report back on risk management matters

Meeting report

DSD report back on 2022 annual report resolutions

Mr Juan Smith, Chief Financial Officer (CFO), Western Cape Department of Social Development (DSD), presented the 2022 annual report resolutions, which included the following key issues:

Broad-Based Black Economic Empowerment (BBBEE)

The Public Accounts Committee (PAC) resolved to engage relevant stakeholders to determine the most effective way of addressing the challenges with BBBEE certification experienced by departments and entities. The Department of Trade, Industry and Competition (DTIC), as custodian of the BBBEE legislation, had embarked on a process to amend regulations which would not require organs of state and public entities to be verified as BBBEE compliant by an agency or professional body. The status quo remains until the regulations are finalised.

Compliance audits versus performance audits

The PAC resolved to engage the Auditor General of South Africa (AGSA), the Audit Committee and the Provincial Treasury (PT) to determine if the Western Cape Government (WCG) was ready to conduct performance audits considering the continuous clean audit outcomes of most departments and entities. The Department awaits guidance from the PT following engagements with the National Treasury (NT) and the AGSA.

Transfer of funds from departments to municipalities

The PAC requested an engagement on the transfer of funds to municipalities. The Department reported that it did not transfer funding to municipalities.

Componentisation of assets

The Department awaits the requirements from the NT and PT on the readiness of departments and entities in the WCG to componentise assets in departmental asset registers, because it would be required in future. The effective date to componentise assets had not yet been determined.

Progress report on organisational design (OD)

The need for OD had been identified as a requirement to address inadequate human resources to deliver on the strategic mandate of the Department. Progress on investigations by the OD unit has been limited, hence the risk remains.

See attached for full presentation
 
Discussion

Ms L Maseko (DA) noted that the Committee had dealt with the BBBEE matter for the past two years. The CFO had highlighted the costs of the compliance certificate as an issue. She questioned whether the costs were not posing a challenge to some of the small, medium and micro enterprises (SMMEs), and if it should not be reviewed to re-open the market and make it more inclusive. This information was needed to get the full scope of challenges for future engagements with the Auditor-General (AG). She asked what the cost implications would be should the audit scope be increased to include performance audits. The AG viewed the time allocated for implementing componentised assets as an emerging risk. She asked if the AG had communicated a timeline regarding the matter. She wanted to know what had triggered the introduction of OD units, and what it was meant to fix.

Ms A Cassiem (EFF) asked what follow up was being done on the fraud cases that had been outstanding since 2014 and what pressure had been placed on the Department to resolve matters. She requested more specific detail about the closed fraud cases.

Mr D America (DA) noted the CFO had reported that the organisation was limited in fully implementing OD. He asked what the inhibiting factors were to complete the investigations, and how the finalisation of OD would contribute to improving service delivery. He wanted to know what impact the risk of the incomplete OD was having on the service delivery mandate of the Department. Underspending of R20.3 million was linked to social welfare services under Programmes 2 and 3, although 99% of the budget had been spent. He asked if there was a link between the organisational structure and underspending.

Mr I Sileku (DA) considered the Department’s response to the BBBEE issue vague. He asked if specific timelines had been agreed with the DTIC to resolve the problem of contradictory regulations. He sought an explanation for the rationale for introducing performance audits. He wanted to know how the risk of componentised assets was being dealt with while the Department was waiting on the policy requirements from the NT and PT. He requested the Department to elaborate on the possibility of prescribed debt.

Ms Maseko said the AG anticipated that componentised assets might be a risk. She acknowledged that the matter was on hold until a framework was in place. She asked if payments to the AG came at a cost to service delivery, because municipalities were complaining about increasing costs.

The Chairperson noted that the transfer of funds to the Beaufort-West and Sedibeng municipalities had not been included in the report. He sought clarity on what had happened, and how the money was used.

Responses

Dr Robert Macdonald, Head of Department (HOD), Western Cape DSD, replied that the Department did not generally transfer funds to municipalities. No funds had been transferred to the Beaufort-West and Sedibeng municipalities.

The delay in implementing OD was due to the lack of capacity in various units. A review of the capacity in the supply chain unit has been completed. The capacity in the regions was being assessed. Because of an increase of more than two million people over the last ten years, the social worker: population ratio has been impacted. The only addition to staff had come as a result of the insourcing of operations from the Bosasa Youth Development and Care Centres. He explained that OD was meant to expand the footprint of local offices, but the process had been slow and complex.

The PT exercised tight control over the expansion of posts due to financial constraints after the Covid-19 pandemic. Because the current wage bill was unaffordable, the Department was unable to increase the number of social workers. It was therefore working with non-governmental organisations (NGOs) to supplement the work of social workers. He explained that underspending was due to the compensation situation. An unexpectedly high number of exits had been reported due to retirements, resignations and deaths. The Department was unable to fill the vacancies at the same speed that people were leaving the system.

Mr Smith agreed that cost was a major factor in BBBEE certification. The contradiction between the legislators and custodians was problematic for departments and entities. The matter was being dealt with transversally under the leadership of the PT, while progress on the matter was discussed in the quarterly CFO forums. The Department was trying to remain compliant as far as possible. Engagement with stakeholder departments was facilitated through the PT, with the NT. The matter was noted in the annual report.

In response to the questions about performance audits, he said it would be a costly exercise. The AG had a specialised unit for performance audits. On an annual basis, the AG decides on the number of programmes to be audited. The Department reports on the outcomes of predetermined targets, on which the AG expresses an opinion. The opinion on non-financial information did not form part of the annual report, but appears in the management report as an opinion based on compliance issues.

He said that costs would be a major factor in the componentisation of assets. For example, instead of registering a computer as a single unit, each component of the computer would have to be registered as a separate unit. The useful life of each component would have to be accounted for independently. The current system would not be able to accommodate the new method of accounting for assets. The NT issues the policy and guidelines and the agreed implementation with the AG. The Department was hoping that it would be done through a phased-in approach. Based on historical purchase dates, a decision would have to be made on which assets needed to be componentised. The process is anticipated to be done manually, which would be time-consuming and costly.

He said the latest status of fraud cases was presented in the annual report. The closed cases involved two employees who did not comply with trip authority while they were using a government vehicle. The matter had been taken for arbitration, and the employees had been sanctioned with unpaid work.

Follow-up discussion

Ms Maseko asked if the trip had cost R25 000, and if it had been work-related. She wanted to know if the fraud was a matter of them simply not recording the details.

The CFO replied that the employees had deviated from the approved trip without obtaining approval for the deviation. The cost of the deviation was less than the sanctioned amount of R25 000. The other closed case involved four employees within the finance unit who had colluded and registered a fictitious NGO to which payments were made. The employees were dismissed, and money was deducted from their pension benefits.

Ms Maseko asked if systems were in place to identify future scenarios of fictitious NGOs.

A DSD official responded that it was difficult to detect collusion. Segregation of duties between different units was applicable, but identifying fraud depended on disclosure. The employees had been found guilty in a court of law, and some were serving sentences.

The CFO said that the employee involved in the fraudulent housing subsidy claims had been dismissed. Legal services worked with the state attorney on fraud matters before the court.

Ms Maseko asked if a threshold was applicable to close matters which would cost too much to take to court.

Mr Smith replied that the Department was allowed to close cases involving less than R3 000 if the recovery cost was more than the claim amount. The Department worked via legal services with the state attorney to obtain approval before a case was written off.

Mr Sileku asked if the R60 000 related to fraudulent housing subsidies had been recovered. He sought clarity on the implication of a possible debt prescription.

A DSD official replied that the debt was not prescribed, because most of the money had been recovered from the pension benefits of the employee, who had since been dismissed. The recovery had been made prior to the legislative changes which stipulated that consent was required for pension fund deductions.

Ms N Nkondlo (ANC) asked if the non-profit organisation (NPO) funding policy for social services had been reviewed, since it had been almost five years since the policy was adopted in 2019. She remarked that compliance reporting was based on evidence. She wanted to know if the Department communicated with the AG regarding preparing for performance audits, and what elements it would involve. She enquired about the Department’s readiness to implement performance audits. She sought clarity about the statement that the NT was the authority on BBBEE reporting, as the custodianship of the policy was unclear to her. She asked what instrument the Department was using to report on BBBEE compliance.

The CFO explained that the NT was the authority on BBBEE reporting because it provided the template that departments used to report on BBBEE compliance. The BBBEE Commissioner was the authority on the instrument for issuing the BBBEE certificates. The Department had resolved that it was sufficient to use the NT template until the contradiction around certification was resolved. The PT had a system to track purchases from SMMEs and state-owned entities (SOEs) on a monthly basis.

He advised that the Department did not have specific engagements with the AG on performance audits, but through transversal reporting, he had become aware of a couple of information technology (IT) performance audits that had been done by a specific team from the AG.

Dr Macdonald said that the NPO funding policy had been updated. One of the changes to the policy was effected when the Early Childhood Development (ECD) function was transferred to the Department of Basic Education (DBE).

The Chairperson remarked that the issue of performance audits had been raised by members of the auditing sector. It had been suggested that a way had to be found to move beyond clean audits because the Department had been reporting on its tenth consecutive clean audit. Performance auditing had not been done in government circles. He asked if a potential implementation date had been determined.

Dr Macdonald replied that the importance of performance information should not be ignored. The reason for the audit of performance information was to ensure information reported was true and correct. He found it difficult to understand how much further reporting on performance should be taken, because the indicators were performance orientated -- for example, in terms of the number of people assisted and the children placed in care.

Ms Maseko said attaching clean audits to service delivery should be reviewed. Although the WCG was performing brilliantly, other provinces were lagging behind. The role of the AG needed to be strengthened to execute consequence management, although she was mindful that any changes to the AG's functions would add costs. The challenge with the social worker allocations was that communities continued to grow while budget cuts were imposed. She asked what innovative ways were being considered to absorb the shock of the increasing demand. Municipalities were experiencing difficulties when social workers had to travel long distances from one area to deal with issues in another area. She asked if OD would cover the demand for social workers in the province.

Mr Sileku said it was not for the Department to decide on performance audits, but it should be the AG's decision.

Ms Nkondlo asked if the reviewed policy document could be shared with the Committee. She sought clarity on whether the updated policy was the same as the reviewed policy.

Dr Macdonald replied that the policy had been updated more than once, and the updated policy was in the process of being signed off. The latest version of the policy would be available within the next few weeks.

He advised that the Department was considering innovative solutions to multiply social services by appointing auxiliary social workers and repurposing some posts in community development functions. Increased funding had been allocated to child- and youth-based programmes to supplement the work of social workers and to increase the footprint of NGOs. Volunteers and programmes within community structures were referred to pathways in schools, churches and civil society role players, who identify cases for referral to social workers. Social workers were still required to do some aspects of the work, such as attending court for child placements. The new Children’s Act provided for the placement of children with a family, instead of going through the Children’s Court. The downside was that it created challenges in terms of finding safety and foster parents. The numbers of children not placed had increased significantly in one year, which indicated that the legislation was not having the desired effect and had created a backlog. The goal was to reduce the backlog and the burden on social workers.

Audit Committee report back on 2022 annual report resolutions

Mr Ameen Amod, Chairperson: Audit Committee, WCPG Social Cluster, said the risks had been extensively discussed and required no further elaboration. From the perspective of the audit committee, he reported that its oversight role included quarterly meetings with the Department and Enterprise Risk Management (ERM). Relevant matters were discussed in closed sessions with the HOD. Audit coverage of the Department was 65%, with a good record on audit outcomes.

See attached

Discussion

Dr Macdonald said the audit committee assisted the DSD by highlighting some of the risks. He acknowledged that a balance was needed between operational demands and audit coverage. However, he was mindful of capacity constraints and audit fatigue.

Ms Maseko said the role of the audit committee should be more like that of a partner than of managing the risks. She enquired about innovative ways to reduce the assurance gap.

Mr Amod said the 50% assurance gap was due to capacity constraints within the Department and due to one of the audits that had not materialised. The combined assurance framework required a level of control in departments. The DSD had good controls in place and obtained good audit outcomes. The audit committee, together with the ERM, were involved in assisting the Department.

Ms Maseko said the oversight function should consider the King IV Code. She asked about the cost implications of managing risks within the Department.

The Chairperson agreed that the discussion of King IV would be a good learning exercise, and said time should be set aside for such a debate.

Mr Smith commented that the engagement had been useful. It helped the Department to understand the level of assurance that the oversight provides.

Minister’s closing remarks

Ms Sharna Fernandez, Provincial Minister of Social Development, agreed that it would be important to deliberate on King IV. She acknowledged that engagements with the audit committee had always been robust and that the team was keeping a close eye on all operational matters. In her previous role as Speaker of Parliament, she had had the opportunity to visit Australia, where she had observed that the AG spent only two weeks at the legislature. She suggested that the time spent by the AG in the WCG, and the associated costs, should be reviewed. She questioned the need to pursue continuous audits considering the Department had achieved more than ten clean audits. She argued that in future, the arrangement should be revisited in light of the costs involved to provide the necessary information for audit purposes.

SAAPAC subscription fees

The Chairperson said that a letter to inform the General-Secretary of the South African Association of Public Accounts Committees (SAAPAC) of its resolution regarding the non-payment of subscription fees, was being finalised. The annual general meeting (AGM) in KwaZulu-Natal was scheduled for the last week in October and the first week in November 2023. The General-Secretary had agreed to explore alternative means to obtain the financial statements. The SAAPAC would appoint a new audit firm to finalise the 2019 financial statements in order to attend the AGM with audited financial statements. He undertook to submit the correspondence to the Procedural Officer for distribution to the Members.

Ms Maseko asked for a response to her previous suggestion that the AG be contacted for advice on alternative avenues to handle the matter of entities who did not submit financial statements timeously. She noted that the AG, who was in partnership with the organisation, addressed the AGM every year, and questioned the silence of the AG on this matter. She was wondering why the partnership was not conforming to financial management practices. She suggested that the resolution to the problem would be a good case study to observe.

The Chairperson said the General-Secretary had informed him how frustrating he was finding it to explain the process to the auditors. The SAAPAC employed one audit firm for bookkeeping and another for conducting audits. He suggested that the General-Secretary should be invited to be present at the next meeting, to hear directly from "the horse’s mouth."

He commented that the Committee had become interested in the issue of performance audits after it had been raised by a member of the audit committee. He proposed that the PT inform the Committee whether performance audits would be implemented.

Ms Maseko proposed that in the engagement with the BBBEE Commissioner, the Committee should enquire about the directive to work with consultants, and the cost of certification.

Mr America supported the idea of the Committee being briefed on the movement towards performance audits. However, he did not think that Members should be side-tracked by the notion of performance audits, but should instead find a way to evaluate performance outcomes as reported in the annual performance plans of departments. The AG had a monopoly over the costs of audits, because the costs depended on the audit scope. He asked to what degree the history of compliance to predetermined objectives necessitated increasing costs due to the audit scope.

Ms Nkondlo said the side-tracking comment by Mr America was out of order, because the Committee had requested a debate on the matter. It was the duty of the Committee to evaluate the spending of taxpayers' money in terms of its impact on communities. Compliance audits did not assess whether the money was spent on the right things. Performance audits would take accountability to the next level, to reach the ultimate goal of changing the conditions of citizens through service delivery. She agreed that it was important to workshop the idea with the AG and other experts to understand the theory of performance auditing and to ensure that the framework considered the peculiarities of the different departments. She argued that comparing outcomes of failing entities was not useful, but rather to raise the bar and celebrate excellence.

The Chairperson found the different viewpoints of the Members interesting. He agreed that understanding the issue was required, which should be raised sharply when the Committee met with the AG.

Ms Maseko asked if it was possible to be provided with the costs of auditing the prior year's financial statements per department and per municipality. She proposed that as part of the agenda, the cost implications of performance auditing should be collected for the sake of comparison. In the Annual Standing Committee Report for service delivery, there appeared to be blurry lines between performance audits and service delivery audits. She said predetermined objectives would have to address service delivery challenges.

Mr Sileku asked how many departments and entities owed the AG audit fees.

Committee matters

The Chairperson said that the next meeting, on 19 April, would be in-person. This meeting had been advertised as in-person, but was changed to hybrid to accommodate requests from Mr America and Ms Nkondlo. The purpose of in-person meetings would be defeated if all Members preferred to be online. He appealed to all Members to attend in-person meetings unless advertised otherwise.

Ms Maseko said if there is a change in option, it must be communicated. If an in-person meeting was agreed on, then the online link should not be distributed. The alternate member could stand in if a Member was not able to attend in person.

Mr America said it had been the practise, as far as possible, that Chairpersons did not dictate to other Chairpersons. He would have considered other options if the Chairperson had refused his request. He questioned the notion of inflexibility, because it was difficult to find a stand-in replacement. It was not a question of taking advantage, and he took offence to the inference being made.

Ms Nkondlo remarked that it was necessary to always mediate between rules and reasonableness so that no inference was made about abusing the rules. The Committee has been introduced to different realities since Covid-19, and should not be stuck in traditional ways of doing things. She asked if the need for physical meetings was due to sensitive information being discussed, or merely for Members to come to the office. She pleaded with the Committee to consider both ends of the spectrum to avoid a one-sided discussion. She was not rebelling against the rules, but if the option was available to still attend online meetings, it should be allowed.

Ms Cassiem agreed that meetings should not be limited only to physical meetings. She had submitted an apology for not being able to attend the meeting, but due to the link, she had been able to attend it from her location in Hermanus. She agreed with compulsory physical meetings in instances where issues of confidentiality were discussed.

The Chairperson thanked the Members for their views on the matter. He still expected Members to be physically present unless a replacement on behalf of a Member was unavailable. He asked that Members make alternative arrangements.

Committee minutes

The Committee adopted the minutes of 5 April 2023 without any amendments.

The meeting was adjourned.