DSBD Portfolio Audit Outcomes

Meeting report

Auditor-General of SA (AGSA) Briefing on 2022/23 Audit Outcomes of Small Business Development Portfolio

Ms Nonhlanhla Zuke, Senior Manager, AGSA,  took Members through the presentation.

Overall reflections on implementation of prior years’ recommendations:

The action plan to address prior year findings was partially effective. The issues identified at the Small Enterprise Development Agency (SEDA) require time and could not have been prevented in one year. Progress has been made on the number of findings identified and the audit outcome on Audit of Predetermined Objectives (AOPO) has improved from a disclaimer.

Even though SEDA has progressed in terms of the number of findings on performance information, there were still material findings in the audit report.

The Department had a material correction on performance information which is an indication that internal processes were not adequate to identify the error in the reported information.

There was also a significant error identified on the financial statements that was subsequently corrected by management. Even though this did not change the Department’s audit outcome, it indicates that controls implemented by management were insufficient to identify errors.

In the current year, the Small Enterprise Finance Agency (SEFA) regressed from a clean audit to an unqualified audit with findings on compliance.

The moratorium on the filling of vacancies was lifted in the current year. However, National Treasury issued guidance on cost containment that might negatively affect the filling of vacancies by the Department.

Overall outcomes for the portfolio regressed from the previous year: Two auditees (Department of Small Business Development (DSBD) and SEFA) obtained an unqualified audit opinion with no findings last year, but only DSBD was able to maintain this outcome, while SEFA regressed to an unqualified audit outcome with findings on compliance. Management, the accounting officer, and the executive authority were commended for maintaining the Department’s clean audit outcome.

The Department maintained its outcome due to a strong leadership culture, sound financial management and effective governance structures that are supported by adequately resourced and skilled officials. However, a material finding was identified in the reported performance of the Department that management later corrected. This resulted in a paragraph included in the audit report for material corrections on performance information, but did not affect the overall outcome. The root cause of the finding was inadequate controls relating to the collation of data for performance reporting, which resulted in errors in the reported achievements for the indicator for the number of women-owned businesses supported to register on international platforms. To prevent similar findings from reoccurring in the next year, management should implement processes to ensure that reported information is supported by reliable and credible information.

Regression in audit outcomes

SEFA has regressed from a clean audit to an unqualified audit outcome with findings on compliance. The non-compliance reported related to the submission of financial statements that did not meet the requirements of the prescribed financial reporting framework. This was due to errors identified on the disclosure items such as the valuation of insurance technical reserves in the Khula Credit Guarantee (KCG) impairment and valuation of expected credit loss in terms of IFRS 9 (Provisions).

The root cause of the findings was a revised methodology on the conditional probabilities that were used to calculate the incurred but not yet reported (IBNR) reserves. We also identified another material non-compliance finding on asset management relating to intercompany loans that were approved without a special resolution. The credit function of the entity needs to be enhanced through strengthening the credit granting and collection processes.

Stagnation in audit outcomes

SEDA's outcomes remained stagnant as it achieved an unqualified audit outcome with material findings on performance information. We identified material findings on usefulness for the following indicators: (1) The number of SMMEs and cooperatives reached through awareness sessions, (2) the number of township and rural businesses supported, and (3) the ecosystem development plan implementation.

We also identified reliability findings on the indicators for the number of township and rural businesses supported, and the number of new incubation centres established. This is a slight improvement from the prior year, where the performance information was disclaimed due to a lack of a process to collate information for reporting. SEDA is in the process of implementing a performance reporting system to eliminate manual intervention, which is prone to errors. The system was not fully implemented at the time of reporting this year, which contributed to the identification of material errors.

Performance over the MTSF period

The Department has performed well in achieving the MFST indicators over the administrative term. In the 2021/22 financial year, three out of the six indicators where the Department lead on the MTSF were already achieved and in the current year, four out of the six indicators were met.

The remaining indicators not yet met relate to strengthening development finance for SMMEs and cooperatives where funding policy was supposed to be approved in March 2022. The Cabinet approved the draft SMMEs and Cooperatives Funding Policy to be published in the government gazette for public comments at the end of April 2023.

The target to Implement the SMME-focused localisation policy and ensure 100% compliance by the public sector in procuring 1 000 designated local products and services from SMMEs by 31 March 2024 is not yet due. It was confirmed that the achievement of this target is on track because a cumulative achievement of 807 had been reported in 2023. However, it was noted that there were changes in legislation in the prior year that might negatively impact the achievement of the remaining 193 designated local products by March 2024.

Achievement of performance targets

The achievement of performance targets remains a concern for the DSBD and SEDA in the current year. The Department did not achieve 44% of its indicators on the APP while SEDA and SEFA did not achieve 40% of its indicators.

The reason for the non-achievement of targets was attributed to vacancies in key positions in the Department, the low uptake of the Department's initiatives and the quality of submissions received from the applicants.

Oversight visit to the North West by the Portfolio Committee.

The Committee conducted an oversight visit in the North West in March 2023, where a number of concerns were raised on governance issues such as loan origination, monitoring the performance of intermediaries and high interest rates charged by intermediaries not in accordance with the National Credit Act (NCA). SEFA has developed an action plan to respond to the findings identified by the Committee. As part of our interim reporting, we will monitor the action plan and provide feedback to management on whether it is achieving the desired outcome.

Conclusions and recommendations

• Implement the recruitment plan to fill vacancies in key positions to the extent possible.
• Monitor the action plan to improve the achievement of planned targets on the APP.
• Monitor processes to ensure that the remaining two targets on the MTSF have been met.
• SEFA: Strengthen the credit granting process and collection process.
• Finalise the monitoring reports for the incubation programme.

This was the first year of the audit of SEFA. Financially, the loans had been increased to R87 million, with R1.61 billion liquidity altogether. There has been an increase in impairment provisions which indicates deterioration in the credit quality of the book. There has been an increase in the interest rate environment and the revenue because of the increase in the loan books and prime lending rate.

See attached for full presentation

Discussion

Mr J De Villiers (DA) inquired about the R5 million that SEDA was investigating. At what stage will this investigation be shown and understand what the irregular spending was used for? Are there vacancies not being filled because of the potential fear of a merger between SEDA and SEFA? Are the vacancies budgeted for, and are they funded? If so, then the vacancies should be filled. It will be best practice regardless of a potential merger. When SEFA and SEDA have programs to help small businesses, corruption remains a significant concern. Especially in the forms of loans and grants to family members of the SEDA and SEFA members. How are the beneficiaries investigated, and what are the criteria? Are there any conflicts? What are the consequences and the investigation in this event for businesses who have not paid back their loans?

Ms B Mathulelwa (EFF) was concerned about the R63.3 million irregular expenditure. There is non-compliance among the SMMEs assisted by SEFA. What are the impacts if SMMEs cannot repay the money they borrowed? Is there any insurance for this non-compliance? If there is no insurance, what are the ways to implement a plan to ensure the money borrowed is paid back?

Mr F Jacobs (ANC) asked whether last year’s management report on last year’s AG report had been completed. There were issues with discipline and irregular expenditure. Has it improved or become worse? Issues around the credit environment remain a concern. Which companies are responsible for the irregularities? There is a R239 million in the loan book for 2023. A qualitative comment is needed about the amount. It links to beneficiaries and application processes. Is Small Business Development a viable financial institute? Can it compare to other departments involved in doing development finance? The concerns around It also remain an issue.

The main focus point is previously disadvantaged communities in townships and rural areas, so an easy bureaucratic process is needed as the Committee simultaneously wants to ensure transparency and accountability. The money should be appropriately allocated. The vacancies are an issue, and the potential merger between SEDA and SEFA should not be used as an excuse. Management needs to implement a contingency plan to continue filling the vacancies. Some vacancies are required to be filled. How can management plan and organise better? The performance plan and budget were already approved. Do the financial statements reflect performance and developmental impacts? Are the incubator centres from the Department? If so, how much funding is given to them, are they providing goods, and how effective are they? Are impairments becoming worse? Is POPI being used to lack transparency? Is there something to learn for the public private partnerships, and what checks and balances are in place?

Mr H April (ANC) recognised the clean audit of 2021/2022, which became an unqualified audit in 2023. Is the lack of a legislative framework that the new Bill seeks to improve a solution to provide better compliance, better reporting standards, and better information collection? Is the current operational space of SMMEs clear evidence of excessive federal regulatory enforcement activities such as repeated audits, exorbitant fines penalties, and threats towards SMMEs, compared to big businesses and multinational companies? Is the environment for SMMEs cordial for them to be more than survivalists and instead participate in the job-creating strategy and bring the economy out of the slumps?

The Chairperson discussed the vision and the mission of the AG. They are enabling the Committee to perform oversight. The focus needs to be on the call to action, and research needs to be done to give back to the Department and its agencies.

Response

Ms Zuke replied to the investigation of the R5 million. She confirmed that there is currently an investigation of irregular expenditure. An accountant must further investigate this expenditure to ensure whether those services were delivered. There was no financial loss, and the reason behind the non-compliance was that the correct supply chain management processes needed to be followed. These matters are currently under investigation.

The questions around the vacancies are still being investigated, but it is confirmed that the vacancies are all budgeted for and form part of the organisational structure. The critical vacancies are positions such as the CEO post. There is hesitance to appoint a CEO of one entity and a different CEO of another, and conflicts of interest arise when the two entities merge. A recruitment process should, however, begin to ensure stability within these entities.

Experts are currently investigating how funds were allocated and whether they were granted to employees or family members.

Also being investigated is whether services were delivered where money was spent. These processes and investigations are now in the second phase, and the Committee must receive an update on these investigations. An action plan had been developed by the management, including the executive authority. However, not all items in the action plan have been implemented, as some are still in process. When implementation does come to fruition, it will be communicated with the Committee. Some positions still need to be filled as part of cost containment, and it is currently being discussed.

Ms Zuke responded to the issue about the incubators. There is no report, but it can be provided upon request later. Site visits were done, and there were no findings in that regard.

Mr Harshal Kana, partner at Deloitte, explains that their report references non-compliance with section 45 of the Company’s Act for those interested in insurance or providing financial assistance.

For the granting of inter-company loans, there must be a special resolution when the loan or financial aid is granted. Some procedural elements state that there was no evidence of a particular solution passed that proves non-compliance with section 45 regarding the assessment of solvency and liquidity.

The company does assess liquidity and solvency, so the loans Mr Jacobs enquired about are related to inter-company loans, which are the property of the business. There is no insurance on loans, and one can consider insurance on a loan book. Consideration of cost and the nature of the hedging must then be implemented. It is complex but a viable solution. An insurance entity, through a credit guarantee, issues credit guarantee insurance to various clients. This is just insurance, and it does not insure the loan book.

The capacity observed was a complicated modelling skill set in the credit modelling space. It is a high-demand skill set. Capacity and skills constraints risks have been experienced. A report was done against the performance, and the numbers are accurate and fairly represented. It yields better decision-making.

The Chairperson thanked the AGSA team for the briefing and engagement with Members. She said there must be a programme of action to monitor the Department on issues of compliance.

Committee Business

The Committee then proceeded to the adoption of minutes and programme for the term. The Committee also considered its programme for public hearings on the National Small Enterprise Amendment Bill. The Committee will split the hearings into two groupings of Members.

Mr H Kruger (DA) requested that as the Small Business Committee, Members should stay in guest houses when travelling for the hearings, to promote small businesses.

Members noted this was a strenuous programme which required much dedication but it was an important sacrifice seeing as the attendance of Members at public hearings was compulsory.

The Committee Secretary said he would return to Members on whether the programme to finalise this Bill by the end of November would leave enough time for the NCOP to also finalise the Bill before the end of the Sixth Parliament.

Mr De Villiers was concerned that much expenses would be incurred on the hearings even though there might not be enough time in parliamentary term for the NCOP to finalise the Bill. Is this not fruitless expenditure? The Committee must be sure there is enough time for the NCOP to deal with the Bill as it too will need to have public hearings.

The Chairperson responded that the Committee did revise its programme to finalise the Bill before the end of November to give the NCOP enough time for its processes. But she would confirm and return with further responses to the Committee Members.

Mr De Villiers raised concerns about Members receiving programmes on time from the Secretariat, ensuring that all Members received documentation timeously and equally as the Secretariat said he did.

The programmes were adopted with amendments. The DA objected as they did not have cite of the documents so could not support it.

The meeting was adjourned.