A summary of this committee meeting is not yet available.
PUBLIC ACCOUNTS STANDING COMMITTEE
22 June 2005
WATER AFFAIRS AND FORESTRY DEPARTMENT; BUSHBUCKRIDGE WATER BOARD: HEARINGS
Documents handed out:
Bushbuckridge Water Board Annual Report 2004:
Bushbuckridge Water Board: Chief Executive’s Report
Bushbuckridge Water Board: Chairperson Review
Bushbuckridge Water Board: Balance Sheet
Report of the Independent Auditors (see Appendix 1)
Report of the Audit Committee (see Appendix 2)
Water Affairs and Forestry Department Annual Report 2003/2004 (available at http://www.dwaf.gov.za/)
The Committee summoned both the Department of Water Affairs and Forestry and Bushbuckridge Water Board to explain their qualified Auditor-General’s reports. Major issues throughout the Committee discussion included the separation of accounts, misallocation of transactions to accounts, the sustainable functioning of its internal auditing unit, the successful transfer of assets to local governments, and the completion of an updated asset register.
During the interaction with Bushbuckridge Water, questions related to the lack of separation of the functions of the Chief Executive Officer, the Chief Financial Officer and the procurement manager. Members were also concerned with the apparent relationship breakdown between the Board and the management of the organisation, the malfunctioning of the organisation’s audit committee, and the possibility of material irregularities in the financial management of the organisation.
Ms L Mabe (ANC) initially introduced that the financial management of the Department and Bushbuckridge Water Board was of serious concern as both institutions had a history of unsatisfactory performance. Mr Beukman (NNP) added that the Committee plenary had adopted the motivation for the hearing.
Mr S Ndou (ANC) stated that the Department often received requests to enact a proper separation of accounts in the past. He noted that the Department had done this only recently. The funds from collections formed a significant amount. He asked to which account the Department directed it.
Department briefing on separation of accounts
Mr Mike Muller (Department Director-General) stated that the Department was in the business of indigenous and commercial forestry; the provision of water services to communities; and, water resource management. These different functions had to be accounted for separately and the structure of the accounts provided for accounting by function. How funds collected paid out related to these different functions determined to which account it would be taken from, or directed to. Where accounts were used as part of a business of the Department, they were categorised and used as trading accounts. Other accounts, in turn, were ‘exchequer’ accounts and were run according to the prescriptions of the National Treasury.
Mr John Mabala (Department Chief Financial Officer) stated that while the Department got money from the National Treasury, it also generated its own revenue. They had a Trading Account with four subdivisions to cater for the funds collected from its different functional areas. ‘Account Number Four’ catered for money received in connection with water services. ‘Account Number Three’ catered for funds received in connection with ‘bulk services’. ‘Account Number Two’ and ‘Account Number One’ respectively serviced ‘integrated schemes’ water levy collections. Funds received from National Treasury were put in the ‘Exchequer Account’, from where it was directed to its intended purpose.
Mr Muller related, in accordance with the Auditor-General’s report, that there were capacity problems at district level to maintain this proper separation of accounts. In certain instances remote functionaries of the department found it difficult to distinguish consistently between activities which should be accounted for under one of the subdivisions of the Trading Account, and activities that should be accounted for under the Exchequer Account.
Mr Ndou expressed his dissatisfaction with the answers provided by the officials, and requested a clear and simple answer to the question of where the Department kept the funds collected.
Mr Mabala said there was only one actual bank account. The subdivisions mentioned were for accounting purposes only.
Mr Ndou referred to the National Water Supply and Sanitation Training Institute (NWSSTI) as one of the Department’s institutions. The NWSSTI received its funding from the Department and from foreign and other donors. He asked where donor funds for the NWSSTI were kept on receipt.
Mr Muller stated that the NWSSTI was, in fact, autonomous and not an institution of the Department. However, the Department did, from time to time, make use of its services. Thus, where it occurred that funds were transferred to the NWSSTI, it was payment for services rendered rather than a budgetary transfer. Donor funds were normally channelled through the National Treasury, which held the funds and paid it into the account from which it was to be used. Such donations were accounted for separately and reflected in the annual report.
Mr Mabala stated that donations were first paid into the RDP fund at the National Treasury. Only once the money was needed for its intended purpose would it be paid over to the Department, subsequent to it requesting the National Treasury to do so. The funds were then paid over to the Department and put into the relevant account from where it was to be paid out. The funds therefore did not remain in the Department’s account for any significant period of time.
Ms Nomfundo Phetha (Treasury Senior Budget Analyst) stated that in Treasury’s understanding, the Department had three separate accounts. The first was the Exchequer Account intended for money received from Treasury. The second and the third were the Water Trading Account — which catered for the businesses that the Department ran — and the Equipment Trading Account, respectively.
Mr Ndou asked where the Exchequer Account was referred to in the annual report of the Department. Mr Muller replied that the Exchequer Account was referred to as ‘Vote 34’ after the Parliamentary vote for the allocation.
Mr Ndou asked where the idea of an Exchequer Account was derived from, and whether it accorded with the Public Finance Management Act (PFMA). Mr Muller confirmed that the finances of the Department were run in accordance with the PFMA. The Department deferred to the National Treasury for the language used to name accounts.
Mr Nico Marais (Treasury Deputy Director: Parliamentary Office) confirmed that referring to an ‘Exchequer Account’ was not necessarily an official practise, but it was standard and in line with the National Treasury regulations.
Mr Ndou expressed his dissatisfaction with the practise of referring to an ‘Exchequer Account’ as the legislation that preceded the PFMA, was apparently referred to as the Exchequer Act. He stated that he thought it politically incorrect. Furthermore, the Department was in the processes of devolving various services to the municipalities and he asked for an update on the progress made in this regard.
Mr Muller replied that the policy of the Department in this regard stemmed from the provisions of the Constitution that clarified the functions of the different spheres of government. It made it clear that the provision of water services was a local government responsibility. The process was taken very seriously, as it involved the transfer of responsibility for services that had a very direct impact on the lives of all South Africans. The Department worked closely with the National Treasury, the Department of Provincial and Local Government and the SA Local Government Association (SALGA) in this regard. Consensus was reached that along with the function, the Department also had to transfer the necessary budget, personnel, knowledge and skills to the municipalities.
Mr Muller stated that because of organisational inertia and the process followed, progress has been slow. Fifty municipalities were currently involved. In accordance with the agreement reached with SALGA, the substance and timetable of the transfer was negotiated with each of these municipalities. The Department’s policy was not to push the pace of the transfers faster than the municipalities were willing to accept them. National Treasury and the Department of Provincial and Local Government were called on for budgetary assistance to boost capacity and to clear maintenance backlogs in the affected municipal areas. The agreement between the Department, the Department of Provincial and Local Government and SALGA required that the transfers be completed by 31 March 2006. This date may, however, be shifted to ensure that the transfers were effective.
Mr Ndou stated that in his report on the audit of the Department accounts, the Auditor-General (A-G) included a qualification because of the misallocation of transactions among vote and trading entities and because of the apparent lack of sufficient supporting documentation.
Mr Muller responded that these matters had since been addressed. The problems originated with the move by government away from cash accounting to accrual accounting. Thus, they should be seen as the results of an incomplete implementation process rather than of mismanagement. Systems were now in place to offer maintenance of and access to the necessary supporting documentation. The Department had not yet received the A-G’s report for the 2004/05 financial year, but believed that it would be repeating its year-on-year improvement in this regard.
Mr Ndou noted that there were various bursary programmes being implemented by the Department for the training of its staff abroad. He referred specifically to a donation made by the Federal Republic of Germany in this regard. He requested that the Department provide the Committee with a summary of and progress report on the bursary holders. He expressed particular interest in how many of the Department’s staff had completed their studies, how many had discontinued their studies, whether there were any staff members that had contravened their bursary conditions in any way and, whether any necessary corrective action had been taken. He also referred to a specific training programme that was run in Holland in which some of the Department’s staff had been registered for.
Mr Muller was not clear on the Member’s question regarding foreign bursaries. Staff did go abroad mostly for short training courses. The one major programme in which the Department’s staff participated since 1994 was in the Netherlands in the mid-1990s. Around one hundred of the Department’s staff was enrolled for a master’s degree in water management at the University of Delft. At present there was no major foreign bursary programme in the Department. There was however, a domestic bursary programme funded and run by the Department.
On Mr Ndou’s request, Mr Muller agreed to provide a comprehensive report on the progress of staff members that had benefited from study assistance administrated by the Department during the last financial year, be it domestic or foreign.
Mr Muller explained that the Department had been funding bursaries for students at tertiary institutions since 1994 in order to ensure a supply of the skills that the Department needed. The bursaries were awarded under the conditions prescribed by the Department of Public Service and Administration. He did not have all the information with him regarding the numbers of the students and the qualifications that they studied for, but committed the Department to forwarding the necessary documentation to the Committee. In addition, with other departments, the Department of Water Affairs also experienced problems with retaining qualified staff because of the remuneration packages offered by the private sector.
Mr Ndou noted that the Department was responsible for the delivery of water and sanitation services pending the transfer of this function to the municipalities. Funds collected by the Department for the service delivery was supposed to have its own account. He asked Mr Muller to give a breakdown of the expenditure of these funds since 1994.
Mr Muller indicated that he was not sure whether the Member was referring to the trading account for water services. It was law that the terms for the payment for water and such services in the municipal areas were set by the municipalities since at least 1999. In the past, municipalities had often refused to pay the Department on the basis that there were no agreements between them and the Department for the Department to deliver services in their areas. Accordingly, a very large build-up of debt in the books of the Department resulted. After discussions with Treasury, it was decided that the latter would supply "grants-in-kind" to the Department to assist with the continued provision of these services. This decision had resulted as the affected communities tended almost always to be very poor, rural and located in the former homeland areas, which made full cost recovery highly unlikely. This had been the practice since the Division of Revenue Act of 2001.
Mr Muller mentioned that though the Department no longer billed the Municipalities for the service, some of the latter billed their customers for it and kept the funds for themselves. As the provision of water services to municipalities was now technically a subsidised, and not a trading activity, the Department considered changing its internal account from a trading account to an exchequer account. However, as these services were going to be transferred to the municipalities anyway, and the account closed by 2006, it was decided to maintain the status quo for now. This complicated the oversight role of the Members, but this was a consequence of placing the powers of billing in the hands of the municipalities rather than substandard accounting practise on the part of the Department.
Mr E Trent (DA) reminded Mr Muller that the PFMA stated that the accounting officer of a government department must have a system of internal audit under the control and direction of an audit committee that complied with the operating regulations and instructions prescribed in the said legislation. Mr Trent cited Treasury regulations to the same effect. The A-G relied, sometimes to a significant extent, on the internal audit plan of the Department in planning for the external audit. Where such an internal audit plan was found wanting, it could prolong the external audit by a significant margin. He asked whether they recognised and agreed with the importance of the internal function.
Mr Muller replied that it was a priority of the Department to comply with the PFMA, and that this was an important feature of the PFMA.
Mr Trent noted in 2003 the Committee had recommended in a resolution, signed by Mr Muller, that as the accounting officer of the Department, he should evaluate the effectiveness of the Department’s financial inspectorate and consider requiring it to report to the audit committee on, at least, a quarterly basis. Furthermore, the report recommended that Mr Muller report back to the Minister within sixty days of the tabling of the report that he, as the accounting officer, complied with the appropriate requirements. Finally, the Committee recommended that Mr Muller had to supply an appropriate high level summary of the performance of the fraud hotline to the audit committee on a regular basis. Mr Muller’s reply to the Committee’s resolution had been that he had already evaluated the work of the financial inspection unit, that the financial inspection unit’s plans were aligned with the audit unit, and that quarterly reports would be supplied to the audit committee on the work of the two units. Mr Trent then asked Mr Muller to confirm that this was indeed so, and that these recommendations were indeed implemented.
Mr Muller replied that the Department was satisfied that the three items that Mr Trent mentioned were dealt with properly.
Mr Trent then referred to the conflict between the opinion expressed in the report of the A-G and the report of the audit committee of the Department. The Department report showed that its audit committee had compiled a review of the internal audit, that it was good and that there was a high level of compliance with the standards set out by the Institute of Internal Auditors. The A-G’s office disputed this view and commissioned a review of the internal audit report by Payne and Associates. He asked why there was this difference of opinion.
Mr Muller acknowledged that there was a "systems issue", but stated that the A-G and the chairperson of the Department’s audit committee had a discussion and agreed on the process, the procedures and the timings of the different interventions to rectify the problems identified. The audit committee had to sign off ahead of the completion of the receipt of the final audited statements. There was a substantial discussion around the process and what audit committees could and could not do within the timetable and the framework of the system. It was a useful discussion as the Department now had a better, structured working relationship between the audit committee and the A-G’s process. This was one of the areas where the Department had set up systems of oversight, -accounting and -auditing that needed to mesh, but was not totally successful. The chairperson of the audit committee was doubtful whether he would be able to discharge his duties as it was required. He had the impression that everything had subsequently been clarified and many improvements had been made, but emphasised that as it was a systemic issue around audit, he was not the ultimate authority on the matter.
Mr Trent expressed his concern over the Department’s apparent lack of capacity as far as its internal audit function was concerned, and requested comment from the A-G in this regard.
Mr S Fakie (Auditor-General) stated that his office had expressed concern about the internal auditing capacity of the Department and of the standards to which internal auditing was doing its work. The Department’s audit committee was equally concerned and it was actually they who commissioned Payne and Associates to do the internal audit review.
Mr Trent then asked the D-G to respond to specific problems raised in the management letter addressed to the Department by the A-G, following its September 2003 audit. These included the fact that the Department’s head of internal audit had no specific audit qualifications and that training and development was not included in the methodology of the internal audit unit. It further indicated that the internal audit staff had made no declaration of personal interests as was prescribed by the standards of the Institute of Internal Auditors and that substantive evidence was not available to substantiate compliance with attribute and performance standards. Finally it concerned the finding that the internal audit report’s findings were not properly documented, not cross-referenced, not properly reviewed and that the standard of the actual reports were poor.
Mr O Thenga (Department Director: Internal Audit) stated that he had a Batchelor of Commerce (Honours) degree and that he had discussed the issue with the A-G’s office to ascertain what it was that they required. The A-G’S office indicated concern that there was no evidence of Mr Thenga having updated and developed his skills through further education and training in the field of internal audit. In response, he provided documentary evidence to indicate that he did update his training from time to time and, that he had enrolled and for and had already written a number of papers towards a Certified Internal Auditor qualification.
Mr Thenga further indicated that during the period under review, the internal auditing unit was still in the process of incorporating training and development into its methodology. The process had since been completed, and the methodology had already been put to use successfully. Documentary proof was forwarded to the office of the A-G in this regard, as well.
Mr Thenga confirmed that, during the period under review, the staff of the internal auditing unit did not declare their interests. ‘Declaration of Interests’ forms had since been drafted, and currently, each member of the internal auditing team was required to complete such and sign such a form prior to undertaking a new assignment.
Mr Thenga further noted that subsequent to further discussion with the A-G’s office, it emerged that the internal auditing unit’s non-compliance with the attribute and performance standards set out by the Institute of Internal Auditors was a matter of minor administrative error rather than negligence or gross malpractice. Amongst these issues counted the regular updating of the internal audit- and audit committee charts, updating of the fraud prevention plan and issues relating to risk assessment. He ascribed the occurrence of these instances of non-compliance to the capacity problems that were experienced by the Department’s internal audit unit at the time. All of these issues have since been addressed.
Mr Trent expressed his satisfaction with these answers, but requested some input from the A-G.
Mr Fakie confirmed Mr Thenga’s response around the matter of compliance with the Institute of Internal Auditors, but added that more significant issues were also identified by his office, for example that the findings of the internal auditors were not properly documented. The report was also not properly cross-referenced — a very basic requirement of the standards of the Institute for Internal Auditors. Finally, no evidence was provided that the findings had been reviewed by someone with sufficient seniority. It was possible that the findings could have been made by a junior official with no oversight by anybody else.
Mr Beukman expressed his dissatisfaction with the Department’s response in this regard. Partial compliance was not good enough, and if overlooked ran the danger of setting an unwanted precedent. He demanded a commitment from the Department that there would be complete adherence to the said regulations.
Mr Trent agreed, and emphasised the importance of the issue. As auditing was an exact science, any manner of non-compliance meant no compliance. He then made reference to the capacity problems in the Department and asked the accounting officer what was being done about understaffing and the rotation of staff in its internal audit unit. He also asked whether the Department had a retention plan to retain valuable skills in the Department.
Mr Muller replied that, in relation to understaffing, one of the points of flux was the extent to which the Department made use of external and internal service providers respectively. He had personally seen to it that a sufficient balance was kept to ensure the flexibility of the internal auditing unit to the extent that it could bridge situations pending the recruitment of new staff. The public service was limited in what it could do in terms of staff retention as the fundamental challenge was one of remuneration levels. Work in the public sector was also regarded as a very good training experience for prospective staff by the private sector. Due to the nature of the work of the internal auditing unit, its staff frequently came into contact with outside institutions that had showed little hesitance in recruiting staff in this manner. It was a broader problem confronting the public sector, particularly in financial and technical areas in which skills were scarce.
Mr Thenga explained that during the 2003/04 period under review, the internal auditing unit had indeed been experiencing staff shortages. At the time, the unit had had a staff compliment of ten, including the Director and his secretary, therefore leaving eight people to do the actual internal auditing work. Every time the internal auditing unit had done their risk assessments, human resources had been identified as a focus area. The unit was subdivided into two groups of four: a group that dealt with risk-based audits, and a group that dealt with special projects. The former grouping was running at half its capacity due to two resignations. However, during 2004/05 the finance department, under which the internal auditing unit fell, was restructured. During this process, the financial inspections division merged with the internal auditing division to boost its staff compliment with an additional eight members. In addition, staff were rotated so that they gained exposure to all facets of the work of the internal auditing unit. Where external auditors were commissioned to deal with areas in which the internal auditing unit had little capacity, skills transfer to the staff was a built in condition of the contract. In exceptional cases, as with one case in 2003/04, remuneration levels were adjusted in consultation with the Chief Financial Officer in order to retain staff. It was, however, kept as a last resort.
Mr Trent acknowledged the difficulty of staff retention in the public service, but contended that constraints with regards to remuneration did not prohibit the formation of a staff retention plan in its entirety. He asked whether the Department of Public Service and Administration had been approached on the issue.
Mr Muller refuted the implication that the Department had no plan. The internal auditing unit was managing a function of high turnover, and that had to be recognised. He again outlined the two components of the Department’s staff retention plan to include the balance of external and internal service providers, and the sparing use of the salary retention approach. The problem was being discussed with the Department of Public Service and Administration on a regular basis.
Mr Trent accepted the D-G’s explanation, but emphasised that the mater was not entirely hopeless and that new avenues should be sought with regards to the problem of staff retention. Mr Thenga replied that during the period under review the internal auditing unit did not have enough staff to complete all its activities. The Committee found it strange that the unit did not take this into account when it did its internal audit planning. He further expressed the Committee’s concern that perhaps the internal auditing unit was underperforming because it was biting off more than it could chew, rather than planning for fewer activities and doing a proper job.
Mr Thenga explained that the high number of incomplete projects of the internal auditing unit for the period under review was an outcome of missed deadlines rather than complete lack of progress. By the 31 March cut-off date, only one audit might have been totally complete, but a further six were in process and finalised after the cut off date.
Mr Trent enquired about the status quo in this regard. Mr Thenga replied that the said incomplete audits were rolled over to 2004/05, and they have since been completed.
Mr Trent asked whether this situation had repeated itself at the end of the 2004/05 financial year. Mr Thenga replied that for 2004/05 only one out of seven audits was incomplete by 31 March.
Mr Fakie said that on the information technology audit side of the internal auditing unit’s activities, the majority of the work was outsourced. He asked the Director of Internal Audit to identify what internal capacity the Department had in terms of information technology audits. Timeframes formed a component of internal audit planning and, for the period under review, certain of the audits were scheduled to be completed by August already.
Mr Muller reiterated that 2003/04 was the year in which the internal auditing unit lost half its capacity to deal with the thirteen audits that it was supposed to complete. By using external capacity and improved internal capacity, the unit went on to complete all twelve rolled over audits, and six out of the seven audits planned for 2004/05 by 31 March 2005. This signalled a serious improvement in the state of the affairs of the unit.
Mr Thenga stated that the Deputy Director for Special Projects, Pieter Jordaan was the only person appointed to deal with information technology audits. The Department was not able to appoint any other information technology specialists for the period under review, as no agreement could be reached with candidate employees regarding remuneration levels. For 2004/05, the Department had managed to appoint an additional information technology auditing specialist.
Mr Trent put forward that contracted capacity normally came in the form of junior staff that were only periodically overseen by the partners of the contracted companies and not by the latter themselves. This meant that outsourced audits were often in inexperienced hands. He asked the accounting officer to comment on this, and on the sustainability of the internal auditing unit in the face of its relationships with external service providers and its high staff turnover.
Mr Muller replied that the advantage of outsourcing had to be that the oversight function was enhanced, and committed himself to reviewing the procurement contracts in this regard to ensure that adequate support was leant to the Department by its external service providers. The sustainability challenges facing the internal auditing unit would be ongoing. The only option was to manage it as well as possible within the existing framework. It was high on the priority list of the Department and it would enjoy the continued preoccupation of the accounting officer, the Chief Financial Officer and the Director of Internal Audit.
Mr Fakie confirmed that the matter of inexperienced outsourced service providers was resolved for the year 2004/05.
Ms L Mashiane (ANC) noted that the A-G pointed out the unavailability of an asset management policy for the Department for the period under review. She asked the accounting officer why this was so, and enquired what policies and procedures were in place in this regard. She further sought an assurance that this matter would not be the subject of future A-G reports.
Mr Muller stated that while there were practices and procedures to manage assets, the matter of their codification into a single asset management policy was still outstanding during the period under review.
Mr Mabala echoed Mr Muller, and added that the asset management policy was finalised in the 2004/05 financial year.
Mr Muller stated that the Department’s intention was to have a full and updated asset management register in place at all times going forward.
Ms Mashiane questioned the Department’s failure to record and update additions and disposals in the asset register for the 2003/04 financial year. She asked if any progress had been made in the development of an updated asset register and also enquired about the control procedures for the management of departmental assets.
Mr Muller pointed out that the Department was in the process of transferring a major portion of its fixed assets to local governments. This process would be once off and not ongoing. Where the Department was engaged in an extensive and expensive exercise to record all its assets for disposal it was certainly experiencing difficulty. The difficulty emanated from the fact that whereas assets might have been registered for accounting purposes, a register was never kept for the purposes of asset transfers. Where the transfers were delayed, it was a result of instances where the asset register was not as it should have been. Substantial assets had also been transferred in the forestry area, and the Department was also engaged in a process to transfer assets on the water resource side of its business.
Mr Mabala explained that the move away from the cash accounting system to the accrual accounting system had caused further complications as it required a new format for the asset register. While the process was incomplete for the year under review, the situation was rectified for the year 2004/05. Updates were now done continuously. In terms of the control processes of asset management, training at remote locations and centres of the Department was an ongoing exercise to ensure that assets were brought onto the register as soon as they were acquired. This represented a major improvement in the situation over the last three years, as before then, the Department had no asset register whatsoever.
Ms Mashiane remarked that the Committee got the reply of an "ongoing process" and "it is getting better" from every Department.
Mr Fakie noted the convenor’s reference to a new capability model for government in her introductory remarks. Where the Department had originally not even had a codified asset management policy in place, it was on level one in terms of such a model. The next step was the implementation of the policy. He took heart from the responses of the Mr Muller and Mr Mabala, as it indicated that the Department was grappling with these issues and making progress. The accounting officer replied that major assets transfers to local governments and within the Department were currently underway. In light of this, it was all the more important to have a fully updated asset register so the Department knew exactly what assets it was transferring, what the value of these assets were and where these assets were being transferred to.
Ms Mashiane asked when the transfer of assets to the local governments would be complete. She asked how long the Chief Financial Officer had been in his position and whether he could account for the length of time it took to get the asset register up to date. Finally, she asked for specifics on the process to update and record asset additions and disposals.
Mr Mabala replied that he had been in the position since 2001. In the year under review there were still a number of challenges that had to be dealt with in terms of the shift to accrual accounting, mainly relating to the coding of transactions. Existing systems had to change as the reporting requirements had changed. He stated that the problems around the updating and recording of additions and disposals were resolved in the 2004/05 financial year. He also mentioned a turn around strategy that would proactively deal with similar problems going forward. The content of this strategy was shared with the A-G and the Portfolio Committee.
Mr Muller expressed doubts concerning the confusion of municipalities around asset transfers to local governments. There were a degree of negotiation involved in this and the municipalities had every incentive to get as much budget and as much additional resources out of the process as they possibly could. They also had an incentive to take the staff that they wanted and not the staff that they did not want. Discussion with SALGA had brought to light that the basis for transfer had been laid. Unless municipalities were not functional and acted timeously, there was no reason why they would not take transfer by the end of March 2006.
Mr Muller reiterated that the asset register for accounting purposes and, the asset register for transfer purposes were not the same thing as their respective ends had different requirements. He explained that while the asset register for transfer purposes was probably not up to the standard that the Department would have liked for its internal purposes, it was a format to which the Department had to agree to in consultation with the municipalities. Dual work such as the dual asset registers, and the fact that the Department currently had to perform new and old functions simultaneously was part of the transition that it was going through and exacted a toll in the day-to-day running of its business.
Ms Mashiane required further clarification on the recording of assets. Mr Mabala explained that at the different remote locations of the Department there were managers dealing with asset acquisitions. These managers were integral to the recording of new assets. The physical bar-coding of new assets used to be a function of the head office of the Department and was done by travelling officials. Now the remote managers immediately recorded and bar-coded new assets themselves.
Mr Fakie added that the 2004/05 audit of the Department was still under way, and that his office would only be able to comment on this matter subject to its conclusion. He further voiced his concern over the duplication of duties related to the different asset registers that the Department had to compile. For the sake of efficiency, he would look into the matter to see if a recommendation to SALGA could not perhaps be made in this regard. An asset register would basically satisfy anybody if it detailed the date an asset was required, if it indicated the date the asset was required, if it indicated the asset’s location and, if it gave an indication of the asset’s approximate value.
Bushbuckridge Water Board
Ms L Mabe noted that, in his contribution to the Bushbuckridge Water Board Annual Report 2004, the A-G raised the fact that there was no segregation of duties in the office of the Chief Financial Officer (CFO). She asked what steps the Board had taken to ensure that the duties were devolved to all eleven staff members.
Ms P Nyakane (Bushbuckridge Water Board Chairperson) stated that the former Finance Director had to resign due to ill health after being involved in a car accident in 2001. The Board resolved, on the advice of the Chief Executive Officer (CEO), to appoint the procurement manager as acting Chief Financial Officer. The Board was limited in what it could do as its function was to agree on resolutions and not to get operationally involved.
Ms Mabe expressed her confusion at the manner in which the finances were managed and asked for an organogram that could perhaps detail, specifically, the financial management of the organisation.
Ms Nyakane stated that the problem was the implementation of the Board resolution that lead to the appointment of the procurement manager as the acting CFO, as it assigned the duties of dealing with creditors to the same person who had to manage the finances of the organisation. It was known to the Board that this was in contravention of the PFMA. When the Board received the disclaimer from the external auditor on the basis of the lack of a separation of functions, it exerted pressure on management to advertise the post of the CFO and to make an appointment. An appointment was about to be made, but as the management had not followed ‘certain processes’ correctly, she felt it her duty to intervene. No further progress was reported. The CEO did not implement the decision of the Board to appoint a new CFO.
Mr S Nkuna (Bushbuckridge Water Board CEO) stated that during the year under review the finance department of Bushbuckridge Water Board consisted of a CFO, a procurement manager and a senior accountant. During 2004/05 the structure was reviewed and it was decided that the structure would include a CFO, a finance manager, a supply chain manager and the accountants below. He blamed the financial constraints in which Bushbuckridge Water Board operated for the fact that these positions had not yet been filled, but stated that the process was well under way to appoint a new CFO.
Ms Mabe expressed her concern over the fact that a CFO had not yet been appointed, even though the previous incumbent had already resigned in 2001. She also stated her disbelief at the Board’s approval of appointing the procurement manager as the acting CFO. There was a problem with the supply chain, as the person who took orders was the same person who made payments. She asked for an explanation from the Board in this regard.
Ms Nyaka stated that the Board had not seen management letters that came from external auditors for quite a while, until the Chairperson had to intervene to obtain them.
Mr Fakie stated that under the circumstances one could probably understand that Bushbuckridge Water Board appointed the procurement manager as acting CFO. The question was, however, what compensating control they put in place. The provision of some sort of compensating control was necessary if a situation like this arose where one person was saddled with incompatible duties such as that of a procurement manager and a CFO. The fact that management letters were withheld from the Board was as a key issue. As the detailed consideration of the financial management of the organisation was a key function of the audit committee of the Board, why did it take so many years for them to realise that information was being withheld? In effect, this meant that the audit committee of the Board had not been fulfilling their responsibility.
Ms Nyaka replied that the issue of compensating controls were never considered as the situation of having the procurement manager acting as the CFO was supposed to be effective only for a very short time. This was so as the Board resolutions to appoint the procurement manager as acting CFO were adopted simultaneously with a resolution to advertise for and appoint a new CFO. The Board was also very unhappy with the audit committee as it had been dysfunctional since 2003. When it received the disclaimer from the external auditors, the audit committee also failed to come forward with clear remedial steps to rectify the situation.
Mr L Mavuso (Deputy Board Chairperson) stated that the audit committee’s task was complicated by the unfilled vacancies in the organisation. He explained that the audit committee was made up of three independent people who were not Members of the Board, and two people who were Members of the Board. He stated that the fact that the audit committee did not have a secretary meant that it could not achieve much. He stated that the audit committee relied heavily on the acting CFO and the CEO in the execution of its functions.
Ms Mabe asked the CEO why the management letters were not handed over to the Board. Mr Nkuna explained that the Board had its committees to which all the relevant documentation had to be tabled. He explained that the audit committee was competent to view all oversight documents pertaining to the organisation’s finances, including the external and internal auditors’ reports and the management letter. He stated that the management letter was delivered duly, and in the presence of the external auditor, to the audit committee.
Mr Beukman asked Ms Nyake whether there was a relationship problem between the Board and the CEO.
Ms Nyake did not want to refer to it as a relationship problem, as it went beyond that. Many of the Board members did not understand their duties to the extent that they personalised every issue that was tabled. When requests for information were tabled, these Members reacted as if war was being waged against the CEO. Communication was constant between the Board and management. She offered documentary proof to this effect.
Ms Mabe expressed that on their return, the Board should request assistance from the Minister in order to put their house in order.
Ms T Tobias (ANC) commended Mr J Sithole from JK Sithole Auditors for the good work done in presenting a full audit opinion, subsequent to the Bushbuckridge Water Board audit he performed for the year 2003/04. When asked by Ms Tobias whether he agreed with the opinion of the external auditor he answered in the affirmative.
Ms Tobias asked Mr Sithole to explain in which instances Section 25 of the Public Accountants and Auditors Act (PAAA) would be invoked. Mr Sithole explained that it was when the uncertainty was so great that there was a significant probability of material irregularity.
Ms Tobias asked the CEO whether he understood the implication thereof. Mr Nkuna answered in the affirmative. It meant that if there were instances in the organisation of material irregularities that he should have been aware of as the CEO of the organisation, then he should take responsibility.
When Ms Tobias asked Ms Nyakane whether she understood the implications of Section 25 of the PAAA, she also answered in the affirmative. Upon Ms Tobias’ request to elaborate on the implication of the said legislation, Ms Nyakane answered that it implied that Bushbuckridge Water Board was incompetent.
Ms Tobias felt that the Board seemed neither to do what it was supposed to do, nor understand what its duties were.
Ms Mabe hoped that the Committee would see significant improvements in the financial management of the two entities heard during the session.
The meeting was adjourned.
PORT OF THE DEPENDENT AUDITORS
09 October 2004
We have audited the annual financial statements of Bushbuckridge Water Board Board as set out on pages 28 - 39 for the year ended 30 June 2004. These financial statements are the responsibility of the Board. Our responsibility is to express an opinion on these financial statements.
We conducted our audit in accordance with statements of South African Auditing Standards. Those standards require that we plan and perform the audit to obtain reasonable assurance that the annual financial statements are free f material misstatement.
An audit includes:
- examining, on test basis, evidence supporting the amounts and disclosures in the financial statements
- assessing the accounting principles use and significant estimates made by management, and
- evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion. Matters which arose during the course of the audit:
1. During the year under review there was a breakdown in controls over creditors and purchases. Laid down procedures were not the, followed and there was no segregation of duties as a result of management override.
2. In additional certain payments totaling R377 836 appear to have been made irregularly and no reasonable explanations could -be obtained from management. In the absence of reasonable explanations we invoked Section 20(5) of the Public Accounts Auditors Act, 1991 (Act No.80 of Accountants 1991) (PAAB) with matters defined there in material irregularities and requested a management within 30 days. We did not receive a satisfactory response and are accordingly obliged in terms of the PAAB to report this.
3. The income of the Board includes reimbursement of certain expenditure incurred from the Department of Water Affairs and Forestry (DWAF). As the expenditure could not be verified, the completeness and validity of income can also not be verified.
4.The financial statements include an adjustment for fundamental errors to retained income for R91 389. No evidence was given for this adjustment and therefore could not be verified.
5. During the year wasteful and fruitless expenditure amounting to R702 404 was incurred in that penalties and interest were incurred because of delays in the submission of VAT returns. Section 51(b)(ii) of the Public Finance and Management Act, 1999 requires that the accounting authorities prevent fruitless and wasteful expenditure
We have been prevailed upon to issue our report by not later than 29 October 2004 which prevents us from attempting to carry out alternative audit procedures
Disclaimer of audit opinion
Because of the significance of the matters discussed in above paragraphs we do not express an opinion on the financial statements.
KJ Sithole & Co.
Chartered Accounts (SA)
Registered Accounts and Auditors
Appendix 2 :
REPORT OF THE AUDIT COMMITTEE
We are pleased to present our report for the year ended 30 June 2004.
Audit Committee Members
The audit committee consists of members listed below and meet at least three times per annum as per its approved charter. However during the year under review the committee met five times as it had to consider a number of issues dealing with establishing the internal audit function and strengthening of internal controls. The members are as follows:
- Casber Mnisi - Independent
- Meshack Nkosi - Independent
- Cynthia Mokoena - Independent
- Velly Mapaila - Board Member
- Leornard Mavuso - Board Member
Audit Committee Responsibility
The Committee has an approved Audit Charter, which complies with the provisions of the PFMA and Treasury Regulations, King II report, and the Protocol on Corporate Governance for State Owned Enterprises. The committee reports to the Board of Bushbuckridge Water, and it is satisfied that for the year under review it has discharged its duties and responsibilities within the Audit Charter framework.
Effectiveness of Internal Controls
The Committee reviewed the adequacy effectiveness of internal accounting controls and systems as presented by the external auditor. As the internal audit function was not in place, a report from such could not be considered. During the year under review there has been a breakdown in control over creditors and purchases. Laid down procedures were not followed as there was no segregation of duties. The Committee raised the matter with the board and management, and we are satisfied by the steps that are being taken to restore internal controls.
The Quality of the Management and Quarterly Reports submitted in terms of the Act
The Committee is satisfied with the content and quality of reports issued to the board by management and the Annual Reports issued to the Executive Authority. However there were no quarterly reports compiled as the Board is still discussing with the Executive Authority the format and the level of details of such reports.
Evaluation of the Financial Statements
The Audit Committee has:
- Reviewed and discussed with the External Auditor and the Accounting Authority the audited financial statements to be included in the annual report;
- Reviewed the External Auditor’s management letter and management response;
- Reviewed changes in the accounting policies and practices;
- Reviewed significant adjustments resulting from the audit.
At its meeting held on 28 October 2004 the Audit Committee unanimously adopted the Annual Financial Statements and the report of the External Auditor, and is the opinion that the documents be published and read together.
Chairperson of the Audit Committee
28 October 2004
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