Qualified Audit Opinions on Departments: briefing by Auditor General; Implementation of Committee Report on Eastern Cape, Kwazul

Meeting report

PUBLIC SERVICES AND ADMINISTRATION PORTFOLIO COMMITTEE
19 June 2006
QUALIFIED AUDIT OPINIONS ON DEPARTMENTS: BRIEFING BY AUDITOR GENERAL; IMPLEMENTATION OF COMMITTEE REPORT ON EASTERN CAPE, KWAZULU NATAL, LIMPOPO & NORTH WEST; COMMITTEE ANNUAL REPORT

Acting Chairperson: Mr M Baloyi (ANC)

Relevant documents:
Presentation by the Auditor General on Audit Outcomes
Auditor General Annual Report 2004/05 (www.agsa.co.za)
Committee Annual Report 2005 (Draft Letter to Parliament)
Committee Report on oversight visits to Eastern Cape, Kwazulu Natal, Limpopo & North West: August 2005
[Available at Committee Reports once tabled]

SUMMARY
The Auditor General gave a brief presentation to the Committee on the qualified audit reports and key recurring issues picked up by his Office, over a period of five years, for the Departments of Water Affairs and Forestry, Health, Labour, Social Development, Education, Housing, Provincial and Local Government, and Transport. He indicated whether the qualifications or areas of concern had arisen through personnel problems, problems in processes, or poor governance. He explained how each of these areas could impact upon delivery. He explained the scope and ambit of the Auditor-General’s reports, and described what areas were not covered. He reported that Treasury wanted to expand the scope of certain investigations, and how the Portfolio Committee could ensure better oversight when calling departments to account.

The Committee Chairperson indicated that the Committee 2005 Annual Report had regrettably become mislaid, but he tabled a draft letter which commented on the reports that had been drawn during that year. Committee members agreed that further issues would need to be addressed with departments during September or October discussions on their annual reports and budgets. After discussion, it was agreed to amend the letter to reflect the current morning’s discussions with the Auditor General and send it to Parliament as the approved version.

The Committee considered the draft Committee Report on its oversight visits to provinces in 2005, together with attached letters calling upon various departments to address issues highlighted during the oversight visits. The Committee approved the report, and agreed that follow-up visits would be made by small committees, during the forthcoming constituency period, followed, if necessary, by further Committee visits later in the year.

MINUTES
Mr M Baloyi announced that he had been requested to act as Chairperson as Mr P Gomomo was unable to attend.

Mr Baloyi reported that the Committee had decided to hold regular investigation of how departments were performing against budgets, so that any problems could be isolated before the end of the financial year. The current meeting would not be looking at the previous quarter, but instead the Auditor General had been asked to brief it on why certain departments had received qualified audit opinions so that the Committee would be able to check, in due course, whether the plans of these departments had addressed the qualified audit opinions and taken steps to prevent their recurrence.

Presentation by the Office of the Auditor General
Mr Shauket Fakie (Auditor General) reported that the Auditor General’s overall report on audits of the 2004/5 financial period was tabled at the end of 2005, in the form of a summary report of all departments. The long report on all departments was issued to each department, including audit outcomes and a report on public entities linked to each department. Similar reports were prepared for provincial departments and general reports were issued for local authorities. This Portfolio Committee had asked for comment on specific departments and the current report would therefore highlight some of the recurrent issues, provided in addition to the individual departmental reports, and would serve as an accountability tool that the Committee could use in questioning the departments.

The Auditor General commented that some departments had received one or two qualified reports, followed by an unqualified report or two, but had then reverted to qualified reports. This usually resulted from implementing "short-term fixes" which were not sustainable. The Auditor General would always attempt to highlight the root cause of the problems so that these could be addressed on a sustainable basis. Universal principles of proper record keeping, accountability, and transparency governed the whole public sector. A key challenges was that departments should report performance information in their annual report. Budget and spending were major issues but the Auditor General believed that the Committee should also investigate the extent to which the departments achieved their performance outcomes. One of the problems was that the PFMA provisions in this regard had not yet been fully implemented, so that the Auditor General had to rely upon statements of performance outcomes without being able to investigate them fully. Presently he focussed on the financial side, but the challenge in future would relate to performance information that was non-financial. His Office and Treasury were working together closely to try to have this information included in the PFMA.

The Auditor General highlighted the information upon which his Office could report. It could report on the reasonableness and reliability of the financial statement information, but could not report on the effectiveness of financial management. It could address the validity of the disclosure input into the organisations, in terms of assets and personnel, but could not examine the outputs and service delivery arising out of use of those assets. It could look at whether fraud control measures, and at potential for fraud, but not at the efficiency and effectiveness of the fraud control measures. It could assess the non-compliance with key financial legislation and matters identified during the course of an audit in the public interest, but could not look to providing comprehensive information on areas for improvement.

Departments, at the strategic level, needed to focus on three issues: people, processes and governance arrangements. The people issue was critical since public services was driven by service delivery, with between 50 and 60% of the budget typically spent on remuneration. Skills were a major problem, and explained why many processes had not been properly carried out. Some departments had a number of unfilled vacancies at managerial level, including Departments of Public Works, Trade and Industry, Transport and National Treasury, and this created problems in decision-making and service delivery. The performance management systems were also crucial as mediocre performance led to compromise of processes. On the process issue, National Treasury and State Information Technology Agency (SITA) played crucial roles. Processes had to be comprehensive at every level, yet simple enough for the personnel to understand what they should do, and how they contributed to overall functioning. The legislation was voluminous and often local government was hindered by outdated legislation. All systems should contain checks and balances, and IT systems should be driven by the business imperatives. Governance arrangements were largely set by the PFMA, which gave flexibility yet provided for accountability, created a proper separation of powers, proper audit functions and provided for a mandatory annual audit by the Auditor General. The challenges lay in how effectively they were enforced. Low levels of compliance would indicate a lack of training.

The Auditor General reported that in respect of each department covered in the report, his Office had looked at a five year period. He indicated whether or not the reports had been qualified, the major recurring issues, and had identified whether the root cause of the recurrence lay in mismanagement of the people, process or governance issues.

The Department of Water Affairs and Forestry (DWAF) had received qualified reports between 2000 and 2004. Key recurring issues were incomplete documentation, lack of policies and procedures, and relationships with trading entities, since DWAF had used the trading entities to balance their books, and those entities had not complied with generally accepted accounting principles. The situation had improved in 2004/5 but there were still inadequate policies and procedures.

The Department of Health (DOH) had received qualified reports for 2001/2, 2003/4 and 2004/5. Problems had not been addressed at source. It did not comply with the Division of Revenue Act (DORA), in that it had not monitored performance on transfers made to provincial departments, nor on assets. There were weaknesses in the audit committee. DOH was currently busy establishing proper audit committees.

The Department of Labour’s (DOL) audit reports had been qualified in 2002/3 and 2004/5. There were insufficient supporting documents for journal entries, and no reconciliation between PERSAL (Personnel and Salary Administration System) and BAS accounting systems.

The Department of Social Development (DSD) had received unqualified reports, but they failed to monitor conditional grants to provinces which had not been fully utilised. There was a mismatch between the roles, responsibilities, mandates and funding between national and provincial departments on the social grants. The national office did not monitor in accordance with DORA, did not register NGOs through lack of capacity and there were problems with the Social Pension System (SOCPEN). The South African Social Security Agency (SASSA) would only be audited next year.

The Department of Education (DOE) had been qualified in 2001/2 but unqualified since then. Recurring shortcomings related to fixed asset systems, DORA compliance and monitoring, and inadequate IT policies and procedures. The fixed asset register had not been completed in 2004/5.

The Department of Housing (DOH) had received an unqualified audit for five years but key recurring issues related to inadequate internal coverage of DORA, poor management of assets and inadequate IT policies and procedures. The Auditor General reported that a special report, on government officials receiving fraudulent access to housing subsidies, had been submitted and that SCOPA had discussed the matter the previous Thursday and would shortly submit its report on the answers given.

The Department of Provincial and Local Government (DPLG) had received unqualified reports but the key recurrent issues were linked to DORA compliance and monitoring, inadequate internal audit coverage, measured against plans, failure to do IRP5 reconciliations, and inadequate IT policies and procedures.

The Department of Transport (DOT) was unqualified in 2001 to 2004 but the latest report had been qualified. Recurring problems related to non-compliance with laws and regulations, and to failure of the audit committee to meet its responsibilities. The 2004/5 qualifications were linked to improper accounting for credit card driving licences, poor controls on expenditure, poor controls on debtors, high vacancy rates and lack of policy and procedure for appointment of board members of public entities.

In summary the Auditor General reported that the issues across many departments displayed similar problems. Although many departments received unqualified reports, difficulties often arose in the transfer of money to provincial offices, when national offices did not ensure compliance with DORA. Treasury was particularly concerned that Conditional Grant Transfer monitoring was not effectively carried out, and that the national offices therefore did not fulfil their role and mandate to ensure service delivery at government level. An examination of effectiveness, as stated before, did not fall within the Auditor General’s purview and therefore he believed that it could best be done by the Portfolio Committees.

Discussion
The Acting Chairperson commented that the Auditor General had been quite correct in stating that the reports on resources were meaningless unless they were linked to realising the objectives and strategic plans of the departments. The Portfolio Committee was indeed mandated to and should examine the relationship between spending and delivery, since the public would turn to members of the portfolio committees when there was no delivery. It was clear that quick fixes did not work. He indicated to the departments present at the meeting that these issues would be targeted by the Committee in future discussions.

Mr K Khumalo (ANC) asked the Auditor General whether he could provide the Committee with a list of the Ordinances that he had alluded to in his report on DPLG, and whether he could also provide a list of unfilled vacancies in the various departments.

The Auditor General reported that any list of vacancies related to the 2004/5 audit and would therefore be out of date. He suggested that perhaps the Department of Public Service and Administration was more suited to giving the latest information. In regard to the Ordinances, there were 284 local authorities, and several had cited different Ordinances as problematic. His Office could not investigate the Ordinances, nor comment upon them, as that was a political function, but could merely report on their implementation. It would be more appropriate for DPLG to specify which ordinances were problematic.

Mr I Julies (DA) commented that the Portfolio Committee should engage with departments more proactively in order to create a more effective single system of public service delivery. A more holistic oversight approach was perhaps needed to ensure that national, provincial and local government met the needs of the citizens.

The Acting Chairperson noted that lack of compliance with DORA was a recurrent issue. He asked whether the Auditor General was able to cite the root cause of the problem.

The Auditor General stated that he did not have with him all the details required under DORA as this fell under Treasury, but there were a number of rules stating what the National Departments should do to ensure that the goals and requirements were met by provincial departments. In many cases the monitoring was simply not done.

Mr J Jacobs (National Treasury) added that DORA prescribed that the transfer payments should only be made by the accounting officer when satisfied that the systems would ensure that the funds were used for the correct purposes, that control measures were in place, that there was a proper report-back, and that certain conditions and reports were completed. The procedures were quite clear.

The Auditor General stated that National Treasury had also raised some concerns about the timing of transfers, since there seemed to be some departments who received funding, but did not pay it out timeously, and then attempted to spend in a rush at the end of the financial period. The Auditor General’s function did not extend to monitoring the timing of payments, but quarterly reports by departments should be given to Treasury, in terms of PFMA.

Mr Jacobs confirmed that there was indeed a facility for monitoring by Treasury and that reports were available.

Ms V Nhlapo (Deputy Director General, Department of Social Development (DSD)) reported that DSD National Office would insist upon certain requirements being met before making transfers to the provincial offices; in particular, these related to provision of business plans to guide delivery. Delays could occur if the provinces failed to finalise their plans. National Departments were responsible for ensuring that systems were in place to monitor effectively. Often there were delays in obtaining reports, which would then slow the payments by National office. Often it was possible that small tranches of payments were made at the beginning of the year, but provinces could not then manage the spending properly at the end of the year. DSD believed that the implementation of the system through SASSA would alleviate the problems, although some of the smaller grants still fell under the equitable share system.

Mr E Besa (Director Financial Administration, DSD) added that it sometimes happened that the officer responsible for signing off the report was absent from office and therefore the money could not be released until his signature was obtained.

The Acting Chairperson noted that this remark highlighted the question whether the systems used were adequate and ensured delivery. He queried whether DORA required signature by a certain level of staff member, or only one person and suggested that this was a matter to be investigated. It was also clear that provincial and national government should engage more fully as they were collectively accountable, and it should not become "routine" for departments to have qualified reports but fail to engage on the issues raised. He wondered if there should not be a system whereby detailed reports must be given on control mechanisms to ensure that certain tasks had been performed. "Business as usual" should not continue once a qualified audit had been received, as it detracted severely from the dignity of the institution, and hindered service delivery.

Mr C Madiba (Chief Director, Strategic Planning, Department of Education) commented that service delivery mostly took place at the local or provincial level. National departments could well achieve clean audits because the amounts had been distributed. In the Department of Education the bulk of the budget was spent on salaries and only a very small amount on service delivery. The monitoring systems at national level were, in his view, a problem and he wondered if the Auditor General was able to comment whether the provincial budgets reflected the level of assistance or monitoring that needed to be given.

The Auditor General commented that the Department of Education in fact utilised only 18% of the budget on operational issues. There was already some provision in PFMA (in respect of transfer payments) and DORA (in respect of conditional payments) stating what the provinces must comply with. The Auditor General could not enter the political debate as to involvement of the national departments versus autonomy by the provinces; unless the conditional grant spelt out the terms of oversight by the national department, it was difficult to check what should have happened. Clearly there was an intention that the national offices should at the least offer support if not oversight, and there should be cooperation between the different spheres to ensure that the overall aim of service delivery was reached.

The Auditor General added that there was a "missing link" in the accountability loop, since the Attorney General focused on financial management only. If financial management was poor this would, in the majority of case, indicate that overall management was lacking. It was not desirable for a Chapter 9 Institution and a department to hark back to the same issues year after year. When the Auditor General identified problems the department should explain these to Parliament, and Parliament should pass the necessary resolution. It would be helpful if, during the budgeting process for the next financial cycle, Parliament could check whether the department had been properly accountable during the last period, whether the money requested in the previous year had been put to proper use, and used for the purposes requested. The Auditor General suggested that it might be desirable for the Portfolio Committees, when considering the Strategic Plans, to ask the departments to give details of how exactly they planned to address the problems arising in previous years. At present this was not required and it left a significant gap. Ideally these issues should be addressed before approval of the budget for the forthcoming year.

The Auditor General summarised that his Office had examined 28 out of 34 national departments, and there had generally been no correlation drawn specifically between the amounts requested and giving of reports on delivery. Treasury had already identified some criteria to be included under performance review. Although there had been some improvement, the level of reporting in the Annual Reports was not yet of a sufficiently high standard. The Auditor General believed it would be very useful if departments were called to account and be able to show that they had achieved their objectives.

The Acting Chairperson agreed and suggested to members that the Portfolio Committee should in future specifically advise the departments appearing before it that these specific reports would be expected, as suggested by the Auditor General, and that non-reporting would result in serious consequences. The remarks and the areas covered by the Auditor General had been very useful.

Mr C Clerihew (Advisor to CFO, Department Provincial and Local Government) stated that guidelines had already been issued in respect of committee interrogations, and DPLG already used these guidelines in preparing reports. Individual departments also had been provided with a template relating to actions, outputs, time frames, programmes and measurable objectives. All departments would generally report upon what had been achieved under those headings. The Select Committee, assisted by the Portfolio Committee on Finance, had held public hearings a few weeks ago on the implementation of DORA and he noted that some useful discussions were recorded there.

Adoption of the Annual Report by the Portfolio Committee and a report to Parliament
The Acting Chairperson reported that various departments had appeared before the Committee during November 2005, when annual reports were considered and a Committee report adopted. However, Parliament had insisted that it had no record of having received this report. Unfortunately this occurred during the time that there was no Committee Secretariat and it had not been possible to trace the report. It was therefore now proposed that the Committee inform Parliament that it had considered the various reports and had found them to be reasonably in compliance with the PFMA, and therefore had been found acceptable to the Committee. He tabled a draft letter to this effect. This letter had not made reference to today’s meeting, when the various departments were asked to appear for the Auditor General’s presentation.

Mr B Mthembu (ANC) felt that the draft report was largely acceptable but that the key strategic issues that the Auditor General had reported upon should be addressed during the presentation of strategic plans.

Mr N Gcwabaza (ANC) noted that the next financial year would end in July and that reports would be submitted again in September and October. He believed that those issues would have to be dealt with specifically in the reports at some stage.

Mr K Khumalo (ANC) agreed that it was probably preferable to issue directives now to the various departments that they must include specific reports and clarify the issues raised by the Auditor General.

The Acting Chairperson commented that guidelines would need to be drawn as to exactly what was expected of departments. The Auditor General had clarified his areas of focus during the current meeting. The Acting Chairperson suggested that since the Committee had now engaged with the Auditor General, this should be indicated in the letter, together with an indication that follow ups would be done on the reports in September or October, when engaging with the departments again. The latest Annual Reports would be tabled and the Committee could specify, for the purposes of doing broader oversight, what must be addressed. He enquired whether members would like to amend the draft letter to indicate that issues had been addressed and that the Committee would need to apply certain guidelines and then monitor performance.

It was agreed that the draft letter would be amended, in the last paragraph, as suggested by the Acting Chairperson.

Report on Oversight Visits during July to August 2005
The Acting Chairperson tabled a draft report on the oversight visits undertaken in Eastern Cape, Kwazulu Natal, Limpopo and North West, during 31 July to 12 August 2005. He commented that there were still some typographical and presentation errors in the report, which would be corrected before it was sent. Members were asked to approve the draft report, the letters addressed to relevant departments in the implementation stage, and the suggestion that further visits be arranged during the constituency period, together with, if necessary, a formal follow-up later in the year.

The Acting Chairperson tabled the various letters addressed to different departments on the issues identified during the oversight, as the first stage of the process.

Mr L Rabkin (Ministerial Parliamentary Officer, Public Service and Administration) was concerned that an incorrect interpretation could be put on the letter addressed to Public Service and Administration about education inspectors. The letter had suggested that an investigation be conducted into morale and efficiency but did not indicate specifically that the problem lay only in the education sector. In fact the problem lay not in the "sunset clauses" of all public service agreements, but with a certain category of people performing work who had not adapted readily to changes in the department’s policies and structures.

The Acting Chairperson took Mr Rabkin’s point and all members agreed that the letter should be amended so that it was more clear and specific.

Members agreed :
1) that the draft report and the letters be approved, subject to the amendment suggested by Mr Rabkin and correction of other clerical errors;
2) that small teams from the Committee should visit areas close to their constituencies to take matters further, as necessary, during the forthcoming constituency period;
3) that, if necessary, further follow ups by way of oversight be performed later in the year.

The meeting adjourned