Marine Living Resources Fund Financial Statements: Auditor-General briefing

ENVIRONMENTAL AFFAIRS AND TOURISM PORTFOLIO COMMITTEE
12 September 2006
MARINE LIVING RESOURCES FUND FINANCIAL STATEMENTS: AUDITOR-GENERAL BRIEFING

Chairperson: Mr L Zita (ANC)

Relevant documents:
Auditor General’s briefing notes on Marine Living Resources Fund (not available)
Department of Environmental Affairs and Tourism Annual Report 2003/04 at www.environment.gov.za
Auditor General Audit Report 2003/04 (see Appendix)
SCOPA briefing

UMMARY
The Auditor-General briefed the Committee on his audit findings on the Financial Statements of the SA Marine Living Resources Fund for the 2002/03, 2004/05 and 2005/06 financial years. He informed the Committee that although Annual Reports and Financial Statements had to be submitted annually, the Fund had submitted the reports and statements for the above-mentioned four years in one bundle. This was due to serious problems the Fund experienced with lack of personnel, skills, capacity, lack of proper governance structures as well as the failure of the financial system implemented by them in 2001. In addition, the Fund had as yet not appointed a Board as required by the Marine Living Resources Act and the Public Finance Management Act.

The Committee was very concerned about the state of affairs at the Fund and agreed that, in the absence of a Board, the Minister, Director-General and Chief Financial Officer of Environmental Affairs and Tourism should appear before the Committee to account for the problems at the Fund.

MINUTES

Chairperson’s opening
The Chairperson said that when the SA Marine Living Resources Fund (SAMLRF) was established a Board of Directors was not established. This Board has still to be established which led to problems when it came to accountability. In terms of the Public Finance Management Act (PFMA), the Director-General of Environmental Affairs and Tourism or his delegate could act in place of the Board. Given the serious nature of the matters raised in the Auditor-General’s Report and taking into account that a Board of Directors was not established, it was proposed that the accountable persons, in this case the Minister of Environmental Affairs and Tourism, the Director-General of the Department and the Chief Financial Officer, should be summoned to appear before the Committee to explain the various problems identified in the Auditor-General’s Report. The Chairperson also asked the Auditor-General to brief the Committee on the organogram of the SAMLRF.

Auditor-General’s briefing
The Auditor-General, Mr Shauket Fakie, said that the following opinions were expressed in his Report in relation to the financial years concerned; namely that for 2002/2003 a qualified audit opinion was expressed; for 2004/2005 a disclaimed audit opinion was expressed and for 2006 a disclaimed audit opinion was also expressed. The Auditor-General raised the following areas of concern as reflected in the Audit Reports for 2004/2005 and 2006.

The accuracy and completeness of harbour income could not be verified, there were problems with the way debtors were managed, there was no evidence that the levy on fish products was done accurately and serious internal control weaknesses existed. He said that this was also attributable to the lack of staff and skills and said that at the last Standing Committee on Public Accounts (SCOPA) hearing they were informed that, in the financial department alone, the SAMLRF was in the process of recruiting between 25 and 30 new employees.

Other problems identified by the Auditor-General included: a lack of appropriate procedures, transactions and policies, inadequate monitoring and review of management information, lack of continuous evaluation of systems of internal control, the lack of oversight and monitoring by the internal audit committee as the internal audit function was outsourced to an external firm.

With regard to the organogram/governance arrangements within the SAMLRF, the Auditor-General said that as part of best practise when a separate public entity (like the SAMLRF) was established, an independent Board was also normally established to draw on skills and expertise from the outside, but that in this case no Board was established and that in terms of the PFMA, where a Board was not established, a person (normally the Director-General) could serve in this capacity. He said that the role a Board played in this regard was very important but that this had been downscaled in the case of the SAMLRF. He also said that the role the Department played in overseeing a separate entity was critical and that the Department had to play an active role in directing and guiding such entity. A shareholder compact was usually signed but in this case there was no specific shareholder compact.

A further problem was with the SAMLRF’s Audit Committee in that such a committee normally reported to the Board while there was no Board in this instance. Further it was also clear that the existing Audit Committee did not meet as regularly as they should have done and that they also did not give adequate guidance and direction to the internal audit which was one of their core responsibilities.

The Auditor-General brought the following important detail to the Committee’s attention:
With regard to the 2005 financial year, the entity did disclose good performance information in its annual report but this information did not meet the requirements as set out in the PFMA, the performance information was not explicit to the entity itself and referred to performance information which related to the Department and therefore it could not be established whether the entity achieved the performance or whether it was the Department which achieved the performance. Also with regard to the 2005/2006 year, the Auditor-General expressed concern with the quality and depth of the performance information that had been disclosed in the entity’s Annual Report.

Of further concern was that the SAMLRF obtained a number of operating vessels in 2002/2003 and that a significant percentage of their operating costs was incurred in operating these vessels.

The Auditor-General expressed the view that further investigating should be done into why this entity was established in the first place, why there had to be a separate entity and whether there was still justification for the entity in its current form and what was expected of the entity in terms of deliverables, etc. If it was decided that the entity should continue in its current form, i.e. separate from the Department, governance arrangements and the extent to which the Department played an oversight and guidance role would have to be re-looked at.

In terms of options for the Department, the Auditor-General said that the following were critical areas on which the Department would have to focus irrespective of what the structural arrangements were:
-The SAMLRF was in the process of obtaining a new computer system that would be installed in November 2006 and the Department would have to make sure that this was the right system to keep fruitless expenditure from being incurred, and also to keep track of the progress made in this regard.
-The Department needed to keep track of the staffing situation to make sure that the entity was adequately staffed and skilled in order for them to fulfil their mandate and responsibilities.
-Establishing proper procedures and policies would also have to be seen to as a matter of importance as well as ensuring that there was a culture of implementing the procedures and policies within the entity.

Discussion
Mr M Swart (DA) asked the following:
-Why was no Board established?
-Who was responsible to see to it that a Board was appointed?
-As one of the disclaimers contained in the Auditor-General’s report revolved around debtors, whether it would not be proper to conduct a forensic audit to ascertain whether any fraud was committed?
-In his opinion, as also contained in the PFMA, the Director-General and the Chief Financial Officer of the Department were the responsible persons; did these individuals receive performance bonuses for the periods under review given the terrible situation the SAMLRF finds itself in?
-The Report referred to loans made to staff. Was this acceptable and what were the purpose of these loans?

Mr A Mokoena (ANC) had the following comments and questions:
-Members of the Committee were collectively responsible as they had an oversight responsibility;
-What were the consequences or recourse when wrongdoing was found?
-Should the Office of the Auditor-General not conduct workshops for the respective Director-Generals so that they were aware of what was expected of them?
-Could the Auditor-General not do interim audits so that any shortcomings could be spotted in advance and corrected?
-He was under the impression that the SAMLRF was a similar entity to for example the Unemployment Insurance Fund (UIF), but it now seemed as if they were dealing with a fund that was supposed to be “called” the Marine and Coastal Management (MCM). Could the Auditor-General provide clarity in this regard?
-He was of the opinion that the entity had to exist but that it had to exist on a sound basis of corporate governance and that therefore a Board had to be appointed. He felt that the Committee had to write a letter to the Minister so that he could ensure that this issue was addressed speedily.

Mr Swart said that he did not agree with Mr Mokoena that Committee Members had to take collective responsibility. During a joint sitting with the Department, all issues were addressed that had been raised by the Department but that this issue was never mentioned at all, perhaps purposely.

(DA) suggested that as a way forward, the responsible people from the SAMLRF, the Chief Financial Officer, the Director-General and the Minister be summoned to appear before the Committee to explain matters raised in the Auditor-General’s Report. He said that he felt that the buck stopped with the Minister and that he had to explain to the Committee why this fund was allowed to continue in this unacceptable manner.

Mr G Morgan (DA) said that it was known that Marine Coastal Resources had been mired in trouble for the past five years but that it was a serious indictment when the fund which was established to deal with all the problems and issues, for instance fishing quotas, had serious problems and that he agreed that the responsible persons had to be called to account and that this matter had to be sorted out as certain fishing communities had already lost trust in the Department.

The Auditor-General responded that they went to the Department once a year to perform an audit and then reported what they found. They were not responsible for the day to day running and administration of the Department and therefore some of the questions asked by the Committee would be better asked to the Department, as it was their responsibility.

The Auditor-General said that Parliament had to take responsibility for the fact that a Board was not appointed as Parliament established this entity in terms of Section 10(3) of the Marine Living Resources Act (Act No 18 of 1998). With regard to debtors and the suggestion that a forensic audit be done; unless there was prima facie evidence of gross misappropriation, which was not the case, forensic audits were not done due to their very high costs. For a forensic audit to take place audit trails and records were needed which was lacking in this case and it was therefore far better to bring the accountable people before the Committee to account.

Regarding the question of loans to personnel, the Auditor-General said that this was mainly a case of advances for travel and subsistence costs to employees and not loans as such, but that as this was an internal arrangement it would be better taken up with the Department.

On the proposal that the Office of the Auditor-General have workshops for Directors-General, he said a lot of the problems being picked up was that Treasury guidelines and regulations were not being complied with by Departments and that the first responsibility for training lay with Treasury. He was also aware that Treasury was experiencing problems as CFOs and Accounting Officers often did not attend the workshops but sent junior personnel. Further to this, the Auditor-General said that his Office also experienced problems with the attendance of pre-audit meetings by Directors-General as well as with responses to management letters, which were issued before an Audit Report was brought out and which gave the opportunity for issues to be addressed before they were incorporated into the reports.

With regard to the structuring of the fund, the Auditor-General reiterated that this matter had to be further looked into by the Department and the Committee as it involved policy decisions to ensure proper governance.

Ms RA Ndzanga (ANC) asked whether the Auditor-General had looked into matters pertaining to the management, administration, resources, researching, monitoring, etc. of the Fund to establish whether the Fund was really effective or even necessary.

The Auditor-General answered that their role was to give an opinion on how an organisation was being run, how the financial management was being conducted and whether the figures reflected in financial statements were a true reflection of the facts. It was management’s responsibility to see to matters regarding resources, skills and assets and to run the organisation effectively. However, with regards to performance auditing, the Auditor-General said that this had to do with the efficiency, the economy and the effectiveness with which things were being done in an organisation. One had to be specific about the field one wanted to audit, for example, fleet management or human resource management.

Mr Morgan asked whether outsourcing of the internal auditing function was out of the ordinary or problematic.

The Auditor-General replied that outsourcing of the internal audit function took place regularly as it was a scarce resource, but that ideally large organisations should be looking at building internal audit capacity.

Moulana Sayedali-Shah said that it was indicated in the Auditor-General’s Report that the outsourcing of the internal audit and procurement functions cost R1.3 million and that reference was also subsequently made to legal action instituted by the Department to recover money from a service provider for failing to fulfil his obligation. Was this in regard to the same R1.3 million? He also wanted to know if, since a CFO has now been appointed, whether the CFO has reported on the outcome of this matter.

The Auditor-General replied that the R1.3 million referred to was with regard to the outsourced internal audit and accounting function and had nothing to do with the legal action. The legal action was against the supplier of the computer system that had to be abandoned in 2004 and which resulted in fruitless expenditure of R3.2 million. He went further to say that to his knowledge no report was issued regarding the status of the legal action taken against the supplier of the computer system.

The Chairperson said that it was important that the Minister and the Director-General and all other accountable persons had to appear before the Committee to deal with the matters raised by the Auditor-General and that it was also important to look into measures that could be put in place to solve the existing problems.

The meeting adjourned.

APPENDIX
ANNUAL REVIEW REPORT OF THE AUDITOR-GENERAL TO PARLIAMENT ON THE FINANCIAL STATEMENTS OF VOTE 28 - DEPARTMENT OF ENVIRONMENTAL AFFAIRS AND TOURISM FOR THE YEAR ENDED 31 MARCH 2004

1. AUDIT ASSIGNMENT

The financial statements as set out on pages 53 to 87 for the year ended 31 March 2004, have been audited in terms of section 188 of the Constitution of the Republic of South Africa, 1996 (Act No. 108 of 1996), read with sections 3 and 5 of the Auditor- General Act, 1995 (Act No. 12 of 1995). These financial statements, the maintenance of effective control measures and compliance with relevant laws and regulations are the responsibility of the accounting officer. My responsibility is to express an opinion on these financial statements, based on the audit.

2. NATURE AND SCOPE

The audit was conducted in accordance with Statements of South African Auditing Standards. Those standards require that I plan and perform the audit to obtain reasonable assurance that the financial statements are free of material misstatement.

An audit includes:

• examining, on a test basis, evidence supporting the amounts and disclosures in the

financial statements,

• assessing the accounting principles used and significant estimates made by

management, and

• evaluating the overall financial statement presentation.

Furthermore, an audit includes an examination, on a test basis, of evidence supporting compliance in all material respects with the relevant laws and regulations which came to my attention and are applicable to financial matters. I believe that the audit provides a reasonable basis for my opinion.

3. AUDIT OPINION

In my opinion, the financial statements fairly present, in all material respects, the financial position of the Department of Environmental Affairs and Tourism at

3.1 March 2004 and the results of its operations and cash flows for the year then ended, in accordance with prescribed accounting practice and in the manner required by the Public Finance Management Act, 1999 (Act No. 1 of 1999).

4. APPRECIATION

The assistance rendered by the staff of the Department of Environmental Affairs and Tourism during the audit is sincerely appreciated.

S Labuschagne

for Auditor-General

Pretoria

30 July 2004