Department’s Audit Report & Financial Performance 2005/6: briefings by Auditor-General & by National Treasury

CORRECTIONAL SERVICES PORTFOLIO COMMITTEE
DEPARTMENT’S AUDIT REPORT AND FINANCIAL PERFORMANCE 2005/6: BRIEFINGS BY AUDITOR-GENERAL & BY NATIONAL TREASURY
23 October 2006

Chairperson: Mr D Bloem (ANC)

Documents handed out:
Annual Report of Department of Correctional Services
Report of the Auditor-General
Audit History of the Department
Presentation by National Treasury

SUMMMARY
The Committee was briefed by the Auditor General and National Treasury on the Annual Report and Financial Statements and performance of the Department of Correctional Services. The audit report had once more been qualified in a number of respects. Most of the qualifications related to inadequate management and monitoring systems. Asset management was also identified as a problem, due to the lack of interface between systems. The Auditor General mentioned that the Department was in the process of transformation and its seven-day per week working cycle impacted on skills training. Procedures and policies were outdated and must be brought into line with the White Paper. There was no Compliance Management Programme for monitoring and controlling procedures. There were weaknesses in the systems. Some matters now raised as qualifications had previously been identified but not corrected. The qualifications were listed and explained. Members raised queries on the medical aid and the lack of databases, whether there was a lack of financial skills, the housing records, and concern was expressed that the DCS had failed to meet with the Auditor-General to resolve these issues. National Treasury commented on some points but as there was insufficient time for discussion the questions would stand over until the following day. It was clear that there needed to be plans for better monitoring.
.
MINUTES
Financial Performance 2005/6 of the Department of Correctional Services: Briefing by National Treasury
Mr Freeman Nomvalo, Director, Liability Management, National Treasury, briefed the Committee on the financial performance of the Department of Correctional Services (DCS), and issues arising from the Department’s Annual Report. The main focus of financial performance was on DCS’s role in asset management, as referred to on page 53 of the Annual Report. He said that the accounting officers should ensure that there were proper systems in place in the Department to ensure adequate asset management. The Department utilised three non-interfacing systems for the purchase, payment and management of assets. In 2000 they identified the non-interfacing systems to be a risk. The LOGIS system was one that would overcome risks relating to the non-interfacing systems but the DCS would be the last Department to move into it. While Mr Nomvalo acknowledged that the department might be having difficulty in migrating to LOGIS, the Department needed to state what steps they had taken to overcome their difficulties.

Discussion
Mr M Phala (ANC) said that Mr Nomvalo had not spoken about any form of monitoring of the systems.

Mr Nomvalo responded that there was prescribed monitoring. He said that the basic accounting system (BAS) was used to prepare accounting statements and each time there was a query, it was possible to go back and monitor the audit trail. He said that he believed that the BAS was adequate to do the bare minimum.

Audit Report 2005/6 for the Department of Correctional Services: Briefing by Auditor General
Mr Barry Wheeler (Business Executive of Office of Auditor-General) gave a background to the DCS’s audit report. He stated that DCS was in the process of transformation and as a result had a working cycle of 7 days per , which impacted on skills training. The policies and procedures were somewhat outdated and had been looked at in order to bring them into line with the White Paper of the Department. Mr Wheeler pointed to Note 50 in the Annual Report, stating that the effectiveness of the internal controls could not be remedied until the information systems were remedied. This was not quite correct as information systems were not needed to ensure internal controls effectiveness. The basic problem with the DCS was that it had no Compliance Management Programme for monitoring and controlling procedures. The Auditor-General (AG) believed that there was an assumption by top management that matters were working correctly, and this was not true because there were weaknesses in the systems.

Mr Wheeler addressed the specifics of the Audit Report. He said that National Treasury (NT) had raised their standards, and had sent guidelines to all departments on their policies, and treatment of these policies. The DCS had still seen an increase in the number of qualifications in its audit report. A “qualification” related to concerns that the auditors had raised on certain items in the financial statements. This could be distinguished from an “emphasis of matter” which meant that although problems within the department had been identified, these were not material enough to give rise to a qualified report. The DCS received five qualifications and nineteen emphasis of matters in their audit report.  Mr Wheeler said that some of the qualifications resulted from issues that had been raised previously as an emphasis of matter although the Department had been warned that it these were not corrected, it could result in qualification.

Mr Wheeler indicated that the major problem areas of the audit report were:-
-The “receivables” of the department were found not to be monitored adequately. The AG suggested that the Department must have at least quarterly monitoring and that it follow these debtors at area and regional level.
-The MEDCOR/Medical Aid contributions by the Department had changed so that one third of the contributions were paid by the member and two-thirds paid by the Department. This resulted in savings for the Department. Amounts were being paid out, but the AG could not trace who the members were.
-In the area of “Housing” the Department did not have adequate systems of control
-The “Information System” was one of the historical and ongoing problems of the Department and had not resolved even in the current financial year.

Mr Wheeler reported on the trend that in large Departments, on introduction of the Basic Accounting System (BAS), there would be problems in putting transactions into the system. He said that until an integrated Management Accounting System (MAS) came on-line and was able to give updated and relevant information, there would still be problems.

Discussion
Ms Z Nawa (ANC) asked whether all members of the Department were on medical aid and also asked if the Department had any database in this regard.

Ms S Seaton (IFP) also raised concerns that the Department was apparently unable to identify the continual members.

Mr Wheeler responded that there was a history behind the administrators, MX Health, who were responsible for dealing with payments and reimbursements for costs. He said that the auditors were disputing the numbers of members who did belong to MX Health. Although there was supposed to be liaison between MX Health, DCS and the AG, this had not been achieved. Mr Wheeler said that the issue of continual members could, he strongly believed, be addressed this year.

Mr L Tolo (ANC) asked whether officials had been trained on financial management because the fact that the DCS had received qualifications meant that there were problems at financial management level.

Mr Wheeler said that the problem was not necessarily an issue of financial skills. Mentoring and reviews by skilled people could resolve the problems.

Mr S Mahote (ANC) asked how the DCS knew if people had died or resigned if the database of members was not being updated. He also asked what reasons were given for the database not being updated.

Mr Wheeler responded that updating the database was just a matter of reconciling the numbers registered with the record of MX Health, and that it was not such a challenging task provided DCS simply got down to the task.

Ms S Seaton (IFP) asked what the problem was with the guarantees for employees who did not have their title deeds to housing.

Mr Wheeler responded that there were no updates of staff who had left, had sold their houses or had died, resulting in inherited property transfers. 

Ms Z Nawa (ANC) asked why DCS had failed to meet with the Auditor-General to resolve these issues.

Mr Wheeler said that the DCS, through its accounting department, needed to ensure that there were adequate systems of internal control. He said that the concerns of the auditors were often raised after the year-end and thus had to rectified in the next financial period. He added that the majority of the qualifications could be cleared within this financial period. He said that where capacity issues existed, nothing was preventing the CFO and Accounting Officer from bringing in necessary skills, even from private contractors.

Ms Ngwenya (ANC) asked, in view of the huge problems, if it was not possible for audits to be done more often.

Mr Wheeler said that interim audits were normally done and the results released to the department. He said those interim audits showed management the progress of internal controls and added that there were only certain issues that could be done within a year.

Mr E Xolo (ANC) asked if there was any disciplinary action for administrative shortcomings.

Mr Wheeler said that this question needed to be posed to the Department. He said he had no knowledge of the processes followed in DCS.

The Chairperson asked if it was possible for the office of the Auditor-General to assist in resolving some of these issues.

Mr Wheeler explained that it would not be possible, as the AG had to maintain its independence and avoid any conflict of interest with respect to the audit work.

Financial Statements of the Department of Correctional Services 2005/6: Comment by National Treasury:
Mr Cor Haak (National Treasury) said that the purpose of annual reports was for the users of financial statements to track both the financial and non-financial performance against targets. He said that the Committee should familiarise itself with the audit report and take particular note of the emphasis of matter areas. The overall budget of the DCS had seen a growth of 8.8% from 7.8% in the 2003/04 financial period. Compensation of employees has seen a growth of 7.8%, with salaries being the largest of all the personnel costs. The DCS requested a roll-over of R122 million, but the funds were not committed as required for a roll over. This was an area of concern, but Mr Haak confirmed that the funds to build the Kimberley prison were still available
 
Mr Haak said that the internal charges published on the expenditure schedule should have not been reflected as an agreement had been reached a while back that these would not published on external documents. The expenditure of the department was shown in terms of graphs reflecting deviations between DCS’s approved plans and actual expenditure.

He noted that the vacancy rate of the department was currently 7.8%. The ratio of custodian personnel per offender population was 1 to 4,3. The DCS currently appointed few personnel in terms of the Public Service and Administration (PSA) Act and therefore cost savings could be achieved with regard to allowances and pensions.

Members agreed, in view of the shortage of time, that questions should be asked of Mr Haak at the meeting on the following day, when all the relevant DCS officials would be present.

The meeting was adjourned.