Department Sport & Recreation & Boxing SA: Interrogation of Audit Reports 2005/6

STANDING COMMITTEE ON PUBLIC ACCOUNTS (SCOPA)
23 February 2007
DEPARTMENT SPORT & RECREATION & BOXING SA: INTERROGATION OF AUDIT REPORTS 2005/6

Chairperson: Mr T Godi (PAC)

Documents handed out:
Sport and Recreation Annual Report (available www.srsa.gov.za)
Boxing South Africa Annual Report (available later www.boxingsa.co.za]

Audio Recording of the Meeting

SUMMARY
The Department of Sport and Recreation were asked to explain the staff situation and acting appointments, and to clarify the amalgamation of the Sports Commission into the Department. Members noted that this showed poor planning, and asked what steps had been taken to address the vacancy rate. The level of monitoring was questioned. Further questions related to the functioning of the audit unit, the pay disputes of the auditors, the lack of proper reporting on money sent to municipalities, the steps taken to improve the situation, the steps to improve asset management and control, and the number of cars used by the Minister. The Department was interrogated about an amount under investigation by the Police.

Boxing SA were asked to explain whether the position of Chief Financial Officer had been filled, whether the skills were adequate, and reasons for the delay in the process. The Chairman of the Board was asked to clarify a possible conflict of interest in his own position. Questions were asked about the fraud attempts in the Leila Ali matter, whether the entity would be able to meet the deadline for reporting and what steps had been taken to rectify the poor situation of boxing.

The Committee asked National Treasury, the Financial Services Board, South African Reserve Bank and the Transport Education Training Authority to clarify the circumstances and their respective positions in relation to the investigation currently under way into Fidentia, and in particular to shed light on the investment by the Training Authority. National Treasury were asked to clarify their investment policies and whether the Authority had the power to invest in Fidentia. The Financial Services Board clarified the way in which funds were mingled. The Reserve Bank stated that its involvement was restricted to any foreign investments. Questions were asked why it took the Board so long to investigate the matter, whether the financial statements had been audited, whether it had the power to demand reports, and whether the investigations were directly the result of the tip-off. The circumstances for extending deadlines were queried. Further questions related to the costs of the curator, the findings in the 14-day report, the reasons why the Training Authority stated the moneys were safe, the terms of the agreements with Fidentia, the lack of proper mandate, and the likelihood of recovery. The Committee was of the view that no blame attached to Treasury, the Reserve Bank or the Financial Services Board.

MINUTES
Department of Sport and Recreation (SRSA): Interrogation of Audit Report 2005/6
The Chairperson asked the Acting Director General how long he had been acting, and how long he would be in office.

Dr Joe Phaahla replied that he began his acting appointment in July 2006 and his term was going to end in March 2006.

The Chairperson asked why there was a serious depletion of staff as according to the reports SRSA were operating on half capacity.

Dr Phaahla replied that the high vacancy rate was due to the fact that the former Sports Commission and the Department of Recreation had been amalgamated. As a result the revised organogram created a new Department that was bigger than the two organizations, hence creating more jobs and more responsibilities over and above those in which the two organizations had formally engaged.

The Chairperson asked for details of the complication of the amalgamation since personnel had apparently retained their previous positions.

Dr Phaahla replied that the complication resulted from the fact that the former structure of the Sports Commission had to be repealed by new legislation that took a long time to pass through parliament.

The Chairperson asked how this had affected administration, since most of the staff was temporary.

Dr Phaahla replied that because of legal complications the staff could not be placed permanently. The Department had entered talks with the unions directly after the repealing legislation was passed.

The Chairperson remarked that this showed lack of planning, as this should have been one of the first processes to be dealt with.

Dr Phaahla conceded that it was indeed poor planning.

The Chairperson asked what SRSA intended to do with the vacancy rate of highly skilled workers which stood at 53%.

Dr Phaahla replied that the process was in motion and by the end of 2006 all horizontal placement of internal staff occupying managerial positions was put in place. By May 2007 all positions should have been filled.

The Chairperson asked if the horizontal placement of staff reflected on the vacancy rate.

Dr Phaahla replied that it did not reflect on the vacancy rate, as there were more temporary than permanent staff.

The Chairperson asked what steps SRSA intended to carry out in order to make sure that the temporary staffing issue had been resolved.

Dr Phaahla replied that advertisements had already gone out externally and SRSA had already filled some senior staff posts, such as the chief directors, one of whom was appointed in February and one who was going to start in March. Moreover interviews were being conducted to fill in the last remaining positions. This should be done by May.

The Chairperson asked whether this shortage of staff had affected the level of monitoring.

Dr Phaahla agreed that it did.

The Chairperson asked whether the Department’s audit unit was now functioning.

Dr Phaahla replied that governance issues had improved since the beginning of the current financial year and the audit committee had met four times during the year, even though SRSA lost some auditors due to remuneration disagreements.

The Chairperson asked if the auditor’s pay disputes had been revised since the loss of the other members.

Dr Phaahla replied that SRSA tried to negotiate new packages with the members who had left but since they were guided by National Treasury (NT) parameters it was not possible to come to an agreement. New members had now been appointed to the audit committee.

The Chairperson asked why SRSA had hired two external audit firms.

Dr Phaahla replied that the audit firm now appointed was a consortium of an old firm and a new firm and SRSA had had no setbacks.

The Chairperson noted that the reporting of the money that was sent to municipalities and provinces was not being done properly.

Dr Phaahla replied that indeed SRSA had problems when it came to reporting and the provinces had had problems meeting the requirements of the grant.

The Chairperson asked what measures SRSA had taken to ensure that reporting was done in time.

Dr Phaahla replied that SRSA had called a number of meetings and workshops where it had invited the heads of department and the Chief Financial Officers (CFOs). SRSA would then take them through the process of how to report and time management. It also deployed some of its own staff, and had suggested that funds be withheld from the provinces if conditions were not being met.

The Chairperson remarked that SRSA’s internal control was insufficient, owing to lack of personnel. He could not understand why it managed to under spend by 5% when its vacancy rate was at 50%.

Dr Phaahla replied that he agreed that lack of staff raised question of value for money, hence SRSA were working expeditiously to fill in vacant positions.

The Chairperson asked what SRSA had done to improve asset management and control which was clearly insufficient.

Dr Phaahla replied that SRSA had appointed managers in the supply chain who had been reviewing policies to ensure that they were comprehensive enough.

The Chairperson requested an explanation as to why the Minister was using three instead of the prescribed two cars.

Dr Phaahla replied that the third car used to be owned by the former Minister and had not yet been disposed of. Instead of hiring a car to chauffer the current Minister it was decided to cut costs by using the previously owned one. Nevertheless, SRSA was told that it had to dispose of this vehicle.

The Chairperson remarked that it seemed as if the amalgamation had actually led to the deterioration of the management of the Department.

Dr Phaahla replied that this was true. However, the measures now being taken were aimed at creating a more stable ground and to ensure that everyone was aware and certain of their duties.

Mr P Gerber (ANC) asked for the remuneration package of the Chair and members of the audit committee who had left.

Dr Phaahla replied that he did not have the figures offhand, but noted that these were in line with the stipulations of Treasury. The former Chair and members had wanted a higher figure.

Mr Phakamani Hadebe, Deputy Director General, National Treasury replied that there was a stipulated tariff of about R1300 per hour, and the transport costs were fully reimbursable.

Mr Gerber asked why there had been the addition of family members of key personnel in the Annual Report.

Dr Phaahla replied that these were intended to be declarations by key personnel as to any family members working in their departments.

The Chairperson asked if there were any who made such an admission.

Dr Phaahla  replied that there were none at all.

Mr Gerber asked why there was an account being investigated by the South African Police and why it was taking so long.

Ms Elsie Cloete, Financial Administration, SRSA replied that this was money which was deposited in an incorrect and most probably fabricated account, and SRSA were informed late that there was nothing that could be found concerning the account.

The Chairperson asked for better clarification.

Ms Cloete replied that around two years ago there were funds transferred into an account but SRSA later discovered that the bank details had been fabricated.

The Chairperson asked whose account it was.

Ms Cloete replied that it was supposed to be an amateur boxing account but the money was never received.

The Chairperson asked to which bank the funds were transferred.

Ms Cloete replied that this was Standard Bank

The Chairperson remarked that it was surprising that the bank could not assist the police by releasing the required information of the account.

Ms Cloete replied that they did attempt to get the details but since the money could not be traced SRSA were convinced that the documents were false.

The Chairperson asked how much was lost.

Ms Cloete replied that it was R154 000.

The Chairperson commented that this happened because there was improper management and a high vacancy rate, which had led to a loss of public funds.

The Chairperson asked Dr Phaahla if SRSA had advertised his post.

Dr Phaahla replied that it had been advertised and interviews had taken place. The process was now in the hands of the executive.

Mr VG Smith (ANC) asked if Dr Phaahla’s predecessor was still in the employ of the state.

Dr Phaahla replied that he was not.

Mr Smith asked whether he was familiar with the Boxing South Africa Annual Report.

Dr Phaahla replied that he was not.

Mr Smith gave him a brief overview. He noted that in 2003/04 the Auditor General (AG) could not express an opinion on the financial statements. In 2004 there was not sufficient information to perform an audit. In 2005 the AG had serious concerns and he could not express an opinion as to the correctness of the statements. In 2004 and 2005 Boxing SA were allocated R1.4 million and R1.7 million respectively. He suggested that in future Boxing SA should not be given any further funding until it had sorted out the maladministration.

Boxing South Africa (BSA): Interrogation of Auditor General’s report 2005/6
The Chairperson asked if the Chief Financial Officer (CFO) vacancy had still not been filled.

Mr Dali Mpofu, Chairperson, BSA Board replied that BSA had filled the post and the new CFO was starting on 1 March 2007.

The Chairperson asked if BSA had a general manager.

Mr Mpofu replied in the negative.

The Chairperson asked whether the person BSA had appointed as the CFO had the requisite skills.

Mr Mpofu replied that BSA had appointed Mr Jos Steyn as the CFO, and was of the opinion that he had the requisite skills since most of the improvements that have been made occurred under his Acting CFO appointment. He further said that BSA was aware that since the inception of Boxing South Africa in 2002 it had not had a clean audit. The Committee should, however, be aware that new Board was appointed last May, which was trying to rectify the situation by appointing a new CFO. This process was taking longer than anticipated as BSA was waiting on the SRSA and the Minister’s confirmation.

The Chairperson asked SRSA the reasons for the delay.

Ms Noma Kotelo, Director SRSA replied that the submissions were still in the process and it was taking long because BSA were having to engage with the resources of SRSA whilst it was also dealing with its own human resource problems.

Mr Smith asked Mr Mpofu if he did not perceive there to be a conflict of interest, since he was Chair of SA Boxing as well as the CEO for SABC.

Mr Mpofu replied that he had raised this situation up with the Minister and with the rival network SuperSport. It seemed that there were no objections and everyone was comfortable with the situation.

Mr Smith asked how it had been possible for the fraudulent actions to have taken place in the Leila Ali matter.

Mr Mpofu replied that he found out about the forgery when the Minister pointed it out to him. In this case there was no requirement that the Minister should give a guarantee. What was required was that the Ali camp be in agreement with the promoter of the match, which was not the case. This was the cause of the controversy.

Dr Phaahla replied that the matter was under investigation.

Mr Smith asked if BSA were going to be on time with their submissions of reports.

Mr Mpofu replied that all the indications were that, for the first time, BSA would indeed be on time with their reports. It was working hard to improve the record keeping.

Mr J Steyn, Acting CFO, BSA replied that BSA were going to make the deadline.

Mr Smith asked what steps had been taken to rectify the poor situation in boxing.

Mr Mpofu replied that the process of putting a proper management system was in place, starting with the appointment of the CFO, and afterwards directing energies to the rest of the staff. BSA had also established provincial representatives without slowing down the momentum of the sport.
 
Mr Steyn added that the record keeping system had been revised, BSA had appointed a bookkeeper and now had internal auditors. Gwenyani auditors were helping out with an independent review. BSA had also computerised the payment system.

Mr Gerber remarked that one of the ways to improve would be to make sure that documents were signed.

Mr Mpofu indicated that his signature did appear on page 20.

Fidentia Investigation: Discussions with National Treasury (NT), Financial Services Board (FSB), South African Reserve Bank (SARB), Transport Education Training Authority (TETA)
The Chairperson asked what happened to the public money that was invested in Fidentia. He asked if National Treasury had prescribed investment policies for public entities like the TETA and if these were properly regulated.

Mr P Hadebe replied that the Public Finance Management Act (PMFA) indicated that NT could prescribe investment policy for public entities, and they had done so for TETA

The Chairperson asked if NT would monitor compliance.

Mr Hadebe replied that this responsibility lay with the accounting authorities.

The Chairperson asked if TETA was aware of the regulations and if they had conducted the investment in compliance with the regulations.

Mr Piet Botha, CFO, TETA replied in the affirmative.

Mr Hadebe explained that NT could exempt public entities in terms of the required regulations. He clarified that NT had in this instance written a letter exempting TETA, but had not specifically approved the investment. The exemption was subject to TETA investing in an investment-rated institution.

The Chairperson asked the FSB about the events at Fidentia and to give an indication how this had affected TETA. He noted that FSB need not respond to any sensitive issues that might jeopardize the ongoing investigation.

Mr Rob Barrow, Chief Executive, FSB replied that the essential findings about Fidentia were that the investor funds were co-mingled with Fidentia’s own funds to such an extent that it could not be determined which funds belonged to Fidentia and which belonged to the investor’s. As a result the investor liability could not be established. This was because Fidentia did not adhere to the requirement that the investor manager should act in a position of trust. The only funds that were supposed to be in the investor manager’s account were fees. The likelihood of recovery was difficult to assess, as FSB and investors would have to wait upon the curator’s findings. Moreover, when FSB had discovered the co-mingling it was apparent that the curators must be involved to determine the potential recovery. This would be a lengthy process. It was unlikely that there would be a full payout, and it was fortunate that there were no very large investments.

Mr Chris Grove, Deputy General Manager, SARB replied that SARB’s possible involvement was restricted to the foreign investments and an investigation of whether Fidentia followed all the right procedures.

Mr Gerber asked why it took a long time for action to be taken from initiation to the time that Fidentia finally responded in October. During the six months of investigation, about R2 million rands were moved from the Fidentia account each day. On 31 October there were R135 million but 62days later there was only R14 million left. This money could have been appropriated if the investigators had not dragged their feet.

Mr Barrow replied that FSB dealt with about 14 000 entities, each in a different manner. The documents that FSB were given did not show that there was anything suspect with the entity. Moreover, the way in which the financial statements were drawn did not enable easy detection of the matter.

Mr D Gumede (ANC) asked if the financial statements were all audited.

Mr Barrow replied that only the 2004 statements were audited. It had been made more difficult to pick up the matter because Fidentia gave different reports to different entities. The information had only recently been able to be correlated by FSB. 

The Chairperson asked for the period of time that Fidentia did not submit financial reports. 

Mr Barrow replied that the annual 2004/5 reports were received in 2005.

Mr Gumede asked if FSB did not have the power to demand the reports and to remedy the situation.

Mr Barrow replied that FSB did not have the power to remedy the situation, but conceded that when it realised that there were financial statements still outstanding they should have looked into the matter.

Mr Gumede asked if the 2004 reports were qualified.

Mr Barrow replied that because of the fact that Fidentia had not consolidated its subsidiaries the real financial position was not apparent.

Mr Gerber asked what would have happened if a tip-off report had not been received, as there clearly was no system in place designed to pick out such issues.

Mr Barrow replied that there was an anonymous tip first before FSB was approached by an individual. However, because anonymous tips came from nameless people they had to be treated with caution and discretion in respect to the company. Moreover, the person who had reported on Fidentia was also to be treated with caution as  he had ongoing litigation with Fidentia, and one of the few things FSB was concerned about was that complaints were often used to try to bolster a case.

Mr Gerber asked when the anonymous tip-off had come through.

Mr Barrow replied that he was not sure or the exact date but it was about six weeks before the named investor came forward. During this time Fidentia was in the process of acquiring businesses that required it to renew approval licenses from various financial boards. It was at this stage that questions about the entity began to crop up. FSB approached Fidentia who offered full cooperation to an investigation, but at every step of the way FSB had actually been challenged by legal teams, which was very expensive. In addition to this the time taken to set up an investigating team was about four to six weeks.

Mr Gerber asked if extending deadlines for reports was the same kind of service FSB would offer to other service providers.

Mr Barrow replied that if the entity requested an extension and the reasons for the extension were valid then the extension would be granted. If not the late submissions would attract a fine.  .

Mr Gerber asked what was the cost of involving curators since previous experiences had shown that their fees could be astronomical.

Mr Barrow replied that the cost was difficult to determine, but to date about R500 000 was already used. The curators had advised that they had reduced overheads and cut some staff. The costs of the curators were not too high compared to what they would save.

Mr Gerber asked what was in the curator’s 14-day report.

Mr Barrow replied that this contained no sensitive issues and it showed that there were a number of issues being investigated, as well as the slashing of the overhead costs.

Mr Smith asked why a TETA spokesperson had misled people by informing them that TETA money was in a different account and therefore safe, whilst the funds were co-mingled and were awaiting the curator’s findings.

Mr Botha replied that the money was supposed to have been in a different bank, according to TETA’s agreement with Fidentia. It had realized after seeing the FSB report that the money formed part of the co-mingled funds.

Mr Smith wanted to confirm that the funds were not secure.

Mr Botha corrected the amount owed, but said that the funds were not secure.

Mr Gerber remarked that the mandate that set up the asset management between TETA and Fidentia had single signatures only and no signatures of witnesses.

Mr Botha replied that the first agreement was signed on 10 April 2003 and the second agreement was signed in December 2003.

The Chairperson asked if there were different records as the information seemed to be contradictory.

Mr Botha replied that the wording of the document referred to by Mr Gerber was the same as the document that was signed in full, and he would make this available to the Committee.

Mr Dawood Seedat, Head: Inspectorate, FSB added that there was supposed to be an initial mandate that should have been renewed every year by TETA. FSB did not find any such document, since the renewal was merely given by way of letters from TETA to Fidentia.

Mr Gerber asked that if there were no documents how could the business be conducted.

Mr Seedat replied that FSB’s initial observation was that Fidentia was trying to hide the fact that TETA was a client, even though there were documents bearing TETA’s name. It was later in October that FSB discovered that TETA was indeed a client, and an FSB team had searched TETA and discovered, within three weeks, that there was no asset management agreement. TETA could not provide information as to why not, and neither could Mr Brown of Fidentia. FSB had questioned him but he claimed that Fidentia was negotiating with TETA.
 
The Chairperson asked if the lack of a proper mandate was the underlying reason for the search and seizure.

Mr Seedat replied that this was indeed so. In addition Fidentia had not cooperated in the way that FSB had expected.

Mr Smith commented that TETA was not disputing anything and it could be clearly understood how the matter had happened and what actions TETA had taken. No blame lay with the Reserve Bank or FSB, who had performed their duties satisfactorily. He believed that their information had been useful. He suggested that TETA be held accountable for its actions.

Mr T Bonhomme (ANC) remarked that this would be a massive court case that involved lots of money. To him it seemed that Fidentia had intentionally misled investors in an area where they knew that there was no legislation allowing for the better control and arrest of funds. He asked how this situation could be prevented.

Mr Barrow replied the curator’s findings would control the situation. The curator had the power to retrieve what he could and make sure that the responsible people were held accountable

Mr Gumede asked what the potential recovery was for other parties.

Mr Barrow replied that FSB had to identify whether there were any parties who profited irregularly from investor funds, and it would then try to recover these profits.

The meeting was adjourned.