Qualified Audit Reports 2005/06; Integrated Financial Management Systems: briefing by National Treasury

STANDING COMMITTEE ON PUBLIC ACCOUNTS (SCOPA)
23 May 2007
QUALIFIED AUDIT REPORTS 2005/06; INTEGRATED FINANCIAL MANAGEMENT SYSTEMS: BRIEFING BY NATIONAL TREASURY

Chairperson: Mr T Godi (PAC)

Documents handed out:
National Treasury: Audit Outcomes 2005/ 2006
Integrated Financial Management Systems (IFMS)
Report of the Auditor-General on audit outcomes for the financial year 2005/06

SUMMARY
The National Treasury team presented on it audit outcomes for 2005/06. Its focus was on the improvements and challenges related to audit reports received from government departments and public entities. They also looked at the consultative nature of policy development, capacity building and improvement of financial controls within government.

A presentation on the Integrated Management System (IFMS) was also delivered. The objectives of the IFMS is to consolidate and replace aging financial systems with modern integrated financial management systems solutions. 

MINUTES
The National Treasury team who made the presentation to SCOPA consisted of Mr Lesetja Kganyago (Director-General: National Treasury), Mr Freeman Nomvalo (Accountant General), Mr Nols du Plessis (Chief Director: Specialist Services),and Mr Bobby Maake (Chief Director: Systems)

Mr Freeman Nomvalo (Accountant General) focused on National Treasury's initiatives to deal with the qualifications issued by the Auditor General after auditing the 2005/06 financial statements of departments and public entities.

He gave an overview of where national departments are in terms of qualified audit opinions. In 2004/05, they had 7 qualified audit reports, 3 clean audit reports and 26 unqualified but with "emphasis of matters". In 2005/06, the figures were 11 qualified audit reports, 4 clean audit reports and 21 unqualified but with "emphasis of matters". He pointed out that Treasury kept increasing the compliance requirements for departments, because they are moving from purely cash-based accounting to more comprehensive accounting.
 
With regards to Provincial Departments the percentage of unqualified audit opinions for 2005/06 was 55% (compared to 67% in 2004/05). Percentages for unqualified audit reports for Public Entities was 60% (compared to 84% in 2004/05).

Audit concerns noted the following trends: internal audit and audit committees, risk management, internal controls, performance information and asset management.

Risk management had taken a back seat in the provinces. Consequently, the department has increased capacity with regards to risk management in the past year. A lot of qualification issues in audit reports relate to a lack of internal controls. Either there are no policies in place or the policies are not being followed.

Mr Nomvalo indicated that asset management is the biggest item in government that must be controlled.

With regards to Treasury initiatives, they intended to revise the Internal Audit Framework and tighten areas that needs to be controlled. Treasury staff had been deployed to sit in the audit committees in various departments to respond to issues that come up, together with departments.

An internal audit indaba was hosted to bring internal auditors together to share information and success stories.

In compliance with international standards there is a continual check on the health of internal audits within departments at least every five years. Mr Nomvalo’s office facilitates a quality assurance review with departments which points out weaknesses and what needs to be done.

Treasury is reviewing their risk management framework. They have acquired a user friendly risk management tool which was made available to all departments. Training sessions were done and a risk management forum was established to enable them to share information and experiences.

An Internal Control Framework as well as a Performance Information Framework had been developed. A Financial Management Training Strategy was also developed. Other initiatives of Treasury includes asset management, an early warning report, materiality framework, monthly management reports, supply chain management reports and implementation of Generally Recognised Accounting Practice (GRAP).

SCOPA had posed written questions which asked how Treasury ensured conformity between the different accounting standards which includes GRAP, Generally Accepted Accounting Principles (GAAP), International Standards and Municipal Audit Standards. Mr Nomvalo indicated that due to the different natures of public entities, municipalities and government departments, the National Treasury prescribes different reporting frameworks. Generally Accepted Municipality Accounting Standards (GAMAP) is the only standards that might have some inconsistencies with other standards. GRAP standards uses exactly the same principles as GAAP. The only difference is with regards to public sector specific issues for instance regarding taxes . Public sector standards however are aligned to private sector standards as far as possible.

With regards to helping the departments with capacity, Mr Nomvalo indicated that any new reforms that are introduced follows a consulation process followed by a policy document or framework. Workshops are held to assist and support departments with new policies. Treasury requires cooperation from departments.

With regards to SCOPA's written question on what guidelines are in place to develop policies in departments, Mr Nomvalo indicated that Treasury’s process is similar to the aforementioned consultation process being followed to support departments.

With regards to progress with the Amendment Bill for the Public Finance Management Act (PFMA), Mr Nols du Plessis (National Treasury) said that good progress has been made. They are still busy with an internal consultation process but will soon submit the Bill to the Director General and the Minister for approval in order to take consultations outside the Treasury. Their legislative programme indicates submission to Cabinet on the 22 August and tabling at Parliament by the end of October.  

Discussion
Mr E Trent (Inkatha Freedom Party) asked what NT’s view is on the Division of Revenue Act issue which is a serious problem. Departments indicated that some of the conditions attached to funds are too onerous for them to comply with. Mr Trent asked if NT can look at making conditions less onerous but still effective.

Mr Trent also asked Treasury to unpack their risk management tool. He requested feedback on performance contracts within the various departments

Mr M Stephens (DA) said that risk management and internal audit functions are internationally recognised as a problem area. Internal auditors do not necessarily understand financial risk management. He asked to what extent are skills training done to address this.

Mr T Bonhomme (ANC) asked why Treasury did not isolate or quarantine those departments, such as Defence, Correctional Services and Home Affairs, that had problems with qualified reports.

With regards to onerous conditions, Mr L Kganyago indicated that these conditions are negotiated with departments. Conditions are revised every year and departments need to make input regarding conditions. Departments need to be specific and indicate to Treasury what specific conditions are unreasonable.

Mr Kganyago said that performance contracts and staff should be assessed in terms of these contracts.

Regarding Treasury’s risk management, Mr Kganyago said that they use a cost-at-risk model. Treasury reviewed the treasury operations of big state owned enterprises to determine the likelihood of guarantees given to state enterprises being called. Mr Nomvalo added that the risk management tool gives them the ability to host information about risk such as risk rating across departments. The risk management tool ensures that there is not duplication of effort. There is a conceptual difference between risk management and internal audit functions. In smaller organisations the function could be done by one individual. Internal auditors need to be up-skilled to deal with risk management issues. In the past year internal audit training was done and problem areas were identified which will be focused on.
 
A committee member asked Treasury what advice was given to the Department of Justice given that first they had three years of qualified reports, then clean reports for two years followed by a qualified report again in 2005/06. A question was also posed on how Audit Committees are appointed.

Mr Bonhomme asked who the Accounting Officer is in a case where there is a Commissioner and Chief Executive Officers (CEO) within state institution.

Mr Trent asked what Treasury does when public entities do not submit their accounts. He also asked which legislation indicates who audits performance information. In terms of the Public Audit Act, the Auditor General (AG) audits performance information, but the PMFA might have the same provisions. He asked whether these provisions would be tightened.

Mr P Gerber (ANC) asked for clarity about top departmental and parastatal officials who might be members of other boards, and how it might influence the work that they are supposed to do for departments.

Mr Kganyago replied that DGs are not allowed to serve on any boards. The DG does not sit on boards because Treasury renders an oversight function. Treasury officials do sit on other boards, including public entities, but are not allowed to take remuneration for that.

Mr Kganyago said that the PMFA aims to measure performance information. Auditing performance information would also be a new function for the Auditor General.

Mr du Plessis indicated that the Public Audit Act provides for the auditing of performance information and for performance audits which is different from the auditing of performance information. The PMFA amendment process will strengthen non financial performance information but will not include detail. A Performance Information Framework is being developed which will including criteria for performance information. This framework is easier to manage as one can change the framework on a yearly basis.

Mr Nomvalo explained that the Department of Justice did not have effective financial management over Monies in Trust and this had led to the qualified report. The other reason for a qualified report was the Department of Justice’s leave records.  Further information on this was on page 121 and 122 in the Report of the Auditor-General on audit outcomes for the financial year 2005/06 . The Acting CFO of that Department is always working closely with Treasury to resolve these and other issues.

Mr Nomvalo noted that if there is a Commissioner and a Governing Board, then the Governing Board becomes the Accounting Authority as directed by the PFMA. The CEO is accountable to the Board and the Board is accountable to the executive authority. The PFMA is being reviewed and this governance arrangement will be discussed.

Mr Nomvalo indicated that when public entities do not submit their accounts, Treasury will write to public entities directly and also through the relevant Minister to further compliance. In some cases Treasury received feedback. There has not been punitive measures yet but Treasury has been communicating with public entities in order to solve these problems.
 
Mr Nomvalo indicated that Treasury spends a lot of time on capacity building and training.

Integrated Management System (IFMS)
Mr Bobby Maake (Chief Director: Systems) explained that the objectives of the IFMS are to consolidate and replace aging financial systems with modern integrated financial management systems solutions.  The IFMS is a mixture of in-house system and an off-the-shelf system. He said that the challenges they faced included access to appropriate Information Technology (IT) skills, access to appropriate functional skills by user departments, alignment of policy implementation with rollout of system solutions and alignment of departmental core systems with the IFMS architecture.

Discussion
Mr Bekker asked to what extent SA systems will be based on international examples for instance from Britain and Australia.

Mr Bonhomme asked to what extent open source technology is being used for the IFMS. To what extent will existing systems have to be tweaked in order to communicate with the IFMS?

Mr Maake indicated that Minimum Operability Standards (MIOS) are being defined and when that is done most systems, including the IFMS, should be able to integrate seamlessly. All systems that are developed in the interim should also comply with MIOS.

Mr Maake noted that open source software poses challenges. It is not as open or as free as is generally stated. There are also issues of support and security. He indicated that they have adopted open standards which can be integrated with open source.

With regards to basing IFMS on international examples, Mr Maake said that off-the-shelf software would require customisation of more than 10% of the software which is not desirable. While some international off-the-shelf systems are based on full accrual, Treasury’s system is still based on modified cash. The IFMS will be fully rolled out by 2011. Different phases of IFMS will be rolled out and early releases can be expected by 2008/09.

Mr Trent asked if Treasury will be able to train people to use the IFMS. Every time systems change there is the need to train lots of people.

Mr Maake replied that usually many people start training but only a small percentage finish training. There is a need to do something different than just "training" people. He indicated that computer literacy is still a problem with staff.

The meeting was adjourned.