BRIEFING TO THE PORTFOLIO COMMITTEE ON DEPARMENT OF DEFENCE (DOD) (VOTE 21) ON THE 

AUDIT OUTCOMES FOR 2010/11 

AS STATED IN THE 2010/11 ANNUAL REPORT OF THE DEPARTMENT

		      CONTENTS				

	PART 1											          Page

		        1		Reputation promise									 	       3
 		        2		Introduction											       3
	  	        3		Background											       4
		        4		Audit Report History 									     10

			PART 2

		        5		Reporting items	 - Department of Defence (DOD)					     11	
		        6            Reporting items        - Special Defence Account (SDA)				     21	        		
		        7		Reporting items	 - South African National Defence Force Fund (SANDF Fund)     21	
		        8            Reporting items        - National Conventional Arms Control Committee (NCACC)	     22
        9            Reporting items        - Castle Control Board                                                                 22
       10           Reporting items        - Armscor                                                                                     24

						

PART 1

1. 	Reputation promise/mission

The Auditor-General has a constitutional mandate and, as the Supreme Audit Institution (SAI) of South Africa, it exists to strengthen our country’s democracy by enabling oversight, accountability and governance in the public sector through auditing, thereby building public confidence.

2. 	Introduction

The purpose of the briefing note is to provide an insight by the Auditor-General of South Africa (AGSA) into the issues resulting in the audit findings on the department of defence (the department), Special Defence Account, NCACC, Castle Control Board, and the South African National Defence Force Fund. The department of Military Veterans is not yet fully operational and all financial transactions are incurred by the department of defence and reflected under the administration programme.

The Annual Report for the Department was tabled in Parliament under reference RP 192/2011 by the Minister of Defence and Military Veterans on 30 September 2011.
 
The entities that report to the Minister/department are the Armscor Group, Special Defence Account, South African National Defence Force Fund (SANDF Fund) and the Castle Control Board. The main purpose of Armscor is to perform procurement activities for the department relating to new equipment and the sale of old equipment. The Special Defence Account is the account which captures all the procurement and sales of the departments assets classified as armament. The NCACC is the arms regulator of South Africa. The SANDF Fund’s aim is to render aid to members and former members of the South African National Defence Force and Auxiliary Services, and their dependents who suffer hardship or financial distress arising directly or indirectly, as a result of service and duties.

3.	Background

3.1	Mandate of the department

The DOD derives its constitutional mandate from Section 200(2) of the Constitution of the Republic of South Africa, 1996. The constitution was given substance in the Defence Act, 2002 (Act No. 42 of 2002). 

Vision of the department
 
Effective defence for a democratic South Africa

Mission of the department

To provide, manage, prepare and employ defence capabilities commensurate with the needs of South Africa, as regulated by the Constitution, National Legislation, Parliamentary and Executive Direction. 

3.2		Accounting Basis

	Department of Defence

The department is required to account on the Modified Cash Basis of Accounting and must prepare its financial statements in terms of the National Treasury Guide for National and Provincial Departments. The department utilised the following accounting systems i.e. FMS; PERSOL; and various logistical systems to record its transactions and activities during the 2010/11 financial year. 

	
	Special Defence Account

	The reporting framework for the Special Defence Account changed from an entity specific basis in 2010/11 as approved by National Treasury to the GRAP basis of accounting. As a result of the change in the reporting framework the department has still not submitted signed financial statements to the AGSA.

The Armscor group, Castle Control Board, and the SANDF Fund
	
	The Armscor group, Castle Control Board, and the SANDF Fund prepared financial statements in accordance with SA 	Standards of GRAP.

3.3		Governance Issues

3.3.1	Audit committee

Department of Defence and Special Defence Account

The appointment, functions and composition of the Audit Committee was in terms of Section 77 of the Public Finance Management Act, 1999 (Act No 1 of 1999) (PFMA), as amended. 

The committee was in place for the 2010-11 financial year. The required meetings occurred during the financial year. The Audit committee reported in their report on material breakdowns in the fuctioning of controls, procedures and systems.

SANDF Fund

The Fund did not have an audit committee in place during the year. Management indicated that it will be a shared committee with Defence.

The Armscor group and Castle Control Board

These entites had an audit committee in operation throughout the financial year, and the audit committee satisfactorily fulfilled its responsibilities for the year.

3.3.2	Internal Audit

	Department of Defence and Special Defence Account

An internal audit unit was established in terms of Section 38 (1)(a)(i) of the PFMA, as amended, and the structure approved by the Minister on 25 August 2008. The position for the new head of internal audit was advertised, but is still vacant. The approved establishment has also not been filled with qualified and skilled staff.

SANDF Fund

Due to the nature and size of the Fund a separate internal audit function is not warranted and the function should be shared with Defence.

Armscor group and Castle Control Board

These entities had an internal audit function in operation throughout the financial year.

3.3.3	Budget information – Department of Defence

Appropriation per Programme
 	
 	 	2010/11	2010/11	2009/10	2009/10	
 	Programme	Final Appropriation	Actual Expenditure	Final Appropriation	Actual Expenditure	
 	 	R'000	R'000	R'000	R'000	
1.	Administration	                                     3,452,915 	                      3,452,915 	                            2,914,090 	                      2,914,090 	
2.	Landward Defence	                                     9,295,568 	                      9,295,568 	                            9,042,226 	                      9,042,226 	
3.	Air Defence	                                     5,488,936 	                      5,488,936 	                            8,643,761 	                      8,643,761 	
4.	Maritime Defence	                                     2,349,916 	                      2,349,916 	                            1,997,454 	                      1,997,454 	
5.	Military Health Support	                                     3,150,334 	                      3,150,114 	                            2,608,189 	                      2,608,129 	
6.	Defence Intelligence	                                         633,853 	                         633,853 	                               594,704 	                          594,704 	
7.	General Support	                                     3,805,612 	                      3,805,612 	                            3,637,343 	                      3,637,343 	
8.	Force Employment	                                     2,265,457 	                      2,265,457 	                            1,887,489 	                      1,886,540 	
 	Total	                                   30,442,591 	                   30,442,371 	                         31,325,256 	                    31,324,247 	
Reconciliation with Statement of Financial Performance	 	 	 	 	
Add:	Departmental receipts	                                         689,688 	 	                               699,949 	 	
Actual amounts per Statement of Financial Performance (Total Revenue)	                                   31,132,279 	 	                         32,025,205 	 	
Actual amounts per Statement of Financial Performance Expenditure	 	                   30,442,371 	 	                    31,324,247 	

Appropriation per Economic classification	 	 	 	 	
 	2010/11	 	2009/10	 	
 	Final Appropriation	Actual Expenditure	Final Appropriation	Actual Expenditure	
 	R'000	R'000	R'000	R'000	
Current payments	 	 	 	 	
Compensation of employees	                     16,597,098	                     16,597,098	                 12,705,579	                       12,705,579	
Goods and services	                       8,890,703	                       8,890,703	                    8,070,281	                         8,069,332	
Interest and rent on land	                                             -   	                                             -   	                                         -   	                                              -   	
Transfers and subsidies	 	 	 	 	
Provinces & municipalities	                                             -   	                                             -   	                                         -   	                                              -   	
Departmental agencies & accounts	                       3,024,728 	                       3,024,728	                    8,629,128	                         8,629,128	
Universities & technikons	                                             -   	                                             -   	                                         -   	                                              -   	
Foreign governments & international organisations	                                             -   	                                             -   	                                         -   	                                              -   	
Public corporations & private enterprises	                           737,510	                           737,510 	                       603,608	                             603,608	
Non-profit institutions	                                5,407	                                5,187	                            4,402	                                 4,342	
Households	                           120,592 	                           120,592 	                       126,350 	                             126,350	
Gifts and donations	                                             -   	                                             -   	                                         -   	                                              -   	
Payments for capital assets	 	 	 	 	
Buildings & other fixed structures	                           251,203	                           251,203	                       599,094 	                             599,094	
Machinery & equipment	                           581,388	                           581,388	                       537,105	                             537,105	
Heritage assets	                                             -   	                                             -   	                                         -   	                                              -   	
Specialised military assets	                             66,760	                             66,760	                                         -   	                                              -   	
Biological assets	                                      71	                                      71	                                  10 	                                       10	
Land & subsoil assets	                                             -   	                                             -   	                                         -   	                                              -   	
Software & other intangible assets	                                   132	                                   132	                                140	                                     140	
Payment for financial assets	                           166,999	                           166,999	                          49,559	                               49,559 	
Total	                     30,442,591 	                     30,442,371	                 31,325,256	                       31,324,247	

4.	Audit Report History

Qualified audit reports for the department were issued in 2010/11, 2009/10, and 2008/09.

Legend:

Q 	= 	Qualification
N/A	=	Not applicable

Department of Defence
Report paragraph		   2010/11	    2009/10	2008/09	
Tangible and intangible capital assets 	Q	Q	Q	
Accruals	N/A	N/A	Q (Comparative)	
Lease commitments	N/A	N/A	Q	
Irregular expenditure	N/A	N/A	Q 	
Departmental revenue (Overstatement)	N/A	N/A	Q	
Goods and Services: Consultant Expenditure	N/A	N/A	Q	

Special Defence Account
Report paragraph	   2010/11	    2009/10	  2008/09	
None.	Still in progress	N/A	N/A	

SANDF Fund
Report paragraph	   10/11	    09/10	08/09	
None.	N/A	N/A	N/A	

Castle Control Board
Report paragraph	   10/11	    09/10	08/09	
None.	N/A	N/A	N/A	

Armscor Group
Report paragraph	   10/11	    09/10	08/09	
None.	N/A	N/A	N/A	

PART 2
REPORTING ITEMS

5.1	 Department of Defence: Qualification Tangible and intangible assets
Background	Qualification	Internal Control deficiencies	Auditor’s comment	
The department, for the first time, disclosed figures in the financial statements for 2010/11.
As disclosed in paragraph 10 of the accounting officer’s report for the year ended 31 March 2011; the Department faces various challenges and has developed a three phased rectification plan. During the year under review the department focussed on serial controlled items (phase 1).  
Phase 1 is however, only partially addressed. The audit revealed serious shortcommings relating to the serial controlled items with regards to all assertions.  	These assets are now stated at R76.9 billion (no disclosure in prior years) in disclosure notes 32, 33 and 34 to the financial statements.  Although the department has commenced addressing some of the prior year qualification matters, the process is unfinished, in that the department could not provide sufficient appropriate audit evidence to support the amount disclosed, and the records did not permit the application of alternative procedures.  	The following deficiencies in the three fundamental key controls are key elements affecting the department’s ability to disclose capital assets as required by National Treasury:
Leadership
•	Insufficient direct involvement by senior management to address risks associated with disclosure of assets and asset management. Senior management does not exercise oversight responsibility on the progress of current projects to ensure complete and accurate asset records.
•	Personnel are not aware of the requirements nor do they have the knowledge of the asset management framework and the Departmental Financial Reporting Framework issued by the National Treasury in all instances. Lack of training of staff on the current logistical systems and asset management as well as a lack of skilled/qualified staff.
•	No dedicated asset management component established to ensure adequate monitoring and reporting to those charged with governance.
•	Management does not have approved updated policies and procedures, including the reporting process to guide management at the lowest level to ensure compliance with National Treasury disclosure requirements and the asset management framework.
•	Project plans do not include all control deficiencies and are not adequately monitored.
•	Management does not ensure compliance with existing policies and procedures relating to identification, safeguarding, the movement and recording of assets.
•	Policies and instructions to perform accurate and complete asset counts are outdated.
Financial and performance management
•	Manual or automated controls are not designed to ensure adequate record keeping in a timely manner which is accessible and available and that the transactions are complete and accurately recorded for the various categories of assets in the financial statements as required by the National Treasury. 
•	Complete and accurate asset registers for all categories of assets are not in place that meet the minimum requirements of National Treasury and for disclosure purposes. 
•	Lack of implemented controls to ensure that reconciliations are performed between the current logistic systems and the financial system with regard to additions and disposals.
•	Lack of controls to ensure the correct classification of assets and that all assets are linked to the standard chart of accounts (SCOA).
•	Insufficient control over invoices/fair value documentation, receipts vouchers, issue vouchers and disposals.
•	The assets are currently managed on four logistical subsystems. The systems are not integrated nor are they integrated with the financial system. Inventory and assets are also not separated on these subsystems. Records of some units/depots are still manual, which are not integrated for reporting purposes.
•	No system is currently in place to barcode all non-serialised assets and link them to the asset records to be able to identify the assets.
•	Systems are not appropriate to facilitate regular, accurate and complete financial information for the preparation of the financial statements.
•	No timely processing of invoices, receipt vouchers, issue vouchers and disposals to ensure accuracy of asset register/ledgers.
•	Lack of proper asset counts including roll forward procedures to ensure complete and accurate asset records at year end.
•	No processes in place to ensure complete and timely preparation and submission of asset registers (detail on warehouse) as at 31 March.

Governance
No internal audit/independent evaluations to ensure compliance with policies, procedures and disclosure requirements	Management should ensure that policies and procedures are implemented to address the control deficiencies in the asset control environment which should include controls over daily and monthly processing and reconciling of transactions. 

Management should ensure that all assets currently still on manual records be recorded on one of the sub systems.        

Management should also ensure that policies and procedures to address the control deficiencies in the control environment are developed, implemented and monitored to ensure proper disclosure of the movement between opening and closing balances.

All possible steps should be taken to ensure accurate, complete records and that supporting documents exist for all categories of assets, disposals and additions and that assets are properly identifiable and monitored to ensure compliance with National Treasury requirements, guidelines and regulations.

A proper action plan must be developed, implemented and monitored on the correct level to ensure accurate and timely reporting to the Minister and those charged with governance (TCWG). An internal independent review process should be implemented to ensure accurate and complete reporting to the Minister and TCWG.	

5.2	 Department of Defence: Compliance with laws and regulations
Significant non adherence to legislation	Internal Control deficiencies	Auditor’s comment	
Compliance with laws and regulations 
Internal Audit 
The accounting officer did not ensure that an internal audit function was in place as per requirements of Treasury Regulation (TR) 3.2.2. However, the Inspector General did perform certain compliance and other procedures which were reported to the audit committee.
	Governance
The department does not have a functional internal audit division.	The necessary action should be taken to ensure that the head of internal audit is appointed, and that the structure is filled.	
Financial misconduct 

Sufficient appropriate audit evidence was not available in all instances, to determine if the accounting officer ensured that investigations were conducted into all allegations of financial misconduct made against officials within 30 days from the date of discovery of the allegation as required in terms of TR4.1.2.
	Leadership
Insufficient direct involvement by senior management to address risks associated with non-compliance. Senior management does not exercise oversight responsibility to ensure compliance with laws and regulations.
Financial and performance management impact
No independent component and processes in place to monitor compliance with laws and regulations.
Governance
The department does not have a functional internal audit division.

Measures should be implemented to ensure that all policies and procedures are updated, implemented and monitored to ensure compliance. The Minister appointed a compliance officer to assist her portfolio to develop a compliance framework to facilitate compliance with laws and regulations.	
Annual financial statements, performance and annual report
1.	The accounting officer did not implement adequate control systems for the safeguarding and maintenance of assets to prevent theft, losses, wastage and misuse, as required by the PFMA section 38(1)(d) and TR 10.1.1(a).

2.	The accounting officer submitted financial statements for auditing that were not prepared in all material aspects in accordance with modified cash basis of accounting determined by the National Treasury, supported by full and proper records in all instances as required by section 40(1)(a) and (b) of the PFMA. Certain material misstatements identified with regards to operating lease commitments were subsequently corrected, however, the uncorrected material misstatements in capital assets resulted in the financial statements receiving a qualified audit opinion in contravention of section 40(3)(a).
	Leadership
Insufficient direct involvement by senior management to address risks associated with non-compliance. Senior management does not exercise oversight responsibility to ensure compliance with laws and regulations.
Management does not have approved updated policies and procedures, to ensure compliance with relevant laws and regulations.
Financial and performance management impact
Existing manual and automated controls are not designed to ensure adequate record keeping in a timely manner which is accessible and available and that the transactions are complete and accurately recorded.
Adequate controls were not in place to ensure complete and timely reporting to relevant authorities as required by laws and regulations.
No independent component and processes in place to monitor compliance with laws and regulations.
Governance
The department does not have a functional internal audit division which evaluates controls and accuracy of financial disclosures as well as the completeness thereof.
	
Measures should be implemented to ensure that all policies and procedures are updated, implemented and monitored to ensure compliance. The Minister appointed a compliance officer to assist her portfolio to develop a compliance framework to facilitate compliance with laws and regulations.	
Human resource management and compensation
Some senior managers did not enter into a performance agreement for the current year as per the requirements of PSR 4/III/B.1 and Department of Defence Instruction: POL and PLAN No. 00065/2002 (Edition 2) dated 1 January 2005.	Leadership
Insufficient direct involvement by senior management to address risks associated with non-compliance. Senior management does not exercise oversight responsibility to ensure compliance with laws and regulations.
Financial and performance management impact
No independent component and processes in place to monitor compliance with laws and regulations.
Governance
The department does not have a functional internal audit division.

	Measures should be implemented to ensure that all policies and procedures are updated, implemented and monitored to ensure compliance. The Minister appointed a compliance officer to assist her portfolio to develop a compliance framework to facilitate compliance with laws and regulations.	
Procurement and contract management
3.	In some instances goods and services with a transaction value of more than R500 000 were not procured by means of a competitive bidding process as per the requirements of TR 16A6.1, TR 16A6.4 and National Treasury Practice Notes 6 and 8 of 2007/08.

4.	Awards were made to suppliers who did not declare their employment by the state or their connection with a person employed by the state or their relationship with persons involved in the evaluation and/or adjudication of the bids as per the requirements of Practice Note 7 of 2009/10. Contrary to SCM requirements this is not a requirement in terms of departmental policies.

5.	Instances were identified where senior managers did not disclose their business interest in a supplier to the department and to the executive authority as per the requirements of chapter 3(C1) of the Public Service Regulations.

6.	In some instances the Supply Chain Management (SCM) officials and/or other SCM role players and those whose close family members and/or partners and/or associates had a private or business interest in contracts awarded by the department failed to disclose their interest and in some cases participated in the process relating to the awarding of the contract contrary to the requirements of TR 16A8.4(a) and (b).	

7.	Some employees performed remunerative work outside their employment in the department without written permission from the relevant authority as per the requirements of section 30 of the Public Service Act and Department of Defence Instruction: PERS NO 4/99 dated 22 December 1999. 
	Leadership
Insufficient direct involvement by senior management to address risks associated with non-compliance. Senior management does not exercise oversight responsibility to ensure compliance with laws and regulations.
Management does not have approved updated policies and procedures, to ensure compliance with relevant laws and regulations.

Financial and performance management impact
Existing manual and automated controls are not designed to ensure adequate record keeping in a timely manner which is accessible and available and that the transactions are complete and accurately recorded.
Adequate controls were not in place to ensure complete and timely reporting to relevant authorities as required by laws and regulations.
No independent component and processes in place to monitor compliance with laws and regulations.
Governance
The department does not have a functional internal audit division.	Measures should be implemented to ensure that all policies and procedures are updated, implemented and monitored to ensure compliance. The Minister appointed a compliance officer to assist her portfolio to develop a compliance framework to facilitate compliance with laws and regulations.	
Expenditure management 
8.	The accounting officer did not, in all instances, immediately upon the discovery reported irregular expenditure to the National Treasury as per the requirements of section 38(1)(g) of the PFMA.
	Leadership
Insufficient direct involvement by senior management to address risks associated with non-compliance. Senior management does not exercise oversight responsibility to ensure compliance with laws and regulations.
Management does not have approved updated policies and procedures, to ensure compliance with relevant laws and regulations.
Financial and performance management impact
Adequate controls were not in place to ensure complete and timely reporting to relevant authorities as required by laws and regulations.
No independent component and processes in place to monitor compliance with laws and regulations.
Governance
The department does not have a functional internal audit division.	Measures should be implemented to ensure that all policies and procedures are updated, implemented and monitored to ensure compliance. The Minister appointed a compliance officer to assist her portfolio to develop a compliance framework to facilitate compliance with laws and regulations.	

5.3	      Department of Defence: Findings on Predetermined objectives
There are no material findings on the annual performance report.

5.4	General control environment
The department did not have a functional internal audit division.

6.	Reporting items - Special Defence Account
The audit process for the 2010/11 year is still in progress.

7. 	Reporting items – South African National Defence Force Fund
No financial qualifications. 
OTHER MATTERS
REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS
Compliance with laws and regulation

Significant non adherence to legislation	Internal Control deficiencies	Auditor’s comment	
      Strategic planning and performance management
No predetermined measurable objectives, expected outcomes and targets were set at the beginning of the financial year, and no evidence could be obtained that these objectives were agreed on by the executive authority as required by the 2010/11 Audit Directive - (General Notice 1111 issued in Government Gazette 33872).
 	
Leadership
Oversight responsibility was not exercised regarding performance reporting and compliance, as the board was only appointed during August 2010.
 	
Measures should be implemented to ensure the compliance in future.

8. Reporting items – National Conventional Arms Control Committee
No deviations reported.
OTHER MATTERS
Non-compliance with section 23(1) of the Act
The NCACC did not submit three quarterly reports (April to June 2010, July to September 2010 and October to December 2010) on all conventional arms export concluded during the preceding quarters to a committee of Parliament, as required in terms of section 23(1)(b) of the Act. 

9. Reporting items – Castle Control Board
No financial qualifications. 

OTHER MATTERS
REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS
Compliance with laws and regulation

Significant non adherence to legislation	Internal Control deficiencies	Auditor’s comment	
Procurement and contract management

The accounting authority did not apply the requirements of the Preferential Procurement Policy Framework Act, 2000 (Act No. 5 of 2000) (PPPF Act) in the procurement of goods and services above R30 000 as required by section 2(a) of the act.
	Leadership

The accounting authority has implemented supply chain management policies that do not comply in all respects with the stringent requirements of the PFMA and the PPPFA.
	Controls should be implemented to ensure that the entity complies with set legislation.
	
Predetermined objectives

-	The accounting authority did not finalise and submit a strategic plan for approval to the relevant executive authority on or before 1 April as required by TR 30.1.1 and 30.1.2.
-	The accounting authority did not establish procedures for quarterly reporting to the executive authority in order to facilitate effective performance monitoring, evaluation, and corrective action as required by TR 30.2.1.
-	The accounting authority did not ensure that the public entity has and maintain an effective, efficient and transparent system of internal control regarding performance management, which described and presented how the entity’s processes of performance planning, monitoring, measurement, review and reporting was conducted, organized and managed as required by section 51(1) (a)(i) of the PFMA.

	Leadership

The accounting authority has implemented performance reporting policies that do not comply in all respects with the stringent requirements of the PFMA.
	Controls should be implemented to ensure that the entity complies with set legislation.

Findings on performance information
Predetermined objectives

I was unable to conduct the audit of performance against predetermined objectives as the public entity did not submit the annual performance report as required by section 55 (2)(a) of the PFMA.

10. Reporting items – Armscor 
None.