ATC100825: Report on Auditor General on the 2008/09 Financial Statements of the Compensation Fund

Public Accounts (SCOPA)

Fifth Report of the Standing Committee on Public Accounts on the Report of the Auditor General on the 2008/09 Financial Statements of the Compensation Fund, dated 25 August 2010

 

 

1. Introduction

 

The Standing Committee on Public Accounts (the Committee), heard evidence on and considered the contents of the Annual Report and the Report of the Auditor-General on the 2008/2009 financial statements of the Compensation Fund (the Fund). The Committee noted the disclaimed audit opinion, highlighted areas which required urgent attention of the Accounting Authority, and reports as follows:

 

2. Governance Issues

 

The Auditor-General reported the following:

a) “The Audit Committee met ten times during the year, as required by Section 77 of the   Public Finance Management Act (No. 1 of 1999).

b) The Audit Committee noted internal control deficiencies and that a number of   these matters had been reported in previous years.

c)  The entity utilised the Internal Audit Unit of the Department of Labours. However, due to vacancy constraints, the Internal Audit Unit could only execute 10% of the operational plans.

 d)  A vacancy rate of 41.6% was reported at senior management level, including the leadership in the Finance Unit.

 e)  In addition, personnel within the Finance Unit did not have adequate skills.

 A permanent Chief Financial Officer was only appointed in September 2009”.

 

The Committee noted that significant unresolved issues led to a disclaimer which could have been resolved had an effective internal audit function been in place. The Committee recommends that the Accounting Authority ensures that:

a)       The internal audit function is adequately staffed as a matter of urgency,

b)       The Fund establishes an effective Audit Committee that acts upon control deficiencies and takes corrective action where necessary;

c)       The Audit Committee takes into consideration work done by internal audit;

d)        Disciplinary action is taken against officials who persist in under performing;

e)       The Fund employs personnel with adequate skills; and

f)         The management is urged to rectify staff shortages as a matter of urgency.

 

3. Basis for accounting opinion

The Auditor-General noted various instances where it was not possible to express an opinion and which led to a disclaimer.

 

With regard to “revenue contributions and assessment debtors,

a)        “Materially incorrect assessments recorded by the Fund;

b)       Inadequate monitoring of controls over overdue assessment debtors resulted in the accumulation of incorrect provisional assessments and materially incorrect debtors with credit balances; and

c)       Lack of a proper management framework for the continuous review of the ageing of assessment debtors which resulted in an unreliable ageing of assessment debtors being applied for purposes of determining the provision for credit losses”.

 

The Committee recommends that the Accounting Authority ensures that:

a)       Management understands and exercises oversight responsibility related to financial reporting and related internal controls;

b)       Management designs and implements internal controls to ensure that revenue contributions and assessment of debtors are performed timeously;

c)       Professionally skilled personnel are used to perform duties and senior staff evaluate  work of subordinates; and

d)       Proper evaluation of managerial abilities is undertaken prior to the appointment of any staff to a managerial position, and that managers who do not possess the required management skills to perform oversight be relieved of their management duties.

 

With regard to “bank reconciliations, the Fund transferred the un-reconciled differences from its compensation and pensions bank reconciliations to a suspense account. At the end of the year, a balance amounting to R 86, 4 million remained in the suspense account. The large volume of transactions did not allow management to reconcile the bank balances with the general ledger and clear the suspense account prior to the finalization of the financial statements”.

 

The Committee recommends that the Accounting Authority ensures that:

a)       Ongoing monitoring and supervision are undertaken to enable management to ensure internal control over financial reporting;

b)       Internal control deficiencies are identified and communicated  to those responsible for taking corrective action; and

c)       The suspense account is cleared within three months and thereafter monthly, and that proper follow-ups are made by the relevant senior officials.

 

With regard to claims incurred, the Auditor-General reflected that a backlog in the scanning of documentation onto the the Fund’s electronic document management system and inadequate management of supporting documentation for claims incurred have resulted in the Fund being unable to retrieve appropriate documentation in support of claims incurred. In addition, an unexplained difference of R81,6 million remained at year end between the total claims approved per the claims system and the general ledger”.

 

 The Committee recommends that the Accounting Authority ensures that:

a)       Adequate steps are taken, with due regard to the costs thereof and the potential effectiveness in mitigating risks to the achievement of financial reporting objectives;

b)       Significant information is identified, captured and used at all levels of the entity and distributed in a form and within a timeframe that supports the achievement of financial reporting objectives; and

c)       Steps are taken to recover losses incurred due to a backlog and inadequate management of supporting documentation for claims.

 

With regard to accounts payable, the Auditor-General indicated that “the Fund was unable to submit creditor reconciliations and analysis or appropriate detailed listings of creditors at the end of the year, amounting to R89.6 million. In addition, the Fund did not accrue interest on unclaimed monies due to beneficiaries”.

 

The Committee recommends that the Accounting Authority ensures that:

a)       Adequate controls are implemented to ensure efficient and effective resource usage as measured by the extent to which specific control objectives are achieved;

b)       Internal control deficiencies are identified and communicated timeously;

c)       Monthly creditors’ statements are obtained from the procurement creditors and reconciliation is performed; and

d)       Disciplinary action is taken against staff responsible transgression.

 

 

 

 

 

4. Property, Plant and Equipment

 

The Auditor-General indicated that “the Fund revalued its Compensation House Property as at 31 March 2009. However, the value of the property disclosed in the financial statements differs by R55.9 million from the valuation amount. According to accounting standards property, plant and equipment require that if a category of assets is revalued all assets in the category need to be revalued, as the Fund in Bisho did not obtain a valuation of its property”.

 

The Committee recommends that the Accounting Authority ensures that:

a)       Management and employees are assigned appropriate levels of authority and responsibility in ensuring that they understand accountability to facilitate effective internal control over financial reporting;

b)       Officials are provided with in-service training; and

c)       All records are updated in order to keep staff updated on the relevant information.

 

5. Disclosure of Information

 

The Auditor-General reported that “the Fund did not disclose the following in respect of its financial instruments as required by Statement of Generally Accepted Accounting Practice, IFRS7 (AC 144):

 

a)       The classification of financial assets and liabilities into the required categories;

b)       The maximum exposure to credit risk on trade and other receivables;

c)       A reconciliation of movements in the provisions for credit losses;

d)       A comparison of the carrying amount and fair value for each class of financial asset  and liability;

e)       The methods and assumptions applied for valuing financial assets and liabilities;

f)         For each type of risk arising from financial instruments, quantitative data about its exposure to that risk; and   

g)       A sensitivity analysis for each type of market risk to which the Fund is exposed”.

 

     The Committee recommends that the Accounting Authority ensures that:

Disciplinary action is taken against  staff who fail to perform their duties satisfactorily.

 

 

 

 

6. Non-compliance with Laws and Regulations

 

      The Auditor-General reported the following:

a)       “Ineffective, inefficient and lack of transparent functioning of financial and risk management and internal control systems as required by section 53(1)(a)(ii) of the Public Finance Management Act, 1999 (Act No 1 of 1999) (PFMA);

b)       Lack of adequate system for bank and cash reconciliations as required by paragraph 31.1.1 of the National Treasury Regulations; and

c)       Internal control deficiencies”.

 

      The Committee recommends that the Accounting Authority ensures that:

a)       The fund has a clear understanding of the risks assessed, self assessment processes, reviews by the internal audit function and an effective audit committee;

b)       Vacant posts in the internal  audit unit are filled to ensure compliance with PFMA;

c)       Improves its organisational structure by addressing areas of responsibility and establishing lines of reporting in order to support effective internal control over financial reporting; and

d)       Steps are taken to ensure that written procedures, record keeping, management reviews and asset safeguards are not segregated to prevent fraudulent financial data and asset misappropriation.

 

7. Conclusion

 

The Committee further recommends that the Executive Authority submit a progress report on the implementation of the above recommendations to the National Assembly within 60 days of the adoption of this report by the House.

 

 

Report to be considered