ATC110316: Third Report on Auditor General on annual report & financial statements of Energy Sector Education Training Authority for the 2009/10 financial year

Public Accounts (SCOPA)

Third Report of the Standing Committee on Public Accounts on the Report of the Auditor General on the annual report and financial statements of the Energy Sector Education Training Authority for the 2009/10 financial year, dated 16 March 2011

 

1. Introduction

The Standing Committee on Public Accounts (SCOPA) heard evidence on and considered the contents of the Annual Report and the Report of the Auditor-General on the 2009/10 financial statements of the Energy Sector Education Training Authority (ESETA). The Committee noted the disclaimer opinion, highlighted areas which required the urgent attention of the Accounting Authority, and reports as follows:

 

2. Comparative figures and opening statements

The Auditor-General identified the following:

a)       ESETA had a number of unadjusted audit differences relating to prior year annual financial statements as reported in the prior year’s management report and audit report.

b)       ESETA has not adjusted the accounting records for the prior year’s unadjusted audit differences and as a result, the opening balances as well as the comparative amounts are inaccurate.

 

The Committee recommends that the Accounting Authority ensures that:

a)        All prior period errors are disclosed in a note in the annual financial statements according to (Generally Recognised Accounting Practise (GRAP 3).

b)       All material audit findings from the external and internal auditors are addressed.

 

3. Accounting records

The Auditor-General identified the following:

a)       Management could not provide supporting documents and explanation for journal entries processed, totalling R5 279 000.

b)       The financial statements components affected are employer grants and project expenses, trade and other payables from exchange transactions, grants and transfers payable, trade and other receivables from exchange transactions.

 

The Committee recommends that the Accounting Authority ensures that:

Management keeps complete, accurate and valid accounting records.

 

4. Administration expenses

The Auditor-General identified the following:

a)       Sufficient, adequate and appropriate supporting documentation for an amount of R1 348 000 included as part of employee costs which forms part of the administration expenditure could not be obtained.

b)       The entity did not straight line the operating lease payments over the period of the lease contract. As a result, the operating lease amount included in administration expenditure is overstated by R263 000 and trade and other payable from exchange transaction is overstated by R263 000.

c)       The operating lease commitment as disclosed in note 24 is understated by

       R397 000.

d)       An amount of R353 000 relating to the cost of employment as disclosed in note 8.1 to the annual financial statements was incorrectly calculated. As a result, cost of employment included in administration expenses is overstated by R353 000 and trade and other payable from exchange transactions is overstated by

      R353 000.

 

The Committee recommends that the Accounting Authority ensures that:

Management assigns appropriate levels of authority and responsibility to ensure that employees understand how they are accountable to facilitate effective internal control over financial reporting.

 

5. Employer grants and project expenses

The Auditor-General identified the following:

a)       According to the Skills Development Act Grant Regulation 7(5), a discretionary grant paid in terms of sub-regulation 7(1)(a) to (n) must fund all project costs for any project funded by a discretionary grant under sub-regulation 7(1) inclusive of project administration costs for the discretionary project subject to the approval by a SETA Board or Council.

b)       A separate budget for the project administration costs not exceeding a maximum of 10% of total project costs may be approved by the SETA Board or Council.

c)       The SETA could not provide the Board’s approval for the administration expenses on discretionary project for audit purposes.

d)       ESETA recognised discretionary grant expenditure amounting to R1 283 000 which relates to prior periods in the current financial year.

 

The Committee recommends that the Accounting Authority ensures that:

a)       The organisational structure addresses adequate controls and procedures to ensure the entity maintains full and proper record of its financial affairs.

b)       The entire accounting record of discretionary grants and administrative expenditure is reviewed and reclassified.

c)       Disciplinary steps are taken in terms of section 51 (1)(e) of the Public Finance Management Act (PFMA) against any employee who permits irregular expenditure or commits an act which undermines the financial management and internal control systems.

d)       Irregular expenditure is recorded and disclosed in the financial statements in terms of section 55(2)(b)(i) and (ii) of the PFMA.

e)       The prior year’s errors are adjusted against the reserves.

f)         The prior year’s adjustments are disclosed separately in a note in the annual financial statements according to GRAP 3.

 

6. National Skills Fund expenses

The Auditor-General identified that:

Sufficient, adequate and appropriate supporting documents for an amount of R1 344 000 relating to a credit transaction, which was offset against National Skills Fund expenditure in the annual financial statements could not be obtained.

 

The Committee recommends that the Accounting Authority ensures that:

Controls are in place for the reliability of the operating system, the accuracy of the data outputs and the protection of files.

 

7. Trade and other payable from exchange transactions

The Auditor-General identified the following:

a)       The existence, obligation, completeness and valuation of the following amounts included in trade and other payable from exchange transactions as a result of lack of supporting documentations and explanation could not be determined:

§         A difference of R4 288 000 for discretionary payables as disclosed in note 18 to the annual financial statements was identified between the accruals listing and the annual financial statements.

§         A reconciliation between the accrual listing and the amount in the financial statements was not performed.

§         An amount of R8 205 000 relating to discretionary grant creditors with debit balances included in note 18 to the annual financial statements.

§         Discretionary grant creditors with debit balances were incorrectly classified as creditors instead of debtors.

§         As a result of these errors trade and other payable from exchange transactions payable and other receivables from exchange transactions are understated by R8 205 000.

§         An amount of R6 094 000 for other payables as disclosed in note 18 to the annual financial statements.

§          An amount of R3 286 000 for mandatory grants creditors as disclosed in note 18 to the annual financial statements.

§         An amount of R1 140 000 for payroll liabilities as disclosed in note 18 to the annual financial statements.

b)             ESETA incorrectly classified mandatory grants payable of R595 000 as discretionary grants payable.

 

The Committee recommends that the Accounting Authority ensures that:

a)             All amounts disclosed as accounts payable actually exist.

b)             All transactions are reviewed before they are captured in the accounting system.

c)             Adequate training is provided to staff for the necessary skills for proper and accurate accounting records.

d)             Adjusting entries are processed to correct errors identified.

 

8. Trade and other receivables from exchange transactions

The Auditor-General identified that:

ESETA recognised payments made in the current year for services delivered in prior years as prepayments. This resulted in an overstatement of prepayments and trade payables from exchange transactions by R1 050 000.

 

The Committee recommends that the Accounting Authority ensures that:

a)                   Adequate training is provided to staff for the necessary skills for proper and accurate accounting records.

b)                   Management reviews the entire accounting record to guarantee that it is complete, accurate and valid.

 

9. Reserves

The Auditor-General identified that:

Included in the mandatory grants disbursed amounting to R76 678 000 which is disclosed in note 7 to the financial statements, is an amount of R7 215 000 which should have been accounted for as a prior period error in terms of GRAP 3. As a result, prior periods mandatory grants expenditure is understated by R7 215 000 and the opening reserves are overstated by R7 215 000.

 

 

The Committee recommends that the Accounting Authority ensures that:

a)                   Adequate training is provided to staff for the necessary skills for proper and accurate accounting records.

b)                   All the mandatory grants payments are automated and the accuracy of the system is audited regularly.

 

10. Provisions

The Auditor-General identified the following:

a)                   ESETA did not record leave taken by its employees in the payroll system during the year under review.

b)                   Following a recalculation of leave balances based on manual leave forms, a difference of R612 000 was identified between the amount as disclosed in note 20 to the annual financial statements and Auditor-General’s calculation.

c)                   The discrepancy was a result of inadequate controls over the recording of transactions.

d)                   As a result, provisions are overstated by R612 000 and cost of employment included in the administration expenses is overstated by R612 000.

 

The Committee recommends that the Accounting Authority ensures that:

a)                   Adequate training is provided to staff for the necessary skills for proper and accurate accounting records.

b)                   Adjusting entries are processed to correct errors identified.

 

11. Commitments

The Auditor-General identified that:

Sufficient and appropriate documentation to support commitments amounting to R79 113 000 as disclosed in note 23 to the annual financial statements could not be obtained.

 

The Committee recommends that the Accounting Authority ensures that:

Amounts disclosed as commitments are valid and complete.

 

12. Prior period error

The Auditor-General identified that:

Sufficient and appropriate audit evidence for the following amounts included in the prior period error note 28 to the annual financial statements could not be obtained:-

a)       An amount of R4 278 000 for the line item “prior profit/loss not accounted for”.

b)       An amount of R10 281 000 relating to the line item “movement of reserves”.

 

The Committee recommends that the Accounting Authority ensures that:

a)             ESETA staff is adequately trained in financial reporting.

b)             All the work that has been done by employees is reviewed by a senior person.

 

13. Irregular expenditure

The Auditor-General identified the following:

ESETA did not disclose the irregular expenditure amounting to R5 036 000 which was incurred during the year under review. The regular expenditure resulted from the following:-

a)       The quotation and/or bidding processes were not adhered to in the procurement of goods and services amounting to R4 370 000.

b)       Tenders were not always advertised in the government Tender Bulletin.

c)       Approvals were not always obtained for administration expenditure prior to expenditure being incurred on projects as required by the Skills Development Grant Regulation. Where approvals were obtained prior to administration expenses on projects were incurred, they were still classified as employer grants and project expenses instead of administration expenses. The correct classification of these expenses will result in ESETA exceeding the allowable 12,5 % for administration expenses as per the Skills Development Act by an amount of R666 000.

 

The Committee recommends that the Accounting Authority ensures that:

a)             Irregular expenditure is disclosed in the annual financial statements.

b)             Supply Chain Management policies are adhered to and disciplinary measures are taken against employees who contravene policies.

c)             There is proper classification of administrative expenses.

 

14. Cash flow statement

The Auditor-General identified that:

a)                   According to GRAP 2, only actual cash receipts should be included as cash received from stakeholders.

b)                   Not all actual cash flows and movements in net working capital and finance leases were taken into account by ESETA in preparing the cash flow statement.

 

The Committee recommends that the Accounting Authority ensures that:

a)                   Adequate training is provided to staff for the necessary skills for proper and accurate accounting records.

b)                   Adjusting entries are processed to correct errors identified.

 

15. Disclosure

The Auditor-General identified the following:

a)             The amounts per the disclosure notes to the financial statements must agree to the statement of financial position, statement of financial performance, statement of changes in net assets and the cash flow statement.

b)             The reserves balance at 31 March 2009 of R45 797 000 as disclosed in note 28 differs by an amount of R9 453 000 as compared to the amount disclosed in the statement of changes in net assets.

c)             The restated amount at 31 March 2009 (after taking into account the prior years errors) differs by an amount of R1 058 000 as compared to the amount disclosed in the statement of change in net assets.

 

The Committee recommends that the Accounting Authority ensures that:

a)             Adequate training is provided to staff for the necessary skills for proper and accurate accounting records.

b)             Adjusting entries are processed to correct errors identified.

c)             Disclosure issues identified are corrected in the annual financial statements.

 

16. Statement of changes in net assets

The Auditor-General identified the following:

a)             Included in the statement of changes in net assets is a line item “movement of reserves” amounting to R22 138 000 and a line item “allocation of unappropriated surplus or deficit not reflected” amounting to R20 252 000 which were incorrectly adjusted against the discretionary grant reserve.

b)             As a result, the grant reserve is overstated by R1 886 000.

 

The Committee recommends that the Accounting Authority ensures that:

a)             Adequate training is provided to staff for the necessary skills for proper and accurate accounting records.

b)             Adjusting entries are processed to correct errors identified.

 

17. Human resources and related issues

The Auditor-General identified the following:

a)             The Chief Financial Officer position was vacant as at 31 March 2010.

b)             ESETA does not measure performance of management and staff.

c)             Not all leave taken by employees was captured accurately and in full.

d)             Reconciliations between the payroll system and the general ledger were not done. Control accounts as posted to by the VIP system were not cleared on a monthly basis.

 

The Committee recommends that the Accounting Authority ensures that:

a)             The position of the Chief Financial Officer is filled by appointing an appropriately qualified permanent official.

b)             Leave forms are timeously and correctly captured on PERSAL and measures be taken against employees who fail to capture records.

c)             Human Resources policies, including performance management, are developed and implemented.

d)             Department of Public Service and Administration policies and procedures are complied with.

e)       Monthly reconciliations are made between the payroll system and the general ledger.

 

18. Supply Chain Management (SCM) issues

The Auditor-General identified the following:

a)       In three instances, quotations were not invited in all instances.

b)       A list of prospective suppliers from whom to invite price quotations was not in place.

c)       The preference point system as required by the Preferential Procurement Policy Framework Act (Act No. 5 of 2000) was not applied in the procurement of all goods and services above R30 000.

d)       Contracts were amended, extended or renewed without approval by a delegated official.

e)       SCM policies and procedures were in conflict with legislation.

f)         The fraud prevention plan did not include specific measures for preventing and detecting fraud in the procurement process.

g)       Services were still being procured after the contract has expired.

 

The Committee recommends that the Accounting Authority ensures that:

a)       The entity’s SCM policy is updated, encompassing all the elements of the PFMA, Treasury Regulations, Preferential Procurement Framework Act, Preferential Procurement Regulations and SCM practice notes issued by the National Treasury that will ensure an appropriate procurement and provisioning system which is fair, equitable, transparent, competitive and cost effective.

b)       A proper filing system for all information supporting SCM related transactions is kept.

c)       Monthly reconciliations are done in order to avoid non-compliance with SCM requirements.

d)       Internal audit scope with regards to SCM is increased to ensure that day to day controls are effectively implemented and all procurements comply with SCM legislative requirements.

 

19. Conclusion

The Committee is concerned that ESETA has had a disclaimer of audit opinion for years. The audit has consistently highlighted a lack of leadership by both management and the ESETA Board and a lack of adequate skills which is a result of improper employment practices.

 

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

 

 

Report to be considered.