ATC110622: Eighth Report Annual Report and Financial Statements of the Department of Water Affairs & the Special Investigations & the report of the Auditor-General on the Financial Statement of the Department of Water Affairs for the 2009/10 financial year
Public Accounts (SCOPA)
Eighth Report of the Committee on Public Accounts on the Annual Report and Financial Statements of the Department of Water Affairs and the Special Investigations and the report of the Auditor-General on the Financial Statement of the Department of Water Affairs for the 2009/10 financial year, dated 22 June 2011
1. Introduction
The Committee on Public Accounts (the Committee) heard evidence on and considered the content of the Annual Report and the Report of the Auditor-General (AG) on the 2009/10 financial statements of the Department of Water Affairs( the Department), the Water Trading Entity and the Special Investigations Report by the AG. The Committee noted the qualified audit opinion, highlighted areas which required the urgent attention of the Accounting Officer, and reports as follows:
2 . The Department of Water Affairs
2.1 Immovable assets
The Auditor-General was unable to verify the existence and completeness of immovable capital tangible assets stated at R33 499 000 (2009: R5 043 122 000) as disclosed in note 32 to the financial statements.
The Committee recommends that the Accounting Officer ensures that:
a) The Department maintains asset registers for each category of assets as required by the Department’s Financial Reporting Framework Guide; and
b) The assets on these registers are verified regularly and correspond to financial records of the Department.
2.2. Movable Assets
The Auditor-General identified the following:
a) The closing balance for all movable tangible capital assets of R90 724 000 as disclosed in note 30 of the financial statements, does not correspond with the balance of R48 257 427 per the asset register.
b) The Department did not provide sufficient and appropriate evidence to explain the difference between the disclosure note and the underlying asset register of
R42 895 573.
c) The Department’s record did not perform the application of alternative procedures to verify the existence and completeness of movable assets.
The Committee recommends that the Accounting Officer ensures that:
a) The asset register is reconciled frequently to the financial records in order to identify and correct any discrepancies; and
b) All officials who record transactions are provided training on the use of Standard Charts of Accounts (SCOA) codes.
2.3. Goods and services
The Auditor-General identified the following:
a) The additions for movable tangible assets of R33 800 000 as disclosed in note 30 of the financial statements does not correspond with the additions of R16 160 794 in the asset register.
b) The difference is a result of misclassification of expenditure on goods and services as capital expenditure.
c) The Department incomplete records did not allow for the application of alternative procedure.
d) The effect of the misclassification on the tangible assets balance and on the goods and services amount contained in the financial statements could not be determined.
The Committee recommends that the Accounting Officer ensures that:
a) The asset register is reconciled frequently to the financial records in order to identify and correct any discrepancies; and
b) All officials who record transactions are provided training on the use of SCOA codes.
3. Water Trading Entity (The Entity)
3.1 Suspense Accounts
The Auditor-General identified the following:
a) Treasury Regulation 17.1.2 requires the source of the transactions in a clearing account to be readily identifiable, as well as monthly reconciliations to confirm the balance of the account. This information could not be provided for the transactions in the clearing account disclosed as part of the unallocated receipts note 10.2 of the financial statements.
b) The transactions that have been journalised out of this clearing account could not be supported by adequate supporting documentation.
c) The entity’s records did not permit the application of alternative audit procedures regarding the clearing account.
d) Sufficient appropriate audit evidence to satisfy existence, obligations, completeness, valuation and allocation of the clearing account could not be obtained.
The Committee recommends that the Accounting Officer ensures that:
a) The Chief Financial Officer (CFO), Finance Director and Revenue Directors closely monitor the exercise of clearing of suspense accounts by designing and implementing action plans to ensure that these accounts have insignificant balances at the end of the financial year;
b) Adequate policies and procedures for the clearing of suspense accounts are designed; and
c) Adequate reviews of suspense accounts are performed, timeously.
3.2 . Water related services revenue
The Auditor-General identified the following:
a) An amount of R231 791 894 relating to “return to sender” invoices was excluded from water related services revenue.
b) The South African Statement of Generally Accepted Accounting Practice (GAAP) and the International Accounting Standards (IAS) 18 require that revenue should be recorded when it is probable that economic benefit will flow to the entity.
c) There was an inadequate system of control to assess the probability of recording these amounts as revenue which is reliable for audit purposes.
d) Audit evidence to support the completeness of water related services revenue of
R1 643 715 as disclosed in the statement of comprehensive income could not be obtained sufficiently.
The Committee recommends that the Accounting Officer ensures that:
a) Adequate evidence exists to conclude when it is probable that economic benefits will flow into the entity for a specific invoice;
b) Revenue recorded is complete; and
c) The Entity complies with IAS 18.
3.3. Unrecorded liabilities
The Auditor-General identified the following:
a) There was no system of control over the recording of outstanding invoices at year-end.
b) There were no satisfactory audit procedures to obtain reasonable assurance that all outstanding invoices have been accrued or provided for.
c) The completeness of the accrual liability in the annual financial statements could not be concluded.
The Committee recommends that the Accounting Officer ensures that:
a) Adequate cut-off procedures to guarantee that all transactions for the financial year are recorded in the annual financial statements; and
b) Adequate creditor reconciliations is done for all significant creditors at 31 March in order to ensure that all outstanding liabilities have been recorded in the annual financial statements.
3.4. Accounts Receivable
The Auditor-General identified the following:
a) The completeness, existence and valuation of water user debtors as disclosed in note 10.1 of the financial statements could not be verified.
b) A limited amount of debtors confirmed their balances and the alternative audit procedure did not render satisfactory results
c) Reasonable assurance that debtors balance exists and are disclosed at the correct value in the annual financial statements
d) The completeness of the trade debtors due to the limitation in the completeness of the water related services revenue could not be concluded.
The Committee recommends that the Accounting Officer ensures that:
The monthly debtors’ reconciliations are prepared and reviewed through regular monitoring to ensure that the debtors’ balances are correct at the end of the financial year.
3.5. Irregular expenditure
The Auditor-General identified that:
As disclosed in note 27 of the financial statements, irregular expenditure to the amount of R6 907 000 was incurred, as proper tender processes had not been followed.
The Committee recommends that the Accounting Officer ensures that:
a) The Entity has an updated Supply Chain Management Policy encompassing all the elements of the Public Finance Management Act (PFMA)(No.1 of 1999), the Treasury Regulations, the Preferential Procurement Framework Act, the Preferential Procurement Regulations, and Supply Chain Management (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) Appropriate disciplinary measures are taken against employees who were responsible for incurring irregular expenditure in terms of section 38(1)(h)(iii) of the PFMA;
c) The Department implements effective, efficient and transparent financial and risk management processes; and
d) The Department strengthens its internal control systems in order to avoid incurring further irregular expenditure.
3.6. Restatement of corresponding figures
The Auditor-General identified that:
As disclosed in note 23 of the financial statements, the corresponding figures for the year ended 31 March 2009 have been restated as a result of errors discovered during the year ended 31 March 2010 in the financial statements of the Water Trading Entity at, and for the year ended, 31 March 2009.
The Committee recommends that the Accounting Officer ensures the following:
a) The financial statements and other information included in the annual report are checked and reviewed for completeness and accuracy prior to the audit process; and
b) All amendments to financial statements and information are effected before the audit process commences.
3.7. Material losses through write-off of debtor balances and impairment of infrastructural assets
The Auditor-General identified the following:
a) As disclosed in note 7 of the financial statements, impairment of infrastructure assets of R446 533 000 occurred as a result of assets not being able to functionally perform as contemplated when they were initially designed, mainly because of limited utilisation and loss of functionality due to siltation.
b) As disclosed in note 10.1 of the financial statements, R115 197 000 of long outstanding debt has been written off due to management’s assessment that the recoverability of these amounts are slim.
The Committee recommends that the Accounting Officer ensures that:
a) Infrastructure assets are serviced and maintained by approved service providers on a regular basis to prevent further impairment of infrastructure assets;
b) Effective and appropriate steps are taken timeously to collect all money due to the entity, including maintenance of proper accounts and records of all debtors as required by Treasury Regulations 11.2.1(a);
c) Monthly debtors reconciliations are prepared and reviewed on a regular basis; and
d) There is continuous monitoring of debtors accounts to guarantee that account balances are correct at the end of the financial year.
4. Special Investigation Report
The Auditor-General reported on the under-mentioned investigations and identified the following:
4.1. Supply Chain Management (SCM)
As required by section 38 (1) (a)(iii) of the Public Finance Management Act (PFMA), a Procurement User manual exists at the Department of Water Affairs (DWA). Instances were identified where officials of the DWA did not always appropriately adhere to the DWA Procurement User manual and the procurement directives issued by the National Treasury. The PFMA stipulates that, where procurement prescripts are contravened, the expenditure incurred should be regarded as irregular expenditure. The irregular expenditure can be condoned ex post facto. The appointments of the service providers are mentioned below:
4.2. Extension of contract with Arivia.kom
a) According to the DWA Procurement manual, contract periods may only be extended for a maximum period of a year. The DWA Delegation of Authority indicates that the original contract value may not be increased by more than 50%.
b) According to an unsigned contract, the DWA entered into a contract with Arivia.kom for a period of 36 months ending 28 February 2006 for an amount of R180 million. According to the above regulations, the contract could only be extended until
c) 28 February 2007 for an amount of not more than R90 million (50% of the original value).
d) The contract was extended by 49 months and the original value was increased from R180 million to R1, 056 billion (587% instead of 50%).
e) The former Director-General (DG) approved the extension from 01 March 2009 to
f) 30 November 2009 (9 months) for an amount of R344 million in contravention of the DWA Procurement User Manual and the DWA Delegation of Authority.
g) The suspended acting DG approved a further extension of the contract for the period 01 December 2009 to 31 March 2010 for an amount of R80 million in contravention of the DWA Procurement User Manual and the DWA Delegation of Authority.
h) Although AGSA reported in May 2010 that the contract was extended in contravention of the DWA Procurement User Manual and the DWA Delegation of Authority and constitutes irregular expenditure, the contract has not been cancelled.
4.3. Appointment of Solexperts AG
a) The chairperson of the departmental bid adjudication committee (DBAC) approved the request to approach a sole provider on 31 October 2008 and the appointment of Solexperts AG as the sole provider for the upgrading of the Trivec Surveillance System on 15 December 2008.
b) No significant deviations were identified except that DWA could not provide the contract with Solexperts AG.
4.4. Appointment of Dr Olver
a) The DWA paid Dr Olver an amount of R289 902 before a contract was signed. The former DG approved the appointment and this was not disclosed in the DWA’s annual report 2008/09.
b) The former DG and Dr Olver were co-directors and strategic partners in Tourism and Nehanda Group and therefore a personal relationship existed.
c) No evidence could be found that the former DG excused herself from the appointment of Dr Olver.
4.5. Appointment of PISM
a) The DWA requested PISM to submit a proposal without following a bidding process. Reasons for not inviting competitive bids were not recorded as required according to DWA Procurement User Manual.
b) Although a bidding process was not followed, the DBAC rectified and approved the appointment of PISM on 23 June 2008.
c) The proposal submitted by PISM was for an amount of R3 890 740 (VAT inclusive), however the contract was signed for an amount of R4 356 932 (VAT inclusive) and PISM was paid an amount of R4 115 378 (VAT inclusive).
4.6. Appointment of Duma Travel, Connex Travel and Sure Flywell Travel for the rendering of travel reservation services
a) An open bidding process was followed. The BEC recommended that Travel with Flair should be appointed as the other bids did not comply with the bid specifications.
b) The former DG did not agree with the composition of BEC and ordered the proposals to be re-evaluated by a different BEC established by her.
c) The second BEC appointed Duma Travel, Connex Travel and Sure Flywell Travel. The service providers did not comply with Preferential Procurement Policy Framework Act (Act No 5 of 2000).
d) The former DG approved the appointment of Duma Travel, Connex Travel and Sure Flywell Travel for an amount of R120 million for a period of 24 months on 1 December 2008.
The Committee recommends that the Accounting Officer ensures that:
a) Appropriate corrective action is taken against officials of the DWA for approving the extension of the contract on various occasions in contravention of the DWA Procurement User Manual and the DWA delegation of Authority;
b) Contract period extensions, where appropriate, are finalized well in advance before the contract expires and should be approved properly by the DBAC and the DG;
c) The total amount paid to the service provider for the period when the contract was extended in contravention of the DWA Procurement User manual and the DWA Delegation of Authority is reported as irregular expenditure in terms of the requirements of the PFMA;
d) The DWA takes appropriate corrective action against officials of the DWA who were responsible for contraventions of the Treasury Regulations and the practice notes issued by the National Treasury;
e) As SCM prescripts were contravened in the appointment of the service providers, all payments made to the service providers amounting to R85, 6 million are regarded as irregular expenditure and reported in accordance with the stipulations of the PFMA;and
f) The DBAC is composed of functional teams comprising of senior officials, of whom one must be a Supply Chain Management practitioner.
4. Conclusions
The Committee notes that the AGSA concluded, following a Special Investigation, that massive irregular expenditure had been incurred in both contracts and procurement practices in the DWA, and further that these irregularities are alleged to have involved officials at the highest level of the administration of the DWA. The Committee urges the Minister of the Department of Water Affairs to apply corrective measures necessary to recover all and any monies found to have been irregular expended.
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 after the adoption of this report by the House.
Report to be considered.
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