ATC120523: Report on Annual Reports & Financial Statements of the Department of Public Works & the Property Management Trading Entity for the 2010/11 Financial Year, dated 23 May 2012
Public Accounts (SCOPA)
DRAFT RESOLUTION
NINTH REPORT OF THE COMMITTEE ON PUBLIC ACCOUNTS ON THE REPORT OF THE AUDITOR GENERAL ON THE ANNUAL REPORTS AND FINANCIAL STATEMENTS OF THE DEPARTMENT OF PUBLIC WORKS AND THE PROPERTY MANAGEMENT TRADING ENTITY FOR THE 2010/11 FINANCIAL YEAR , DATED 23 MAY 2012
1. Introduction
The Committee on Public Accounts (the Committee) heard evidence on and considered the contents of the Annual Report and Report of the Auditor-General on the financial statements of the Department of Public Works (the Department) for the 2010/11 financial year.
The Committee noted the disclaimer of audit opinion, and expressed concern at the fact that this has been a recurring problem with the Departments audit outcomes over the years. This is clearly as a result of instability of leadership in the Department. The Committee further noted the reported lack of internal controls, which render the Department increasingly dysfunctional. The Committee highlighted areas which required the urgent attention of the Accounting Officer, and reports as follows:
2. Immovable tangible capital assets
The Auditor-General identified the following:
a) The department did not provide sufficient and appropriate audit evidence to confirm the completeness, existence, rights, valuation and allocation of properties recorded in the immovable asset register of the department stated at R3 498 747 000 in note 34 to the financial statements;
b) There was no supporting documentation for the restatement as disclosed in note 34 to the financial statements, the corresponding figure for immovable assets has been reduced by R6 091 920 000 in order to address a prior financial years misstatement; and
c) The existence, completeness, valuation and allocation of, and rights pertaining to, the restated immovable assets corresponding figure of R2 238 008 000, could not be confirmed.
The Committee recommends that the Accounting Officer ensures that:
a) Capacity constraints in the Department are addressed so that its officials take ownership of and responsibility for the immovable asset register;
b) All information listed in the asset register is supported by valid documentation;
c) The asset register is updated and maintained throughout the year and adheres to the requirements for asset registers by the National Treasury; and
d) Valuation of assets is done in accordance with the applicable accounting framework.
3. Irregular and other expenditure
The Auditor-General identified the following:
a) The Department did not have an adequate system in place for identifying and recognising all irregular expenditure. The completeness of irregular expenditure relating to the 2010/11 financial year stated at R1 396 000 (2010: R27 402 000) in note 26 to the financial statements could not be confirmed;
b) Irregular expenditure was understated by R16 552 542 due to payments that were made in contravention of supply chain management requirements not being included in irregular expenditure relating to the 2010/11 financial year, disclosed at R1 396 000 in note 26 to the financial statements; and
c) Audit evidence for expenditure transactions recorded with an estimated value of R154 648 753 could not be obtained. The occurrence, accuracy and compliance of goods and services amounting to R819 046 000 and expenditure for capital assets stated at an amount of R1 340 569 000 in the statement of financial performance, could not be verified.
The Committee recommends that the Accounting Officer ensures that:
a) The completion of the deviation registers is made compulsory for all offices;
b) The deviations are monitored, investigated and discussed at top management level, and appropriate disciplinary action is taken against officials who are responsible for unjustifiable deviations;
c) Supply chain management policies are updated and circulars to this effect issued, and monitoring controls are strengthened to ensure adherence;
d) Capacity constraints in the internal audit unit are addressed; and
e) A comprehensive policy with corresponding procedures is implemented to ensure proper record-keeping.
4. Lease commitments
The Auditor- General identified the following:
a) Audit evidence could not be obtained for the restatement of the comparative for operating leases of R115 039 000;
b) The obligation, valuation and classification of the operating lease commitments corresponding figure of R115 039 000 as disclosed in note 24.1 to the financial statements, could not be confirmed; and
c) Information technology (IT) finance leases entered into in April 2009 were not included in the finance lease commitments during the financial year. Available lease registers did not contain the commitments as at the end of the prior financial year. The completeness of the finance lease commitments of the prior financial year, amounting to R7 797 000 as disclosed in note 24.3 to the financial statements, could not be confirmed.
The Committee recommends that the Accounting Officer ensures that:
a) Sufficient audit evidence is made available on time for all disclosure notes in the financial statements, for audit purposes;
b) Control measures are implemented to ensure completeness of information disclosed; and
c) Officials at regional offices are capacitated and trained to perform these functions.
The committee has noted the committments made by the Minister of Public Works to review and investigate all leases within the Department, in order to ensure that all leases have been entered into a transparent, effective and economic manner.
5. Contingent liabilities
The Auditor-General identified the following:
a) Claims against the Department amounting to R5 095 376 were not included in the contingent liabilities disclosed. Furthermore, the Department did not perform any assessment as to the most likely settlement amounts. The valuation and completeness of claims against the Department stated at R29 395 000 in note 20 to the financial statements could not be confirmed; and
b) Contingent liabilities were understated by R3 636 000 due to unconfirmed interdepartmental balances not being included in disclosure note 20 to the financial statements.
The Committee recommends that the Accounting Officer ensures that:
a) Assessments of claims are documented and included in audit files submitted with the financial statements; and
b) A reconciliation of claims disclosed in the Department and those disclosed in the Property Management Trading Entity is performed to ensure completeness of disclosures.
6. Public-private partnership (PPP)
The Auditor-General identified the following:
a) As disclosed in note 30 to the financial statements, the Department is participating in a PPP for the lease of vehicles. However, neither lease expenditure nor lease commitments have been included in the disclosure note;
b) Lease expenditure for the 2010/11 financial year was understated by R19 955 610 (by R17 400 000 the prior financial year), but the Departments accounting records did not permit the quantification of the omission of prior financial year lease expenditure; and
c) The extent to which the lease expenditure of the prior financial year and the lease commitments of the 2010/11 financial year had been understated could not be determined.
The Committee recommends that the Accounting Officer ensures that:
a) Monitoring controls are implemented to ensure that disclosures are in line with the prescribed accounting framework; and
b) A comprehensive policy with corresponding procedures is implemented to ensure proper record-keeping.
7. Property Management Trading Entity
The Committee heard evidence on and considered the contents of the Annual Report and Report of the Auditor-General on the 2010/11 financial statements of the Property Management Trading Entity. The Committee noted the disclaimer of audit opinion, highlighted areas which require the urgent attention of the Accounting Officer, and reports as follows:
7.1 Irregular expenditure
The Auditor-General identified the following:
a) The entity did not have adequate systems for identifying and recognising all irregular expenditure. The completeness of irregular expenditure relating to the current year stated at R138 637 000 (2010: R264 180 000) in note 12 to the financial statements could therefore not be confirmed; and
b) Payments amounting to R291 668 886 were made in contravention of supply chain management requirements. The amount was not included in irregular expenditure, disclosed in note 12 to the financial statements, resulting in irregular expenditure being understated by R291 668 886.
The Committee recommends that the Accounting Officer ensures that:
a) The planned project, to implement a system that enables continuous financial reporting in line with the requirements of the SA statements of GAAP, is prioritised and finalised as a matter of urgency;
b) The completion of the deviation registers is made compulsory for all offices;
c) The deviations are monitored, investigated and discussed at top management level, and appropriate disciplinary action is taken against officials who are responsible for unjustifiable deviations;
d) Supply chain management policies are updated and circulars to this effect issued, and monitoring controls are strengthened to ensure adherence; and
e) A comprehensive policy with corresponding procedures is implemented to ensure proper record-keeping.
7.2 Fruitless and wasteful expenditure
The Auditor-General reported that the entity did not have adequate systems for identifying and recognising all fruitless and wasteful expenditure. The completeness of fruitless and wasteful expenditure of R6 772 000 in note 12 to the financial statements could therefore not be confirmed.
The Committee recommends that the Accounting Officer ensures that:
a) The fruitless and wasteful expenditure register is compiled monthly, and management review the register to ensure compliance with Treasury Regulations and the Public Finance Management Act (PFMA);
b) The entity implements adequate and appropriate systems to identify unutilised or underutilised buildings so as to avoid frutiless and wasteful expenditure; and
c) Monies are recovered from employees who were responsible for incuring such fruitless and wasteful expenditure.
7.3 Bank overdraft
The Auditor-General reported that the entity did not apply the principles contained in SA Statements of GAAP, IAS 39 (AC 133) Financial Instruments: Recognition and Measurement correctly and was unable to provide sufficient appropriate audit evidence for the assumptions used in determining the accounting treatment of the bank overdraft.
As a result, interest received stated at R123 657 000 in note 9 to the financial statements - was overstated by R84 510 107 and the bank overdraft stated at R1 254 763 000 in note 4 to the financial statements was understated by R84 510 107.
The Committee recommends that the Accounting Officer ensures that:
a) Adequately skilled personnel with the necessary GAAP knowledge and experience are employed, and that current staff members are trained to ensure correct application of GAAP principles; and
b) The financial statements and supporting schedules are reviewed in line with the SA statements of GAAP and that all deficiencies are resolved before they are submitted for audit.
7.4 Other commitments
The Auditor-General reported that the occurrence, obligations, completeness, classification and accuracy of commitments of R9 475 435 000 in note 13 to the financial statements could not be verified due to a lack of sufficient appropriate audit evidence.
The Committee recommends that the Accounting Officer ensures that:
a) A comprehensive policy with corresponding procedures is implemented to ensure proper record-keeping; and
b) Responsibility for the safeguarding of documents is clearly assigned to individuals and action is taken if documentation is lost.
7.5 Contingent liabilities
The Auditor-General identified the following:
a) The entity did not assess the probability of the outflow of future economic benefits in respect of claims made against the entity as required per SA Statements of GAAP, IAS 37. As a result the audit team was not able to determine whether contingent liabilities reflected were accurately valued and whether, based on the probability of the outflow of future economic benefits, in certain instances a provision should have been raised. Consequently, the completeness, occurrence, obligations, classification and valuation of contingent liabilities stated at R129 436 000 in note 14 to the financial statements could not be verified; and
b) The entity could not provide evidence for the prior financial year error (reduction of contingent liabilities by R320 728 000). Consequently the occurrence, obligation, completeness, classification and valuation pertaining to the contingent liabilities corresponding figure of R70 276 000 in note 14 to the financial statements could not be verified.
The Committee recommends that the Accounting Officer ensures that:
a) Monitoring controls are implemented to ensure that disclosures are in line with the prescribed accounting framework;
b) Assessments of claims are documented and included in audit files submitted with the financial statement; and
c) A reconciliation of the claims disclosed in the department and those disclosed in the Property Management Trading Entity is performed to ensure completeness of disclosures.
7.6 Operating lease commitments
The Auditor-General reported that the operating lease commitments from the perspective of both the lessee and lessor stated at R12 521 880 000 in note 13 to the financial statements, were understated by an estimated amount of R2 651 698 215. This resulted from the calculation of the operating lease commitment being based on the straight-line lease payments instead of taking the minimum lease payments into account as per SA Statements of GAAP, IAS 17 (AC105) on Leases.
The Committee recommends that the Accounting Officer ensures that:
a) Adequately skilled personnel with the necessary GAAP knowledge and experience are employed, and that the current staff members are trained to ensure correct application of GAAP principles; and
b) The financial statements and supporting schedules are reviewed in line with the SA statements of GAAP and that all deficiencies are resolved before they are submitted for audit.
7.7 Related parties
The Auditor-General reported that due to the lack of a proper accounting system for trade receivables and unreconciled individual trade receivable balances at year-end, the existence, completeness, valuation, rights and obligations of related party balances as well as the occurrence, completeness, accuracy, cut-off and classification of related party transactions, as disclosed in note 15 of the financial statements, could not be verified.
The Committee recommends that the Accounting Officer ensures that:
a) Adequately skilled personnel with the necessary GAAP knowledge and experience are employed, and that the current staff members are trained to ensure correct application of GAAP principles;
b) The financial statements and supporting schedules are reviewed in line with the SA Statements of GAAP and that all deficiencies are resolved before they are submitted for audit;
c) Policies and procedures are developed to regulate the identification and recording of related parties in line with GAAP; and
d) A register to record all related party transactions is implemented.
7.8 Restatement of comparative amounts
The Auditor-General reported that the entity did not include a narrative note as per the requirements of SA Statements of GAAP, IAS 8 on the nature of the restatements disclosed.
The Committee recommends that the Accounting Officer ensures that:
a) Adequately skilled personnel with the necessary GAAP knowledge and experience are employed, and that the current staff members are trained to ensure correct application of GAAP principles; and
b) The financial statements and supporting schedules are reviewed in line with the SA statements of GAAP and that all deficiencies are resolved before they are submitted for audit.
7.9 Investigations
The Auditor-General reported on investigations relating to:
a) The alleged abuse of urgent and emergency procurement as well the utilisation of sole suppliers. The investigation aims to establish whether there was collusion between officials and service providers and to determine any reckless spending of funds. The investigation was still ongoing at the reporting date;
b) Irregular expenditure in respect of the leasing of properties as well as an alleged irregular award of a tender and the incapacity of a contractor to fulfil his duties. The investigation was still ongoing at the reporting date;
c) Complaints and allegations of maladministration and improper and unlawful conduct by the Department of Public Works and the South African Police Service relating to the leasing of office accommodation in Pretoria; and
d) Complaints and allegations of maladministration and improper and unlawful conduct by the Department of Public Works and the South African Police Service relating to the leasing of the South African Police Services office accommodation in Durban.
The Committee notes the reported investigations and urges the Accounting Officer to ensure their finalisation without unnecessary delay, and to apply whatever corrective measures necessary to recover all monies found to have been irregularly expended.
8. Conclusion
The Committee requests that it is furnished with the report on investigations on lease commitments within the Department as soon as it becomes available.
The Committee recommends that the Executive Authority submits a progress report on the implementation of all the above recommendations to the National Assembly within 60 days of the adoption of this Report by the House.
The Committee further recommends that the Accounting Officer submits quarterly reports on all the above-mentioned recommendations.
Report to be considered
Documents
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