Parliament 2016/17 audit: Auditor-General briefing & research analysis

Meeting report

Mr V Smith (ANC), Co-Chairperson of the Joint Standing Committee, welcomed all in attendance and said that the Auditor-General of South Africa (AGSA), and Committee researchers would be briefing the Committee in preparation for its engagement with the leadership of Parliament to discuss its annual report. The session was to empower Members of Parliament (MPs) to ask questions effectively when the executive authority of Parliament was present.

AGSA Briefing

Ms Sharonne Adams, Business Executive: AGSA said that the purpose of AGSA was to assist the Committee in its oversight role when considering the 2016-17 annual report of Parliament.

Parliament linked their core objectives and mandates to the Medium Term Strategic Framework (MTSF). One of the core objectives AGSA was driving was the status of record review. With this review, AGSA was doing a ‘dip-stick exercise’ to see, from a control environment, if controls were in place and if action plans were monitored. In a status of record review, AGSA looked at eight items: oversight and monitoring, financial management, performance management, procurement and contract management, compliance management, human resource (HR) management, information technology (IT) management, and financial health. If these eight items were not addressed properly, they could have an impact on the audit outcome. The review was conducted on Parliament twice a year, in March and September, to get a “dip-stick view” of how Parliament was doing.

Parliament had received an unqualified audit report for 2016-17 financial year. During the audit process, there were no material misstatements that had to be adjusted for Parliament. On the areas of compliance to laws and regulations, AGSA did not identify any material findings relating to laws and regulations. However, one of the key concerns was related to the area of supply chain management (SCM). In the annual report, there had been an increase in irregular expenditure for 2016-17 compared to 2015-16. Additional irregular expenditure incurred in 2016-17 was R528 000. Amounts condoned relating to prior years was R13 million. The findings were mostly related to local content and tax clearance certificates. The key concern was that this could have an impact on Parliament’s audit outcomes for 2017-18 financial year. If auditors found similar findings in the 2017-18 annual report that were also in the 2016-17 annual report, this could result in a regression in terms of Parliament receiving a paragraph on the prevention of irregular expenditure.

When Parliament advertised for local content in terms of the requirements, the advert had not been clear that they required local content. The only reason it did not result in material non-compliance was because the amounts were below the threshold. The Committee could raise this with the executive authority -- to put adequate control processes in place to make sure non-compliance with local content requirements did not recur in the next financial year.

Looking at the quality of performance information, AGSA indicated that the information that Parliament submitted relating to programme two had not been accurate and reliable. Afterwards, they had made the adjustment. There were continuous material misstatements in this area which needed to be corrected. The Committee could propose to the executive authority that they should strengthen this process when  collating their performance information.

Looking at the status of internal control, AGSA had not identified any material internal deficiencies. However, the area of financial performance and management was concerning, mainly because of the findings from the SCM perspective and also in relation to the predetermined objectives. There were also repeat findings year on year that could ultimately have an impact on the outcomes of Parliament.

Ms Adams said the assurance providers all indicated some assurance. This was mainly because from a senior management perspective, there were repeat findings that were occurring on predetermined objectives and SCM. From an accounting officer (AO) perspective, action plans were not effective because similar findings occurred. From an executive authority perspective, AGSA had highlighted repeat findings in the management report. It had not reached the audit report by the time the quarterly report had to be submitted to the National Assembly (NA). This had resulted in the regression in respect of assurance providers.

Looking at the liability perspective, the post-retirement medical aid benefit was sitting at about R1 billion. For 2016-17, Parliament paid about R50 million extra, which normally came from the statutory appropriation from National Treasury (NT). From a financial health perspective, Parliament needed to be aware of the impact that post-retirement medical aid benefits could have on the financial position of Parliament.

Discussion

Co-Chairperson Smith said that if he understood correctly, Ms Adams had started off by saying Parliament had an unqualified audit report with no major breaches in policy compliance. However, then there was irregular expenditure where Parliament was doing business after contracts had expired, or procuring goods without prior approval, and no formal contracts.

Ms Adams said that those findings were for prior years.

Co-Chairperson Smith said that R13 million had been condoned as irregular expenditure, and asked who had the power to condone. R18 000 had been condoned as fruitless and wasteful expenditure. He had no idea why any government department could condone fruitless and wasteful expenditure, because this meant that it was something that should never have occurred. He asked how fruitless and wasteful expenditure was condoned. His understanding was that condonation resided with the Committee.

Mr N Singh (IFP) asked if the report was unqualified, and that AGSA had concerns about some internal controls -- was this referred to as a clean audit opinion?

Ms Adams agreed.

Ms N Mente (EFF) said that her understanding was that AGSA had found something irregular in the previous year, and had left instructions on how to deal with the irregular expenditure shortcomings. Was Ms Adams satisfied that there had been compliance with the instructions?

Ms E Coleman (ANC) asked AGSA to clarify the years under review with regard to the amounts condoned

AGSA’s Response

Ms Adams said that the R13 million condonation consisted of prior years where the executive authority had condoned. The Act itself said that the executive authority had the authority to condone irregular expenditure. From AGSA’s perspective -- to satisfy themselves -- if the expenditure was entered through a divisional management head, the policy indicated that a Special Dispensation Pardon (SDP) would be needed to approve that.

The R18 000 written off as fruitless and wasteful expenditure could have been for 2015/16, but because the write-off had occurred in 2017, it was reflected under 2017. The Act showed that the executive authority could approve fruitless and wasteful expenditure. For the current year, the fruitless and wasteful expenditure of R255 000 had occurred due to an event where banners were ordered but not used for an event, and certain equipment had been hired but then not used.

Co-Chairperson Smith asked who had the authority to condone.

Mr Wallied Heynes, Audit Manager, AGSA said the Financial Management of Parliament and Provincial Legislatures Act (FMPLA) stated that “the executive authority may approve departures from regulations or condone a failure to condone with a regulation, provided that the objective of the Act is not undermined.”

Co-Chairperson Smith asked if this related to fruitless and wasteful expenditure.

Mr Heynes said any departure from the regulations.

Co-Chairperson Smith said that if that was a lacuna in the Act, then it was fine and the Committee must accept the Act. If the Committee was challenging what AGSA was saying -- that it was not in the Act -- then the Committee should do that.

Mr M Waters (DA) asked if the AGSA was satisfied that the necessary process had been followed by the executive authority in condoning. He also asked for a breakdown of the fruitless and wasteful expenditure.

Mr Heynes said that Parliament had a governance assurance committee, and that committee would investigate any instances of fruitless and wasteful expenditure. It would investigate all instances brought before them and make a recommendation through the Secretary to Parliament, and the Secretary to Parliament would then make a recommendation whether the recommendation would be approved or not. Only then did it go to the executive authority. Once instances reached the level of the executive authority, they then acted on the recommendations of the Secretary.
Matters that had been condoned in 2016-17 were: R567 for damaged catering goods; R1 534 for damaged goods as well; a fine of R800 for VIP protection services; R15 000 for banners that Parliament had procured from a service provider, but then cancelled the event after the banners had already been procured; R48 000 for banners; loss of equipment came to R93 000 and R98 000. There were two instances of loss of equipment. An investigation had been conducted and AGSA had been provided with a breakdown of the amounts. For audit purposes, the amount was trivial -- they had something they classified as a “threshold,” and therefore the amount did not impact on the audit finding. However, because the amount was fruitless and wasteful, it was something that the Committee could probe the authority on.

Co-Chairperson Smith asked if Members were making notes.

Ms Mente said that there had been an irregular expenditure for a contract or job awarded to a Member of Parliament (MP), and asked if this was acceptable.

Mr J Steenhuisen (DA) asked how it was possible that Parliament had received 100% for compliance when he had written to the Auditor-General (AG) himself on how Parliament had materially failed to comply with the FMPLA in tabling monthly, quarterly and annual financial statements.

Ms Adams said that the amount condoned of R13 million was not inclusive of the R20 000.

She said that they had picked up on the MP doing business with Parliament while conducting the audit, and because that was not allowed in terms of the legislation, that part had not been condoned, and was therefore reflected as irregular expenditure.
 
Co-Chairperson Smith asked for the details of the MP to be sent to him, and he would share the details with the Committee.

Ms Adams said that AGSA clearly indicated in the directory the type of areas they focused on when looking at compliance with laws and regulations, and the main focus was on the financial statements’ perspectives. The fact that the quarterly report had not been submitted did not mean that they had not reported on it. It was reported in the management report. However, it was not audit report finding. From an audit report perspective, they assessed the materiality based on the methodology and looked at financial areas that would have an impact in terms of compliance to laws and regulation. The areas AGSA specifically focused on related to budgetary controls, financial statements, internal and external audit committee work, and expenditure management. The non-compliance was reported in the management report for Parliament.

Mr Steenhuisen said that one either complied 100% with legislation or one did not. AGSA was saying to Parliament that it had done well, even though it had not been doing well for years. It was not an accurate reflection, and Parliament was in fact in breach of one of the most fundamental laws of South Africa governing its financial management, and in breach of one of the most important oversights of those financial statements, which was by the Members of the Committee. He did not accept that AGSA should give Parliament 100% compliance when they were absolutely not compliant. He also asked why the AG had not acknowledged receipt of the letter he had sent and had never responded to it. It was a very poor showing on the part of the AG.

Co-Chairperson Smith asked if it was accurate what Mr Steenhuisen was saying -- that financials had not been submitted. If it was an accurate statement, then that is where it ended, because that is what AGSA had done a sample on, and it was therefore the Committee’s responsibility to probe the principle of it.
He said that AGSA did a sample audit of financials, but not a complete audit of everything. There were certain things the Committee would pick up that the AG would not, because it was not part of the sample.

Mr Steenhuisen said that he was referring to Section 54 (1) and (2) of the FMPLA, which stated that “the executive authority must table the monthly, quarterly, and mid-year reports in Parliament within five working days of receiving the report.” They had not done this, and he had had a huge argument with the Secretary to Parliament, who had said that AGSA had given him permission not to do so.

Ms Adams said that in the monthly financial reports, AGSA had raised a finding. Two of the four quarterly reports had been submitted, and the finding in the management report could be shared with the Committee. It was accurate that submission of reports did not always happen on time, and AGSA had raised that in the management report and communicated to Parliament.

She said that AGSA had not identified any incidents of material non-compliance in respect of compliance criteria for the applicable subject matters that it had looked at. The issue Mr Steenhuisen had raised would not be a specific subject matter that would result in an audit finding. The subject matter AGSA looked at with regard to being submitted on time was the year-end financial statements, whereas he had been referring to the monthly statements.

Ms Adams said that as far as she was aware, the AG had responded to Mr Steenhuisen’s correspondence.

Mr Steenhuisen said that Parliament had been given 100%, which meant that for legislative compliance…

Co-Chairperson Smith interrupted, and said Ms Adams did not have to respond, and that he was not disagreeing with what Mr Steenhuisen was saying.

Co-Chairperson Smith said that the AG did a sample audit report. If there were 10 issues and he picked up five, and in all five, there was 100% compliance, then he would say that there was 100% compliance but it was not 100% in all 10. Just the five that were sampled.

Mr F Essack (DA, Mpumalanga) asked about the disclosed litigations on page 140, and if they were possible outflows. He wanted to understand how the numbers were derived -- if they were possible outflows.

Ms Adams said that the report spoke of contingent liabilities, and this was when the final outcome to determine who would win the case was uncertain, and one was not 100% sure who would get the settlement. Auditors looked at the best estimate, which came from lawyers who determined what the best settlement would be. AGSA then did its own work and assessed the estimated amount and confirm if it was sound and could be collaborated in any way.

The Chairperson asked if it would be an intelligent question to ask Parliament -- whether they made provisions for the case or not. A prudent financial management approach would be to make a provision in the event that they lost the case.

Ms Adams said that a provision was where the timing and amount was certain, and in this case it was not certain. Hence it was a contingent liability. Parliament disclosed it as a contingent liability instead of a provision.

She advised the Committee that AGSA had responded to Mr Steenhuizen’s letter on 20 May 2016.

Research analysis

Ms Yolanda Brown, Research Unit, Parliament, said that there were 41 indicators, of which 20 had been achieved. However, when looking at this from a public value perspective, 89% of the budget had been spent. Expenditure against performance was very low. The core business programme was the worst performer. Of 22 targets, only seven were achieved.  All other programmes had underperformed, except for associated services. Associated services had four indicators and had achieved all of them.

There had been discrepancies in the annual report and the annual performance plan (APP). Some indicators were stated differently in the APP compared to what was reported in the annual report. Some targets set in the APP had been restated in the annual report. There were additional indicators and targets reported in the APP, but no target or indicator reported in the annual report. The performance reported against some indicators was not verifiable.

Poor performance was attributed to capacity issues. There were vacancies and sick leave taken throughout the financial year. Poor performance was attributed to capacity issues owing to vacancies and resignation in the high skilled production and the higher skilled supervisory category. There was a high number of employees utilising sick leave, which translated to low productivity. The low skilled category was absent for 13 days on average, either due to being over-worked, stress, or other issues.

Mr Mbuyiselo Hlekiso, Researcher, Parliament, said that Parliament received a budget of R2.2 billion. The compensation of employees had been overspent by R102 million. This should be classified as unauthorised expenditure, but did not show in the annual report as unauthorised expenditure. This could be attributed to posts that were not budgeted for. In goods in services, Parliament had under-spent by R51.9 million. Under-spending could be attributed to projects that were not completed at the end of the financial year. Transfers to non-profitable institutions, including political parties, had been adjusted by a further R8.8 million after the budget of R394.4 million had been approved. The accounting officer needed to indicate if the adjustment was approved by Parliament, because it came after the budget had been approved.

The compensation of Members of Parliament had been under-spent by R93 million. Section 23(4) of the FMPLA required that the under-spent funds in the statutory fund must be returned to the National Revenue Fund (NRF), but Parliament had returned R62.8 million instead of R93.3 million. The accounting officer needed to state why they had not surrendered the rest of the money.

Parliament had closed their books at the end of the financial year with R311.6 million. This figure included the money that was committed to incomplete projects and other revenue.

Catering had a profit of R3.6 million, versus the R25.7 million that had been received in interest. Catering was a business in Parliament and charged a profit on catering. The Committee needed to ask how much was spent in order to make a profit of R3 million, because running the service of catering was not only buying food but paying catering staff.

Parliament had a surplus of R121.9 million, whereas last year it had a deficit of R109 million. One would think that Parliament had performed, but the accounting officer needed to breakdown where the R109 million had come from.

Parliament’s assets amounted to R325.6 million in 2016/17, and the current liabilities amounted to R213.8 million, which meant that there was a positive variance of R111.8 million. In a short time, Parliament could sustain itself to run the business it does, but when looking at the total current assets and total liabilities, Parliament was underperforming. It was running at a deficit of R855 million. This meant that in the long term, Parliament was at a low risk, since it did not include the main appropriations and statutory appropriations.

The disclosure items included irregular expenditure, fruitless and wasteful expenditure, and unauthorised expenditure. In the financial statements, Parliament disclosed irregular expenditure of R2.4 million compared to R15 million in the previous year (2015/16), of which R13 million had been condoned. Fruitless and wasteful expenditure amounted to R1 million, versus R813 000 in 2015/16. There were no disclosures on unathorised expenditure. Parliament had overspent on compensation of employees by R102 million, and the amount should be disclosed as unathorised expenditure in the financial statements but it had not been disclosed as such.

The Content Advisor said that fruitless and wasteful expenditure could not be condoned. It was just supposed to be written off, or recovered. The argument was, why would one condone financial negligence? Parliament was supposed to inform the Committee on which basis they were condoning fruitless and wasteful expenditure.

Co-Chairperson Smith asked if the authority to write off fruitless and wasteful expenditure lay with the Members of the Committee.

The Content Advisor responded that they could not just do a condonation of fruitless and wasteful expenditure, because it was financial negligence. He had requested a briefing from the legal services of Parliament in terms of Section 64(a), and they were convinced that condonation was not allowed. Parliament was supposed to recover the monies, and if this was difficult then they were supposed to write the amount off.

Section 56(2)(D3) of the FMPLA said that in the notes of the financial statements, Parliament was supposed to show consequence management and progress of disciplinary action taken on those committing fruitless and wasteful expenditure, as well as the irregular expenditure that was not condoned. These particulars were not given in the financial statements of Parliament.

The executive authority had the authority to condone irregular expenditure, but they had to write to the Committee and explain why they were condoning. However, they had never written to the Committee.

Ms Coleman said that when a legal person was doing an analysis, it needed to be in black and white.

The Chairperson thanked the presenters for their briefing.

The meeting was adjourned.