Tourism Portfolio Audit Outcomes

Meeting report

Briefing by the Office of the Auditor-General of South Africa
In her introductory remarks, Ms Nompakamo Matanzima, Business Unit Leader, AGSA, stated the tourism portfolio plays a critical role in growing the SA economy and job creation. The pandemic heavily affected the sector, and the Department of Tourism could not achieve its mandate. The Auditor-General (AG) requested the focus be on the culture shift strategy and how it translates into the plans and processes of the Department. The focus should be on the achievement of targets, and the recommendations made for targets to be achieved.

Mr Siphesihle Mlangeni, Senior Audit Manager, AGSA, reported that the overall audit outcome for the tourism portfolio has improved from the prior year. The National Department of Tourism (NDT) and South African Tourism (SAT) received unqualified audit opinions, with findings on compliance with key legislation. The improvement in the overall audit outcome is due to the improvement at SAT, with the entity receiving a qualified opinion in the prior year – with findings on compliance and predetermined objectives. In the prior year, SAT was qualified on marketing expenditure and receivables from non-exchange transactions, as management did not have sufficient controls to ensure completeness of expenditure incurred by third parties on behalf of SAT.

The improvement in the audit outcome for the portfolio is attributable to the effectiveness of the action plan implemented by the accounting authority of SAT, as well as the existence of effective governance structures to implement and monitor the audit action plan. While the audit outcome for NDT remains unchanged from the prior year, there was a notable improvement in areas of compliance with supply chain management and predetermined objectives. The improvement is attributable to the effectiveness of the action plan implemented by the accounting officer. While the action plan effectively addressed prior year findings, the emergence of new findings indicates the need to implement preventative controls that will strengthen the overall control environment. The accounting officer and accounting authority should ensure that the portfolio has embedded preventative controls necessary to improve audit outcomes to achieve clean administration and avert regression. The future action plan should be tailored to achieving clean administration and not only addressing prior year findings.

The irregular expenditure in the portfolio decreased from R21.29 million in the prior year to R8.6 million in the current year. SAT remains the biggest contributor to irregular expenditure, accounting for 79% of irregular expenditure for the year. The irregular expenditure incurred by SAT relates mainly to non-compliance with Supply Chain Management (SCM) prescripts, which was due to lack of preventative controls to ensure compliance with SCM legislation. The accounting authority should ensure that sound preventative controls are implemented and adequate monitoring of compliance with laws and regulations. The irregular expenditure incurred at NDT was mainly due to a multi-year contract declared irregular in the prior year, wherein expenditure is still being incurred. NDT did not have new instances of irregular expenditure. The accounting officer is commended for this improvement. An assessment of irregular expenditure against five pillars of constitutional provisions was performed. The results indicated that 54% of the instances related to a procurement process that was not competitive; 19% was not fair; 17% was not transparent, and 10% not equitable. The AG’s assessment concluded that value for money was received irregular expenditure incurred.

The financial health of the tourism portfolio has improved when compared to the prior year. This is evidenced by the overall improvement in key financial health indicators at NDT and SAT such as available cash reserves and creditors’ payment period, which are within a reasonable timeframe and the 30-day period in terms of the Public Finance Management Act (PFMA), and available cash reserves. SAT also made a profit in the current year compared to the operating loss in the prior year, whereas NDT maintained its surplus status from the prior year. While there was a significant increase in the cash balance for SAT, there was a marginal reduction in cash balance for NDT in the current year.

The quality of submitted annual financial statements is a concern for the tourism portfolio as material adjustments were made to the financial statements submitted for audit of NDT and SAT. The material adjustment for NDT related to incorrect accounting treatment for intangible assets (software licenses). At SAT, errors identified range from inconsistencies between figures reported in the financial statements and the notes, to formula errors and inappropriate presentation. This was mainly due to inadequate review of the annual financial statements, as the errors could have been identified had timeous and proper reviews been undertaken. The accounting officer/authority should enhance the preparation and review of the financial statements to ensure that financial statements submitted for audit are of good quality. Management should ensure that the preparation and review of the financial statements are planned to ensure that adequate reviews by senior management, internal audit and audit committee are adequately performed.

There was an improvement in the credibility of submitted annual performance report. At NDT, no material misstatements were identified on usefulness and reliability of reported performance information. This improved from the prior year, when a usefulness finding was reported. The improvement was due to enhanced review of the annual performance against the annual performance plan by management. At SAT, a material misstatement was identified in the indicator for number of domestic deals driven campaigns implemented. The reported achievement for this target was misstated, as the audit evidence indicated five domestic deal-driven campaigns were implemented and not four – as was reported in the annual performance report submitted for audit. This was due to inadequate review of the annual performance report against source documents. This misstatement was subsequently corrected, resulting in no material finding being reported. The accounting authority should enhance the process of preparation and review of the annual performance report to ensure that annual performance reports submitted for audit are of good quality.

The key priority for the tourism portfolio was the revival of the economy. The portfolio’s contribution to the economy is measured through various KPIs linked to the MTSF. The Department achieved 80% (44 of the 55 targets) in the annual performance plan. Key targets achieved include, amongst others those relating to the implementation of the pilot programme for women in tourism implemented in Vhembe and Mopani districts in Limpopo province; the capacitation of tour guides; enrolment of women in tourism in an executive development programme. Further, successfully implementing training initiatives will go a long way in improving the tourism sector. These initiatives included the recognition of prior learning processes for chefs. The AGSA commends the Department for exceeding the target for the training of 249 SMMEs on norms and standards for safe tourism operations in all nine provinces, targeting villages, townships, and small towns. The Department also hosted a successful National Tourism Careers Expo on 25 - 27 March 2022 in NASREC. The career expo would go a long way in driving the goal of the National Tourism Sector Strategy to create an additional 300 000 tourism job opportunities by 2026.

The Department did not achieve 11 targets overall. Targets not achieved are mainly those geared towards uplifting small businesses in the tourism industry, transformation of women and youth, and the indirect creation of jobs. The reasons for underachievement were mainly due to delays in finalising procurement processes for service providers to implement the initiatives and litigation against the Department, which delays the implementation of the initiatives. This negatively impacts the transformation of the industry, the upliftment of emerging businesses in the tourism industry and job creation. The AG recommends that the Department develop a strategy to overcome procurement-related challenges and other external factors that negatively affect the achievement of planned targets. The Department should also improve in terms of planning for implementing initiatives to ensure that adequate preparatory activities are undertaken in a timely manner, to ensure successful implementation of the planned indicators and targets.

At SAT, 73% (30 out of 41) of the targets were achieved. The key priority for SAT in the 2021/22 financial year was, firstly, to lead the recovery of the tourism sector and reaffirm South Africa as a preferred leisure and business events destination to relevant markets. Another key priority was to also position the entity for the future of tourism in an environment of rapid change. The entity achieved this, as evidenced by the number of international and regional tourists coming to South Africa and the spending by tourists in the country. Regarding business events, the ‘Africa Travel and Tourism Summit’ was held in September 2021 without the ‘Africa Travel Indaba’ as a platform to solve tourism challenges created by the pandemic. The AGSA further commends the entity for hosting a successful tourism business event, ‘Meetings Africa’, with the objective of showcasing Africa’s diverse offering of tourism services and products, where African associations and African meetings industry professionals collaborated to help transform our continent. In the prior year, MTSF Targets for the entity were adjusted due to the reduction in the budget for the entity by 60%. This negatively affected the achievement of some of the MTSF targets as shown in the next slide. The prior year's focus was domestic travel, given the restrictions on international travel. The accounting authority should continue to monitor the achievement of targets and devise a strategy for catching up on targets not achieved by the entity, particularly as a result of COVID-19.

Key targets not achieved include:
-Implementation of the Tourism Equity Fund: the processing and adjudication of TEF applications have been temporarily halted through a court interdict.
-Incubation programme to support tourism SMMEs: the Department did not anticipate that the project would entail as much preparatory work as it did prior to commencing with the process to appoint service provider(s). The terms of reference have been developed.
-Implementation of Tourism Monitors Programme: the programme was not implemented in Limpopo province. The bid evaluation process identified irregularity. The Department then took a decision to restart the procurement process.
-Brand strength index: the tender was re-advertised and is currently being evaluated. The survey would thus be undertaken in the new fiscal year.
-Number of day trips: lockdown restrictions and related limitations imposed by the COVID-19 risk-adjusted strategy.

The non-achievement of targets was delaying transformation in the tourism industry, displaying a lack of support for small, medium and micro enterprises in the industry, delaying job creation, putting under pressure the domestic tourism due to a lack of support by South Africans, and displaying a lack of support for women and youth in tourism, particularly in the rural provinces.

Pertaining to employment initiatives, the Department participated in the PESP (Presidential Employment Stimulus Package) to create jobs in the tourism sector to help reduce the unemployment burden. This was done through expenditure on tourism projects that would create employment. They only had six months to rollout the programme, and agreed with the PESP team on a target of 1 162 learners in the programme. While sustainability of the created job may be a cause for concern, the learning/training received by the learners are expected to benefit them in the long run. The target was not met because, when NDT applied for PESP funding, they planned to implement the programme for a full financial year. However, the Department only received confirmation of funding for the programme towards the end of September 2021, which left NDT with reduced time to plan and implement the programme itself.

In addition, the Department is responsible for implementing EPWP projects under the Working for Tourism (WFT) programme. The WFT facilitates the development of tourism infrastructure that could lead to job creation and accredited training and skills development facilities and programmes. The reason for the over-achievement is that some projects that commenced in 2020/21 and had been delayed because of COVID-19 lockdown restrictions in the tourism sector were able to continue in 2021/22.

Some of the recommendations from the AG include the enhancement of the financial management discipline, by ensuring that reviewing and updating of the fixed asset register occurs on a more frequent basis; the timely review of controls to ensure annual financial statements, annual performance reports and underlying records are reviewed at the appropriate level; implementation of appropriate preventative controls to prevent instances of non-compliance with SCM prescripts, through the use of checklists and pro-active assurance by the internal audit committee; and ensuring the audit action plan is root-cause focused and is assessed for effectiveness in addressing the findings through an agile approach.

Discussion

Deliberations with AGSA

Ms H Winkler (DA) wanted to understand how much of the Tourism Relief Fund was recouped, or if the money was part of the amount that had been written off. She wanted to find out if there have been any findings of the previous years that have been resolved, and asked why they are not being addressed if they are recurring. She also asked if the AG has observed any of the shortcomings of the internal audit committee. How is the relationship between the audit committee and internal audit committee?

Ms Matanzima responded that debt and recovery plans were underway concerning the Tourism Relief Fund. There is money that has been recovered, but some amounts have not been recovered. She also stated that six re-occurring findings belong to the Department, while SAT had 26 findings. She explained that the internal audit committee and audit committee were key role players in the ecosystem to ensure the controls were embedded in the system and that the submitted financial statements did not contain errors. The Department has been asked to enhance its review processes and then compile financial statements quarterly and submit them to the AG for review so that they have no errors when they are submitted to the AG for audit at the end of the year.

Mr Mlangeni said it is not enough to speak of an unqualified opinion with findings. It is important to remove the findings.

Mr Nicholas Mokwena, Acting Deputy Business Unit Leader, AGSA, said that the root causes had been raised in the report when it comes to internal controls. The matter concerns the lack or absence of review processes and monitoring of internal controls. He further stated that the internal audit committee and audit committee are closer to the processes before the AG comes to play.

Ms M Gomba (ANC) wanted to find out about the number of previous reoccurrences the AG has noted, and how the reoccurrences would be addressed. She remarked financial misstatements keep on re-occurring, but they were reflecting badly on the AG’s findings because these seem to be hindering the audit process.

Ms Gomba enquired if there were areas of concern regarding the submission of financial statements for both the Department and SAT. She asked how the Department has responded to the overspending when, at the same time, it has underperformed because it spent 98% of the budget in the Presidential Stimulus Package while it has performed only 75%. She also wanted to know about the relationship of the Department, with the risk committee and internal audit committee. Were they all working seamlessly? She enquired if the AG was shepherding them to get improvements in the outcomes.

Ms Matanzima reported that R105m of the R108m has been spent on the Presidential Stimulus Package because 75% of the targets were achieved. She further indicated that there is a proper relationship between these risk committee, internal audit committee and audit committee, because these were working together to improve audit outcomes of the Department. That is the key area they need to enhance.

Mr Mokwena said that there was a slight increase of R23 in the hourly rate regarding the Presidential Stimulus Package. That is a concern for the AG.

Mr A Matumba (EFF) commented that the AG should give Members a clear picture of what is happening on the ground, so that things could be scrutinised. He wanted to know if the financial statements were prepared by the Department officials or consultants. Who was accountable for the problems in procurement, because this signalled unwillingness to do the work? He wanted to understand if the created jobs were permanent or part-time. Is there internal capacity to do some of the work internally?

Ms Matanzima stated that some of the targets could not be achieved because of the COVID-19 impact and the delays in the procurement processes. The accounting officer is the one responsible for accounting to ensure things happen. The created jobs were not permanent. That is why the AG has recommended that jobs created should be permanent to contribute to the SA economy and GDP.

Mr Mlangeni said that it is important for the Department to ensure it creates permanent jobs instead of part-time ones.

Mr Mokwena said that financial statements were prepared internally by the officials of the Department. The problem lies with the internal review process of ensuring that they are error-free.

Ms S Maneli (ANC) asked for clarity on why there was no confirmation of the availability of funds, as it appeared as though the project process plan on PESP was not followed.

Ms Matanzima admitted that, around the Presidential Stimulus Package, planning was proving to be a challenge. This included delays that have been experienced in the implementation of this project.

The Chairperson remarked that some of the items highlighted in the current audit report were matters that the AG raised in the audit report of 2021. These related to improper procurement processes and errors in financial statements. The Committee Members cannot be expected to be happy with the current report, especially when there are problems with validity of beneficiaries and municipalities benefiting from the Tourism Relief Fund. The AGs recommendations did not state how the AG wants the Committee to intervene to address these matters.

Ms Matanzima explained that the AG had recommended interventions for repeat findings. These matters have been elevated in this report to help the Committee to do its oversight. It has been further recommended that the management of the Department should report quarterly to the Committee, especially on re-occurring matters and other areas of concern. This would help the management to explain how it plans to address or solve some of these challenges related to findings. The embedment of controls is very important. That is why the internal audit committee and audit committee play a critical role in helping the management.

Mr Mlangeni stated that the AG does the review of the action plans and procurement plans so that accounting officers could be held accountable. The action plans, it has been suggested, should be tabled before the Committee.

Ms Gomba asked if the AG has been able to identify the SMART principle to see if the goals are specific and achievable.

Ms Matanzima stated the annual performance information submitted for the audit was smart and achievable.

Ms Winkler wanted to know the exact nature of the irregular expenditure of R1.5m by SAT. She wanted to understand the next step or consequence management for the poorly performing internal audit committee, because it appeared as though it did not listen to the AG's recommendations and kept repeating the same findings. She asked where the R51 000 recouped for the Tourism Relief Fund came from while R736 000 was being investigated.

Ms Matanzima said there is underspending due to challenges experienced regarding procurement and litigation.

Mr Mlangeni said that irregular expenditure relates to the “I DO” campaign. The entity did not follow the correct procurement processes. The contract was awarded to the second bidder that did not have a high score. The matter is under investigation. The preference point system was not applied around the BBEEE scorecard due to incorrect calculations. He further stated the entity entered into a partnership with Eastern Cape Tourism, without the approval of the executive authority for a boxing tournament in the province. The payment has not been made. The money would be released when the investigation is completed. He also indicated that R36.43m had been written off. This stems from the 2018/19, 2019/20 and 2020/21 financial years. It relates to competitive bidding processes that were not followed. Quotes were not received from three service providers. These were considered for condonation. The recovered R51 700 relates to 16 employees that are in the service of the state and are paying in instalments; the other was from ward councillors working for the municipalities.

Mr Matumba remarked that it is not clear what the internal audit committee is doing because the Members relied on the AG, Special Investigating Unit, National Prosecuting Authority or whistleblowers regarding the reports. He wanted to know what the litigations are because it appears some officials are using the money of the Department for these litigations. He further remarked the reason why white people continued to support apartheid was because the then government delivered on its mandate. Had it failed, the whites were going to kick the government out. It appears that the departments do not send specifics to the accounting officers. The departments do not want to do their work well.

Ms Matanzima said that the investigations were related to the Tourism Equity Fund. The delay is outside of the powers of the Department. There is a court case underway.

Mr Mlangeni added that there were instructions from the court that procurement should be halted.

Ms Winkler wanted to know what would happen to the balance that has not been recouped.

Mr Mlangeni said that the engagements were on the consideration that has been put through. The arrangement is to pay in instalments. The Department would consider written submissions on recovery.

The meeting was adjourned.