Department of Defence Financial Statements 2003/04: Public hearing

PUBLIC ACCOUNTS STANDING COMMITTEE
9 March 2005
DEPARTMENT OF DEFENCE FINANCIAL STATEMENTS 2003/04: PUBLIC HEARING

Chairperson: Mr F Beukman (NNP)

Relevant documents:
Department of Defence Annual Report 2003/04 is available at http://www.mil.za
Auditor General’s Report on Department of Defence (See Appendix)

SUMMARY
The Committee was critical of the Department of Defence for being given a qualified audit by the Auditor-General. Department officials admitted that much of the criticism was justified but assured the Committee that improvements were being made. Concerns were voiced about problems with calculating and recording leave emoluments; lack of control over the use of Departmental vehicles; unreliable or non-existent registers of assets such as vehicles and land; lack of control over Department income; the slow rate of transformation in the staff complement; inability to fill vacancies in staffing; limited training programmes; abuse of Department assets such as vehicles and telephones; declining revenue; resistance or inability at staff level four to execute instructions and procedures; and the unco-ordinated introduction of accounting procedures.

MINUTES
Introduction
Mr P Gerber (ANC), after expressing his loyalty to the South African National Defence Force (SANDF), voiced his concern about the shortcomings in the financial accounting in the Defence Force as evidenced by the qualified verdict of the Auditor-General. It seemed that the situation had deteriorated from the unqualified 2002/03 finding. The Department had to come up with commitments, solutions and timeframes for dealing with the situation.

Department Income
Mr G Koornhof (ANC) mentioned many causes for the poor accounting highlighted in the Auditor-General’s report such as lack of computerised control; human resource challenges; lack of internal control; lack of competent staff; improper management; and abuses such as non-payment of rent, private telephone calls, and selling of state-owned equipment. He asked for detailed information about proposed steps to be taken by the Department including timeframes.

Mr J Masilela (Secretary for Defence) concurred with the criticism and mentioned that they were engaged in discussions with the Auditor-General on proposed new policies, compliance initiatives and control systems. April 2004 would bring an update of the White Paper on Defence and the Defence Review resulting in policy initiatives.

Mr J Grundling (Department Chief Financial Officer) explained that income for the Department was generated from a vast range of activities from the sale of a cup of coffee in a mess to the sale of a redundant defence system at R300 million. This virtually excluded the possibility of accurate accounting. They had been warned that their revenue had been declining, but it was impossible to know their true revenue target. Historic information was pure conjecture, but they were aiming for a quantum improvement.

Mr Koornhof concluded that the main cause of the problem was in human resources at the lower levels (level 4). Commitment to reconcile and check was lacking. Irregularities and losses of R18.5 million, mainly of vehicles, were reported. As there was no accuracy and completeness and no sanctions for non-compliance and lack of discipline, the situation was bound to deteriorate.

Mr Grundling explained that effective decentralisation of the loss and claim structure to level 4 was being implemented so that responsibilities would henceforth lie with the "owner" of the assets. A pilot training programme was started during 2004, conducted part-time by functionaries, but the 75 000 Department employees would only be reached by hiring outside instructors.

Mr Koornhof enquired about the fact that the NCACC (National Conventional Arms Control Committee) which had been in existence for some years still had neither a constitution, nor an Inspectorate division or controls in place.

Mr Masilela explained that they were under the impression that a constitution was not required as procedures, etc were set out in detail in the Act. However, a task team was working on it. An Inspectorate for investigation would be up in two months or so.

Mr Koornhof asked whether two public entities - Armscor and the Castle Control Board - could be audited by the Auditor-General.

Contingent Liabilities: Leave and Personnel Expenditure
Mr T Mofokeng (ANC) asked about accuracy, completeness, internal controls and action in cases of non-compliance and pointed out that as much as RI billion was at stake. Why was the situation deteriorating, and why the conversion from calendar days to working days in calculating leave?

Mr Masilela acknowledged the validity of the concerns expressed by Members. They had an amount of R35 million for focusing on improving registers and calculations. Revenue control would be decentralized to line manager level.

General A de Wit (Director of Human Resources Planning, Department of Defence) explained that from April 2002, leave dispensation had to be calculated in working and not calendar days which would be fully implemented by 1 July 2005. To ensure compliance detailed instructions on operating procedures such as roll calls and attendance registers had been issued. Currently videos, seminars, a pocket-sized booklet and staff visits were underway. The new computer system would address that problem.

Mr Mofokeng asked how much of the R1 billion would have to be written off, to which Mr Masilela replied that a write-off was not being considered.

Mr Grundling said that because of the historical cash basis accounting no records of accumulated leave were kept . With the new requirements two personnel systems were in place. Improvement would be attained during the 2004/05 and 2005/06 financial years.

Mr Fakie (Auditor-General) explained that what was required was merely a disclosure amount or an adjustment.

Mr Mofokeng asked for the source documentation to be made available.

Physical/intangible asset movement schedules / Management of inventories, machinery, equipment
Dr G Woods (IFP) asked why it was impossible to improvise a fixed asset register or asset movement schedule computer system, to which Mr Masilela replied that there was no alternative to a multiple computer system and it would have been impossible to do it manually.

Mr Grundling stated that the Department needed assistance from National Treasury. The new reporting requirements ran to about 100 pages, whereas previously it had been covered by two pages. Instructions from Treasury had also been given late. The Department was considering introducing a new accounting system, but was hesitant because National Treasury was also starting a new system.

Mr F Nomvalo (Deputy Director-General in the Office of the Accountant-General at National Treasury) insisted that a uniform approach was necessary which would take time to achieve. SCOPA would be kept informed. He admitted that they were late which led to problems for Departments. In the future templates would be issued to Departments earlier.

Dr Woods warned that National Treasury was creating problems by being out of sync. Each Department should be given freedom to use their own system.

Mr Nomvalo replied that their requirements did not discard the internal systems. A time–frame of four to five years was considered realistic. No blanket exemption was possible. Information had to be made available by the Department, moving from cash to accrual accounting.

Dr Woods stressed that there appeared to be poor management at unit level (level 4) where functionaries were incompetent and ignored stipulated procedures. Was training being done with urgency?

Mr Masilela agreed that command and control were unsatisfactory. There was too much centralisation.

Mr T Ntsibande (Chief of Logistics, Department of Defence) agreed that execution had to be decentralised.

Mr Fakie stated that National Treasury had their own system apart from the requirements of the Accountants Standards Board.

Dr Woods expressed concern about the large number of staff vacancies and the lack of control over equipment, which was being sent to the wrong destinations and on unauthorised trips and asked what consequences resulted.

Mr Masilela stated that crime syndicates were flourishing. They did not know how many vehicles the Department possessed. They were on a learning curve in the DRC operation.

Mr Gerber asked whether a cost-benefit analysis had been conducted to assess the Rooivalk helicopter which had been delivered incomplete at a total cost of R6 - R7 billion, to which Mr Masilela replied that negotiations were in progress with ARMSCOR and DENEL. The dividing line between the responsibilities of the Department of Defence and the Public Works Department respectively was being negotiated.

Land and Buildings / Information systems
Mr Gerber suggested that innovative ways for building and maintaining infrastructure such as the Air Force College could be explored. Had the 30 000 properties of the Department’s "footprint" throughout South Africa been categorised according to size, description and potential for the land reform programme? It appeared that the Departments of Public Works and Land Reform’s computer systems did not "speak" to that of Defence.

Mr Masilela replied that the Facilities Directorate of the Department had handed over 100 000 hectares of their land to communities. The cost estimate of Operation Neptune against abelone poachers would be available in two weeks’ time. The Minister of Finance had requested that the naval dockyard at Simon’sTown be handed over to Armscor.

Gifts, Donations and Sponsorships / Revenue and Receivables
Mr D Gumede (ANC) was concerned about the Special Defence Account where gifts and donations could not be verified. Mr Grundling replied that a wide spectrum was covered. It had taken a year to develop a new, much improved system that was standard from February 2005.

Mr Gumede maintained that soldiers had to be ordered, not "briefed" and/or "taken on board". Someone had to take responsibility for the fact that there was still no system for foreign aid accounting.

Purchases and payables: Accruals
Ms Dreyer wondered how all these irregularities happened, whether they were due to corruption, and whether something was done to bring about improvement. It appeared that there was a serious lack of internal control.

Mr Grundling replied that, although they wanted to improve, they were unable. They had to wait for the new single system to be approved by Cabinet. The magnitude and variety of goods were daunting, but corruption was minimal.

Mr A Hurribunce (Chief of Command and Management Information Systems, Department of Defence) explained that an interim manual system was being used. Selective information access security had to be ensured. The action plan for the internal control problem was due to come into operation on 11 March 2005.

Personnel (Financial controls)
Mr G Madikiza (UDM) enquired about the attainment of race objectives in the personnel complement. Mr Masilela replied that they were broadly complying with objectives, but that in the lower ranks there were too many blacks, and that colonels were still predominantly of one race. This situation would be rectified in recruitment. Each arm of the services had its own target date. Strategy 2010 was aiming at the correct race, gender and age profile by 2010. They were getting input from trade unions on how to "exit" people.

Mr Ntsibande announced that life skills were being taught to 3 600 recruits which, at the end of 2005, would rise to 4 200.

Mr Grundling explained that the high vacancy rate and slow transformation in the staff of the Department was due to the non-availability of suitably qualified Blacks to fill positions such as for example air space controllers which required special skills. Training was of crucial importance. Eighty trainees were sent to India for training and Germany was also helping.

Mr Hurribunce said that incentive schemes to bring down the turnover rate due to people leaving the Department were considered. Training capacity was limited.

Unauthorised expenditure
Mr Koornhof enquired about the huge overspending and Mr Grundling replied that the Burundi exercise resulted in an unforeseeable and unavoidable over-expenditure of R40 million. In such a case the involved Ministers were notified and the relevant correspondence filed. The Department then raked through other activities for savings to best keep the overspending down.

Mr Nomvalo announced that templates for standardising accounting procedures would be made available to Departments but not undue pressure put on them, although demands would be made.

Mr Grundling mentioned that they had to contend with money on their budget which the Department of Public Works could not spend. As far as debts were concerned there was no automatic write-offs. They dealt with the State Attorney in such cases.

Mr Mofokeng enquired about the remuneration of medical practitioners to which Mr De Wit replied that they were underpaid. Overtime registers according to proper policies were kept. In future non-pensionable professional allowances would be introduced. Mr Grundling admitted that documentation was not available.

Dr Woods referred to the weapons deal with Saudi Arabia of six years before and asked what progress had been made to recover the R100 million. Mr Fakie replied that the matter was out of their hands and with the Director of Public Prosecutions.

Mr Koornhof repeated his request that ARMSCOR be audited by the Auditor-General and asked that progress be reported.

The meeting was adjourned.

Appendix:

REPORT OF THE AUDITOR-GENERAL TO PARLIAMENT ON THE FINANCIAL STATEMENTS OF THE SPECIAL DEFENCE ACCOUNT FOR THE YEAR ENDED 31 MARCH 2004

1. INTRODUCTION
The Special Defence Account (SDA) was instituted in terms of section 1 of the Defence Special Account Act, 1974 (Act No. 6 of 1974), to defray the expenditure and purchases incurred for special defence activities as approved from time to time by the Ministers of Finance and Defence. Income is derived mainly from interest received and proceeds from the sale of armament, in addition to the amount allocated annually from the vote.

The largest part of the SDA's expenditure, namely R7 073 239 000 (2002-03: R6 150 901 000), was incurred by Armscor, while the balance of R201 204 000 (2002-03: R238 507 000) was incurred and administered by the Department of Defence (DOD). The chief executive officer of Armscor and the Secretary for Defence, respectively, are accountable.

The total expenditure of a sensitive nature, which totalled R49 148 000 for 2003-04 (2002- 03: R41 359 000), was subjected to an audit for the year under review.

2. AUDIT ASSIGNMENT
The financial statements as set out on pages 212 to 219, for the year ended 31 March 2004, have been audited in terms of section 188 of the Constitution of the Republic of South Africa, 1996 (Act No. 108 of 1996), read with sections 3 and 5 of the Auditor-General Act, 1995 (Act No. 12 of 1995) and section 5 of the Defence Special Account Act, 1974. These financial statements, the maintenance of effective control measures and compliance with relevant laws and regulations are the responsibility of the accounting officer. My responsibility is to express an opinion on these financial statements, based on the audit.

3. NATURE AND SCOPE
The audit was conducted in accordance with Statements of South African Auditing Standards. Those standards require that I plan and perform the audit to obtain reasonable assurance that the financial statements are free of material misstatement.

An audit includes:
- examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
- assessing the accounting principles used and significant estimates made by management, and - evaluating the overall financial statement presentation. Furthermore, an audit includes an examination, on a test basis, of evidence supporting compliance in all material respects with the relevant laws and regulations which came to my attention and are applicable to financial matters. I believe that the audit provides a reasonable basis for my opinion.

3.1 Level of audit assurance
Owing to the following inherent aspects, the level of audit assurance is lower than is normally the case with ordinary audits:
- The nature of certain transactions and the circumstances in which they are incurred and recorded.
- The circumstances in which assets and services are procured and utilised within the sensitive projects.

4. AUDIT OPINION
In my opinion, the financial statements fairly present, in all material respects, the financial position of the Special Defence Account at 31 March 2004 and the results of its operations and cash flows for the year then ended, in accordance with prescribed accounting practice and in the manner required by the Public Finance Management Act, 1999 (Act No. 1 of 1999) (PFMA).

5. PROGRESS MADE WITH PREVIOUSLY REPORTED MATTERS AND SCOPA RESOLUTIONS
The DOD has reacted favourably to the SCOPA resolutions, however, corrective actions to resolve the issues may take longer than one year.

The DOD has finalised one of the six items reported on in the previous financial year and is currently in the process of addressing the other outstanding items. For more detail in this regard, refer to annexure A.

6. APPRECIATION
The assistance rendered by the staff of the DOD and Armscor during the audit is sincerely appreciated.

S A Fakie
Auditor-General
Pretoria
28 July 2004