Companies & Intellectual Property Registration Office (CIPRO) Auditor General Report on findings of Procurement Investigation

STANDING COMMITTEE ON PUBLIC ACCOUNTS
8 November 2006
COMPANIES AND INTELLECTUAL PROPERTY REGISTRATION OFFICE (CIPRO) AUDITOR GENERAL REPORT ON FINDINGS OF PROCUREMENT INVESTIGATION

Chairperson: Mr T Godi (PAC)

Documents handed out:
Companies and Intellectual Property Registration Office (CIPRO) Annual Report 2005/2006 [available shortly at www.cipro.gov.za]
Auditor General's Audit Report on CIPRO
Auditor General's Report: Findings of Investigation into Procurement of Companies and Intellectual Property Registration Office

SUMMARY
The Companies and Intellectual Property Registration Office as well as the Department of Trade and Industry were called before the Committee. The Office had received a disclaimer from the Auditor-General for its financial statements. The Members raised concern about irregularities in the procurement of goods and services. Questions were asked about the Office’s old debts, sponsorships, inadequate IT systems, irregular and wasteful expenditure, staff turnover rates and large numbers of unfilled positions. The Director General of Trade and Industry was told that he has to turn the Office around by the end of January 2007. Should this not happen, the Committee will institute criminal proceedings against him.

MINUTES
The Chairperson noted that the Standing Committee on Public Accounts (SCOPA) takes the financial management of all departments and public entities seriously and that it would be no different with the Companies and Intellectual Property Registration Office (CIPRO). SCOPA believed that CIPRO was not fulfilling its mandate. The performance report received from the Director-General: Trade and Industry and the disclaimer from the Auditor-General Shauket Fakie was not good. The recent media coverage about CIPRO was an embarrassment to the government.

Mr D Gumede (ANC) wanted to know what had been done about the disclaimer which CIPRO had received from the Auditor General. He added that the internal audit Committee of CIPRO is not functional. He wanted to know why outside help had not been sought.

Mr Keith Sendwe, Chief Executive Officer for CIPRO, replied that he had only been recently appointed and that Mr Kobus Pienaar would be able to answer the question, as he was the Acting CEO of CIPRO at the time.

Mr Kobus Pienaar, Executive Manager, replied that CIPRO had had an Acting CEO for almost two years. The previous Acting CEO was offered the position but had declined and had taken up another position in government. During the two years there had been much instability at CIPRO. The company had lost 13 managers. He added that the internal audit Committee had since become fully functional. Various consultants had been employed to help with the internal audit Committee.

The Chairperson asked for how long the consultants would be helping the company. He also wanted to know from the Director-General why a Chief Executive Officer had not been appointed.

The CEO replied that they had contracted the consultants for the next two years.

Mr Tshediso Matona, Director General: Department of Trade and Industry (DTI), commented that the situation with CIPRO was beyond their control. The previous Acting CEO, who was put in place after the CEO resigned, had been offered another position in government. The delay in the latter part of this process was with the Department of Public Service and Administration. He reminded members that CEOs are appointed with the approval of Cabinet.

Mr Gumede wanted to know if CIPRO had asked for any assistance from National Treasury.

Mr Pienaar replied that they had not asked National Treasury for assistance. CIPRO had developed a strategy to improve the internal audit structure, which was in place.

Mr Gumede commented that the process of internal auditing was ongoing. He wanted to know if they had simply decided to put this process on hold because they are restructuring.

Mr Pienaar replied that CIPRO had a severe shortage of senior managers and other staff. CIPRO was growing at a fast pace and they had improved the time it takes for registration from six weeks to two days for a close corporation.

Mr Gumede wanted to know if CIPRO regards controls as being critical.

Mr Pienaar replied that they see control as being important.

Mr E Trent (DA) wanted more clarity on the fraud and corruption investigation which was currently taking place at CIPRO

The Auditor-General asked CIPRO why there had been such a huge exodus of staff.

Mr Sendwe replied that in 2002 there were a lot of challenges facing CIPRO, which had still not been overcome. He said that the organisation is still extremely traumatized. In the last few years there have been seven CEOs. Six CFOs and 14 managers have left.

Ms Astrid Ludin, Deputy Director General: Management and Organisation, DTI, replied that the DTI had put together an advisory Committee to deal with some of the challenges at CIPRO. Most of the staff had left because the CEO had left.

Ms A Dreyer (DA) asked the Director General how long he had been in his position.

The Director General replied that he was the Acting Director General from April 2005 and was appointed as a full Director General in July this year.

Ms Dreyer said this was part of the problem. Even thought the Director General was only appointed in full in July this year, the Committee will still hold him accountable. She wanted to know if the DTI believed that the CIPRO mandate applied to them.

The Director-General replied that the mandate does apply to the Department as well.

Ms Dreyer wanted to know why two board members and some of the senior officials in the Department did not declare their interests.

The Director-General replied that he is not sure if the two board members knew that they had to declare interests in companies.

Ms Dreyer commented that if they knew about the section in the Public Service Act that says they should declare all interests in companies affiliated to the Department, it means that they had knowingly broken the law.

The Director-General replied that in an environment like CIPRO where there are no strong controls in place, people would do things that they normally would not do.

Ms Ludin said that the two board members who did not declare any of their interests were asked by CIPRO to do some work for them. She felt that the Auditor General’s report was a bit misleading.

Ms Dreyer wanted to know what action was taken against the senior officials who did not declare their interests.

Mr Pienaar replied that everyone from post level thirteen upwards had to declare financial or commercial interests. This process has already begun and everyone who should be filling in the form will be asked to do so.

The Auditor-General commented that there may have been an internal discussion about the interests of board members, but his office had not received any official documents.

Ms Dreyer commented that she had come across an advertisement in the newspaper from CIPRO asking for the public to comment on a register which would have a list of all people who have been convicted or declared insolvent. She wanted to know if this register would also apply to the Department. She said that the lack of policies and procedures could be traced back to the high level of vacancies in CIPRO. She wanted to know if this staff turnover is not a cause of concern to the Auditor General.

The Director-General replied that the vacant positions are for senior managers. The Department felt that it would be best to first fill the vacancy of CEO after which the other vacant positions would be filled.

Ms Dreyer wanted to know why all the staff was leaving.

The Director-General replied that a large organisation needed a strong top structure. There was low staff morale in the organisation, which needed to be addressed. No survey or research was conducted to find out why the people were leaving.

Ms Dreyer commented that she hoped that CIPRO had developed a staff retention process.

Mr Sendwe replied that they needed to establish where the gaps in the organisation were. He said that they are about to appoint a new Chief Information Officer (CIO). The IT strategy of CIPRO is about to take off and checks and balances will be put into place.

Ms Dreyer wanted to know what surety CIPRO has that the Chief Financial Officer will not leave. She also wanted to know how CIPRO would cope with registrations with the 2010 World Cup looming.

Mr Sendwe replied that the registration process is up and running and meeting all the deadlines.

The Chairperson commented that the financial statements had received a disclaimer.

Ms Dreyer commented that a disclaimer was the worst form of opinion from the Auditor General. She said that one should look at quality and not quantity.

Ms Olga Hattingh, Chief Financial Officer, replied that they had adopted the Department’s policies and procedures. All accounts from April-October 2006 have been reconciled. All managers had signed a performance agreement.

Mr G Madikiza (UDM) wanted to know what the telephone policy of CIPRO is.

Ms Hattingh replied that each staff member receives R40 for private calls. If the calls exceed this amount the staff member is required to pay the excess. Blocking certain numbers enforces this policy.

Mr Madikiza commented that a large sum of money for the telephone account had not been recovered.

Ms Hattingh replied that they are in the process of sending letters out to staff who owe CIPRO money for the phone bill. They would be required to sign the letter, which would enable CIPRO to deduct the money from their salary.

The Auditor-General asked that the Committee be given an indication about the age of the debt.

Ms Hattingh replied that the debt is a year old. CIPRO is in the process of identifying how many of the involved staff members still work for them and how many have left.

Mr Madikiza wanted to know if any of the staff had been paid a performance bonus and on what basis this was done.

Mr Pienaar replied that performance bonuses had been paid. He said that they could not penalise staff who had met their performance targets.

Mr T Mofokeng (ANC) commented that IT related goods and services were procured by CIPRO. There was no consultation with the State Information and Technology Agency (SITA) and no compliance with the Public Finance Management Act (PFMA). Millions of rands were spent on the IT systems and yet no tender process was followed. He wanted to know why SITA was not consulted.

Mr Pienaar replied that the people involved in the IT transactions were no longer working for CIPRO. CIPRO is currently in consultation with the legal department to see if there was a way to take legal action against those responsible. SITA was not cooperating at the time when the IT systems were procured. Currently CIPRO is using SITA for a lot of transactions.

The Chairperson wanted to know when CIPRO had discovered the deviations. He wanted to know why CIPRO had not informed the DTI about the problems with SITA.

Mr Pienaar replied that the system was acquired 3 or 4 years ago.

Mr Trent commented that this is the first time he has seen the Auditor General recommend that legal action be taken by a Department.

Mr Sendwe indicated that they would provide quarterly reports to the Committee on the progress of the investigation.

Dr E Nkem-Abonta (ANC) wanted to know what the core function of CIPRO was.

Ms Ludin replied that their core function is the registration of close corporations and of intellectual property.

Dr Nkem-Abonta wanted to know if they dealt with confidential information.

Ms Ludin confirmed this.

Dr Nkem-Abonta commented that in 2004 a report was compiled which found serious weaknesses in CIPRO.

Ms Ludin replied that the audit related to the company’s computer system.

Dr Nkem-Abonta wanted to know if the weaknesses identified had been addressed.

Ms Ludin replied that the Department was aware of the report but did not deal with it.

Ms Hattingh replied that a detailed action plan has been put together to deal with the findings in the report.

Dr Nkem-Abonta wanted to know if any progress had been made.

Mr Sendwe replied that at the time CIPRO was seriously incapacitated. Currently CIPRO is recruiting specialists to deal with the problems.

Dr Nkem-Abonta wanted to know to know if CIPRO had received any sponsorship and if it had been declared.

Mr Pienaar replied that they had received some sponsorship for their year-end function. The sponsorships had been recorded but were not declared officially to the Auditor General. The system, which they used did not allow for the registration of sponsorships.

Mr H Bekker (IFP) commented that there was a payment of over R1million for work that was never completed.

Ms Hattingh replied that this problem had been corrected. The line managers are receiving training. They are told to make sure that the work has been completed before issuing an invoice.

Mr Bekker commented that were indications that there was no tender process in place. He said that there were three quotations from different companies but they have the same physical address and telephone numbers. He said that this was fraud and wanted to know what action has been taken.

Ms Hattingh replied that measures have been put in place so that the service provider can be verified. She replied that no disciplinary action has been taken yet as there is still an investigation taking place to see if it was fraud.

Mr Bekker felt that this was either incompetence or fraud.

Ms Hattingh commented that they have implemented guidelines from National Treasury.

Mr Bekker wanted to know if the IT systems had been updated. He said that it was embarrassing to find that the information in the system had not been updated.

Mr Pienaar replied that they are in the process of updating the system. CIPRO is compiling a list of MPs and senior managers who need to be contacted and their information updated.

Mr Bekker wanted to know if the new system was operational or if there was a lack of capacity in CIPRO to update the system.

Mr Pienaar replied that there are different reasons for the backlog. Once the system has been cleaned up all the information in it will be correct.

Mr Bekker wanted to know if the system that was acquired is able to handle the information.

Mr Pienaar replied that the system is old and is currently under review.

Mr Sendwe added that there is a constant need to review the system.

Mr Bekker wanted to know if CIPRO is able to give the assurance that only people who are registered to claim for VAT could claim.

Ms Hattingh replied that they could give the assusrance.

Mr Trent commented that the Committee was told that people were leaving CIPRO because of the work environment. CIPRO has made R88 million profit. The third highest expenditure is for the outsourcing of services. He wanted to know why CIPRO could not solve their problems.

The Director-General replied that they were looking at issues in a wider context. Low staff morale was just one of the challenges at CIPRO.

Mr Sendwe replied that a huge amount of money had been spent on outsourcing, but this was mainly for ICT.

The Auditor-General commented that there has been a lot of instability and vacancies in CIPRO, as well as a lack of skills. He felt that it would be helpful for CIPRO to share their strategy with the Committee and to provide quarterly reports.

Mr V Smith (ANC) suggested to the Director-General that he started managing his Department. He said that there was a failure to comply with any tender process. He told the Director-General that there has to be improvement by the end of January 2007 or the Committee will initiate criminal action against him. He said that there was a recurrence of companies that had benefited from irregularities in the procurement process.

An official from National Treasury told the Committee that in 2004, the DTI had asked them to change the CFO. She said that some of the problems that were highlighted were due to the reporting procedure followed. The approvals needed by trading entities had to come through the Director General at the DTI.

The Director-General commented that they would be happy to share the turnaround strategy with the Committee. He said that the irregularities around the procurement of goods and services have to be pursued.

The meeting was adjourned.