The Standing Committee on Public Accounts, having heard and considered evidence on the Report of the Auditor-General on the Financial Statements of Vote 7 - Department of Defence (Department), the Trading Account for Medical Stock (TAMS), and the Special Defence Account (SDA) for the year ended 31 March 2001 [RP 138-01], referred to it, and having considered the Department's Annual Report for 2000-01, the Responses by the Department to the Committee's Preliminary Questions and the written submissions made by the Secretary for Defence subsequent to the hearing on 20 March 2002, reports as follows:
A. Audit opinion
While the Auditor-General gave an unqualified opinion on the financial audit, the Committee notes with concern that the compliance audit was qualified.
The Committee recommends that the Department pay special attention to all aspects resulting in the qualification, and urgently implements corrective measures with the view to avoiding such a qualification in future.
B. Excessive stock levels
The issue of excessive stock levels within the Department, estimated at between R70 billion and R100 billion, has remained a matter of grave concern to the Committee for many years, for a variety of reasons.
Excessive stock represent financial resources, which could be redirected to other strategic and needy areas. It places a great burden on the Department to effectively manage and maintain control over excessive stock. The longer excessive stock remains undisposed, the greater the danger of a widening gap between the book value of the stock and the actual revenue realised upon the disposal of such stock.
While the Committee has noted several steps taken by the accounting officer, it remains very concerned at the slow pace of disposal. The indication that the completion date of determining excessive stock levels and the reduction thereof is foreseen to be in 2005, is of serious concern to the Committee. This means that the Department Excessive Stock Level Plan would have been running for five years without knowing what the excessive stock levels are and how it will be reduced.
Equally disturbing is the indication that the Department's evaluation of stock in monetary terms is dependent on the computerisation of units, because the Department has been computerising units for more than a decade.
The indication that the Treasury Approval to account by quantity would remain in place in the interim, is problematic for the Committee. The guidelines issued by the National Treasury on financial statements and records indicate that the public sector is moving towards accrual accounting. This means that the accounting of stock/equipment will soon have to be done in terms of monetary value.
The Committee recommends that, as a matter of urgency, the Department take steps to ensure that when the final instructions are given to use an accrual accounting system, the Department would not have to negotiate an extension of time for implementation.
The Committee is dissatisfied with the Department's failure to implement the Auditor-General's recommendations. It notes that the Department is in the process of compiling a comprehensive document regarding the progress made with each of those recommendations. The Committee notes the Department's undertaking to submit the said document to the Committee by 1 July 2002. The submission will be evaluated in order for the Committee to consider the adequacy of the remedial action being taken by the accounting officer.
C. Transformation process
Concern was expressed at the hearing regarding the Auditor-General's comments to the effect that, notwithstanding the expenditure of R55 million on consultants, the original aim of the transformation process of providing adequate, appropriate, affordable and accountable Defence by the year 2000, had not been achieved.
The Auditor-General further stated that it was difficult to determine whether the Department's Strategic Plan, the new master plan for the transformation process, would assist the Department in achieving the original aim.
The Committee is concerned that if the objectives are not achieved, the Department stands in danger of incurring fruitless and/or wasteful expenditure.
The Committee notes that the issue of transformation has been reassessed, that a new approach and strategy has been presented and accepted, and that a new change management strategy will be developed in 2002-03.
While the Committee recognises that the issue of transformation is both complex and challenging, the constant reassessments and development of new approaches and new strategies leave the Committee concerned, since it creates the impression that the Department is still grappling with the issue without a clear way forward.
The Committee notes that the next briefing to the Department management on the transformation process has been scheduled for 7 July 2002.
The Committee recommends that it be provided with a written update by the accounting officer on the briefing by 31 July 2002.
D. Risk management system
The Committee notes with concern the Department's delay in developing a holistic risk management system for implementation in the financial year 2001-02.
The Committee notes the reason for the delay, and welcomes the Department's initiatives to rectify the situation.
The Committee notes the Department's written undertaking to submit a formal report to it on 1 July 2002, confirming the successful implementation of the system.
The Committee recommends that the Auditor-General follow up and report thereon during the next audit.
E. Fraud prevention strategy
The Committee expresses its grave concern at the fact that originally the fraud prevention strategy was supposed to have been developed for implementation during 2001-02, but that a fully operational strategy is now only envisaged for the year 2002-03.
The Committee notes the Department's written commitment to submit a formal report to it on 1 October 2002, confirming the successful implementation of a fraud prevention strategy.
The Committee recommends that the Auditor-General follow up and report thereon during the next audit.
F. Computerised debtors system
It is with grave concern that the Committee notes that for the past four years the Auditor-General has reported on the inadequacies of the debtor management system of the Department.
It is with equal concern that the Committee notes that the original implementation date of October 2000 for a computerised debtor system has now been delayed until at least July 2002.
The Committee welcomes the Department's written undertaking to the effect:
1. That the development and programming would be completed in June 2002, for envisaged implementation by July 2002
2. That the Department will submit a formal report to the Committee on 1 August 2002, confirming the successful implementation of a computerised debtors system.
The Committee recommends that the Auditor-General follow up and report on the above during the next audit.
G. Inadequate information systems
The Committee expresses its concern at the Department's inability to provide certain information in the Notes to the Financial Statements. It welcomes the National Treasury's establishment of a forum for Chief Financial Officers to, inter alia, deal with the adequacy of information produced by the financial management information system.
The Committee views with reservation the Department's assurance that it will be able to comply with the new set of standards set by the Accountant-General for the current year's financial statements. It does so because the Committee notes that the requirements being set by the Accountant-General are still being considered by the Department, together with its ability to comply with them.
The Committee therefore recommends that the Auditor-General, in his next audit report, comment on the completeness of the information reflected in the notes to the financial statements.
H. Reconstituted Audit Committee
The Committee expresses dissatisfaction with the non-functionality of the Audit Committee since May 2001.
The Committee welcomes the steps taken by the Department that led to the reconstitution of the Audit Committee in a manner that, should the reasons recur that led to it being non-functional, the Audit Committee would continue to remain functional and ensure continuity.
The Committee recommends:
1. That since the inaugural meeting had been scheduled towards the end of April 2002, the Department furnish the Committee with a report on the meeting by 31 July 2002
2. That the Department furnish the Committee with the date of the Audit Committee's next meeting, so as to satisfy the terms of the PFMA that the Audit Committee meet at least twice a year.
I. Internal auditors
The Committee welcomes the assurance by the Secretary for Defence that not only is the independence of internal auditors guaranteed, but that in addition no limitation whatsoever has been placed on the scope of their work.
J. Revenue manager
The Committee expresses its serious concern at the Department's failure to organise itself along the lines of an efficient revenue collection system, which failure has resulted in the under-collection of revenue over several years.
The Committee welcomes:
1. The appointment of a Revenue Manager
2. The Department's decision to assess itself; to determine whether targets set for revenue collection are being met monthly; and that it will be reporting actual revenue against budget on a monthly basis from 1 April 2002
3. The Department's written assurance to submit a formal report to the Committee on 1 July 2002 regarding an assessment of the impact of the Revenue Manager's work and functioning in the Department.
The Committee recommends that:
(a) The Department include in the above assessment a schedule outlining the extent to which set targets for revenue collection have been met for the three-month period from 1 April to 30 June 2002, and that the above assessment be submitted to the Committee by 1 September 2002
(b) The matter be followed up by the Auditor-General and reported on during the next audit.
K. Unauthorised expenditure - R1 535 000
The Committee is concerned about the recurring problem of the Department's use of State funds to finance the expenditure of military museums without authorisation, hence the unauthorised expenditure.
The Committee welcomes the fact that legislation is currently under review to provide for the expenditure on military museums to be financed by State funds.
The Committee therefore defers its recommendation to Parliament for the approval or otherwise of the unauthorised expenditure until the legislative process in respect of the Defence Bill has been finalised.
L. Unauthorised expenditure not yet finalised
For a variety of reasons beyond its control, the Committee was unable to finalise its recommendations on the following unauthorised expenditure relating to a number of previous financial years:
Year Amount in '000
1994-95 R 24,772
1995-96 R 13,665
1996-97 R 2,084
1997-98 R428,226
1998-99 R 9,764
1999-00 R 8,053
_________
R486,564
---------
The Committee plans to finalise all outstanding recommendations on unauthorised expenditure by the end of the current financial year.
M. Irregular expenditure - R2,148 million
The Committee is concerned that various incidents of irregular expenditure had occurred at the Department, amounting to R2,148 million during the year under review. The Committee notes that the five cases of irregular expenditure related to repairs to buildings - R15 613; health care and hygiene services - R29 526; procurement of chemicals - R26 999; lease agreement -R44 480; and irregular hiring of photocopiers - R2 031 million.
The Committee strongly emphasises the following:
1. The attitude that the State would not suffer any loss must not be exploited as a loophole by the Department's personnel to by-pass procurement procedures
2. Disciplinary step such as warnings and letters of warning/reprimand are often insufficient to enforce compliance with procurement procedures.
The Committee therefore recommends that, in addition to further stepping up its efforts to ensure compliance with procurement procedures, the Department take more harsh and appropriate disciplinary measures against those responsible.
The Committee further recommends that the Department, in consultation with the National Treasury, report to Parliament, via the 2001-2002 annual report of the Department, on each of the instances of irregular expenditure reported, on whether:
(a) The accounting officer reported in writing each instance of the irregularity to National Treasury immediately upon its discovery, as required by section 38(1)(g) of the PFMA, and in the monthly report as required by Treasury Regulation 9.1.2
(b) The National Treasury or the Tender Board investigated each of the instances, and condoned the non-compliance with Treasury or Tender Board Regulations
(c) In cases where non-compliance was not condoned, the appropriate disciplinary action was taken as required by section 38(I)(h) of the PFMA, and/or whether the amount was recovered in terms of Treasury Regulation 12.7
(d) In any of the instances, the amount in question was regarded as irrecoverable, and was written off by the accounting officer in terms of Treasury Regulation 11.4
(e) The amount(s) were properly disclosed in the relevant financial statements.
N. Alleged irregularities
The Committee notes that the Department investigated two cases of alleged irregularities, and that the Department needs to inform the Committee of the outcomes of those investigations, as well as the nature of the disciplinary measures to be instituted against those responsible.
The Committee accepts the Department's request for an extension of time until 1 July 2002 to provide it with an update on the matter due to the unavailability of the investigator in question.
O. Leave credits and leave administration
The Committee expresses its deep concern about the shortcomings in the Department's leave administration system.
The Committee welcomes the Department's corrective measures to address some of the shortcomings, notes that since September 2001 no incidents were found or reported in relation to non-adherence to leave policies and prescripts, and welcomes the Department's undertaking that non-adherence will result in firm disciplinary action against those responsible.
The Committee recommends that the Chief Director of Human Resources furnish the Committee with a report by 31 August 2002 regarding the extent of the errors found since September 2001, if any, and the total financial value of such errors.
P. Medical benefit overpayments
The Committee expresses its dissatisfaction with the situation where various members who had retired and had received the medical benefit lump-sum, also became members of the Medical Continuation Fund.
The Committee notes that the names of those members who have been identified as having received double benefits will be submitted to the Finance Division to institute the necessary steps to recover the overpayments.
The Committee accepts the Department's written undertaking to submit a final report to the Committee by 1 August 2002 regarding the number of members involved and the monetary value of overpayments.
The Committee expects that the Department's final report will also include an update on the actual steps taken by the Finance Division to recover the overpayments, as well as the extent of recovery, if any.
Q. Advances
An audit of the advance accounts, particularly those relating to foreign currency, revealed that internal control over and the review of advances were inadequate and unsatisfactory.
Since the Committee considers this aspect a high-risk area, it welcomes the Department's efforts to develop and establish a computerised system to manage foreign currency advances, and that it is on track for the system to become operational by 30 June 2002.
The Committee notes the Department's written undertaking to submit a formal report to the Committee on 1 July 2002, confirming the successful implementation of the system. It is recommended that the matter be followed up by the Auditor-General and reported in the next audit report.
R. Service corps
The Committee is concerned that little has been done to address the shortcomings in respect of operations, performance and outputs of the Service Corps since its inception in January 1995, and that the institution is not performing at optimum level.
The Committee is extremely disturbed to note that, whereas in terms of the hearing, senior management has taken the decision to convert the Service Corps into a settlement agency and that its Centre for advanced training should migrate to reside under the Department of Labour, in terms of the post-hearing submission by the Secretary for Defence, the future and direction of the Service Corps is still under scrutiny by means of numerous workshops.
The Committee recommends:
1. That the Department clarify the contradiction between the decisions already taken and the workshops currently being held
2. That the final outcomes of these workshops be reported to the Committee on 1 July 2002
3. That the Auditor-General follow up and report thereon during the next audit.
S. Environmental policy
The Committee expresses its grave concern about the inadequate and inappropriate manner in which the Department handled and stored chemicals, managed the disposal of waste, the overall handling of old and new oil, and the monitoring of potential leakages.
The Committee is equally concerned with the minimal impact of corrective measures, which are done in a random way without achieving consistency.
The Committee notes that a formal report will be submitted to the Committee on 1 October 2002, confirming the successful promulgation and implementation of the environmental policy.
The Committee recommends that the Auditor-General follow up and report on the above during the next audit.
T. Staff debt
The Committee notes with concern the disturbing trend of an increase in staff debt at the Department, especially in relation to salary overpayments and motor vehicle accidents.
The Committee notes that the Department will only be able to provide an age analysis of the staff debt once the computerised system has been implemented. However, it is the view of the Committee that a more concerted effort can be made to provide an age analysis.
The Committee recommends that:
1. Based on the indication that the successful implementation of the computerised debtors system has been envisaged for August 2002, it be provided with the age analysis of staff debt at that time
2. The Department manage down its staff debt by vigorously implementing its lines of recovery of staff debts through the staff's accumulated leave pensions, and through monthly salary deductions, where applicable.
U. TAMS
The Committee welcomes the Department's confirmation of the final closure of the Trading Account for Medical Stock, as well as the repayment of the loan of R10,5 million to the National Treasury.
The Committee notes that the Office of the Auditor-General met with officials of the Department to discuss and plan the final audit of this account, and that the closure of TAMS will be audited this year.
V. Special Defence Account
As long ago as November 1997, the then Standing Committee on Public Accounts had recommended that the Special Defence Account be separated from the General Defence Account.
The Committee notes that the Department and the Office of the Auditor-General deliberated on the matter during April 2002, that it was decided to subdivide the bills payable account between the General Defence Account (GDA) and the Special Defence Account (SDA), that it was envisaged that the amended PFMA would list the SDA under schedule A as a fund of the Department, and that the accounting standard might change from GAAP to GRAP, in which event the Department will request approval to retain the GAAP accounting standards from the Accountant-General.
The Committee recommends:
1. That the Department furnish the Committee with a progress report on the matter on a regular basis
2. That it review or reaffirm the previous Standing Committee on Public Accounts' original recommendation regarding the separation of the SDA from the GDA on the basis of a final report on the matter from the Department.
W. Commission on sale of Puma helicopters
The Committee notes that Armscor had been contacted, and that follow-ups on the case are made on a continuous basis.
The Committee recommends that the Department, together with Armscor, seek clarification from the Director of Public Prosecutions about the reasons why prosecution was still pending, and by when prosecution was likely to take place.
X. Commission on purchase of Pilatus training aircraft
The Committee welcomes the confirmation by the Directorate of Special Operations that the target date for finalising the report was 30 April 2002.
The Committee recommends that the Department keep the Committee updated on all the details and progress made once the case has been finalised.
Y. Persol transactions not cleared
The Committee is concerned that the outstanding Persol transactions, which are not cleared in good time, numbered 6 145 as determined by the 2000-01 audit.
The Committee notes the reported dramatic decrease in transactions not cleared to 2 158 as at 6 april 2002. it further notes this various categories in which the uncleared transactions are located.
The Committee therefore:
* looks forward to a confirmation of this decrease in the department's next report
* recommends that every effort be made by the department to clear all uncleared persol transactions by 31 october 2002.
Z. Conclusion
The Committee records its appreciation to the Department for the user-friendly manner in which it responded to the Committee's written preliminary questions, as well as for the timeous submission of responses and undertakings made at the hearing.
Finally, the Committee wishes to record that during its review of the Department audit reports over the last number of years, the Committee has noted an improvement in several areas of financial management for which it commends the Department. The Committee looks forward to the Department seriously considering the recommendations made by the Committee so that the Auditor-General will not express qualified audit opinions in future.