The Department presented extracts from the Annual Financial Statements and Audit Report. An overview was provided of the following:

1. General review of the state of financial affairs:
1. Additional amounts allocated in the Adjustments Budget
2. Reprioritisation of the budget during the financial year
3. High level details of under expenditure against the budget
2. Report of the Auditor-General on the financial statements
1. Incompleteness of income – driver's licence registration fee
2. Internal control shortcomings- financial audit
3. Internal control shortcomings-computer audit
4. Irregular expenditure
5. Unauthorised expenditure
6. Non-compliance with minimum requirements - Driver’s Licence Testing Centres (DLTCs)
7. Non-compliance with transfer payment requirements
8. Audit committee and internal audit function

• In the Adjusted Budget, an amount of R29,2 million was shifted to enable the Department to migrate at an increased pace towards the new National Traffic Information System (NaTIS). For this purpose, amounts were shifted from transfer payments to assist provinces with the upgrading of Driver’s License Testing Centres and with overloading control infrastructure. Amounts of R3 million and R3,6 million respectively were also made available to fund a foreign office for the newly elected South African representative to the International Civil Aviation Organisation Council and to establish a Maritime Rescue Control Centre.
• Subsequent to the Adjusted Budget, amounts totalling R40.8 million was shifted towards the "Arrive Alive" campaign after it became apparent that the expected donor funding was suspended. A further R21,5 million was made available to speed up the migration to the new NaTIS system. R6 million was made available for a feasibility study into the new proposed Highway Patrol Unit and R9,6 million was shifted to the under budgeted contract for oil pollution prevention services. These amounts were sourced from various activities, anticipated under expenditure and savings across the organisation.

• The project to complete a proper fixed asset register was completed after the end of the financial year.

• Formal written policies and procedures were documented into an Internal Control Manual after the end of the financial year. Financial delegations were updated, new procurement delegations were approved and the Department is in the process of re-confirming the appointments of Programme and Responsibility Managers.

• Fruitless and wasteful expenditure of R2,1 million incurred during 2003/04:

• Payments made to contractor without service delivery R ! 756 345-00:

• Employees hired cars while on vacation R 55 218-90:

• Overpayment made to a contractor R 145 635-96:

• Non arrivals and cancellation charges R 104 192-83:

• Overpayment of sessional allowances R 36 368-16:

• Telkom Watchkeeping Services (Safety Of Life At Sea Convention) R 5 086 814:

• Escalation of management fees on a contract R 1 655 229:

• Arrangements for a Taxi Conference R 1 938 073:

• Payment made to a Taxi Cooperative before the receipt of a certificate in terms of section 38(1)(j) of the PFMA and without having budgeted for the particular transfer payment R 300 000:

• In two cases, totaling R 2 051 416, the Department’s Advisory Committee on Financial Irregularities advised that the matters should be condoned and that submissions must be made to Treasury for approval. One case, amounting to R1692034, is because the former manager in charge of Arrive Alive communications contracted directly with the service provider instead of via GCIS. The remainder of R 359 382 was for search and rescue services, for which the State Tender Board since provided exemption from tender procedures, but not condonement of expenditure already incurred.

• In four cases, totaling R 89 090, written warnings was issued. The Department must still apply to the Treasury for approval.

• Services was procured to maintain the Department’s website amounting to R 106145. The Information Technology Committee at the time, however, did not keep proper records to identify any officials against whom disciplinary action could be taken. The responsible manager since left the employ of the Department. A submission must still be made to apply for ex post facto approval.

• In one case amounting to R7 917, documentary evidence is inadequate to identify the person to be disciplined, although the service was needed and rendered to the Department.

• In two cases, totaling R 18 478, it is expected that disciplinary action would be taken.

• Two other cases amounting to R 83 268 may not have been irregular, although former employees exceeded their delegated powers. More evidence must be obtained to determine a way forward in these cases.

• Interim contracts are currently monitored through independent auditors who verifies every claim.
• Current tendered contracts are monitored through the provincially appointed monitoring teams, which is a standard requirement of each contract.
• Monthly schedules of utilisation of transfer payments certified by the Accounting Officers are submitted to the Department.
• Annual Reports of the utilisation of transfer funds are submitted to the Department at the end of every financial year in terms of the Agreement.

1. AUDIT ASSIGNMENT

The financial statements as set out on pages [ ] to [ ], 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).

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.

2. 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.

• 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.

1. AUDIT OPINION

In my opinion, the financial statements fairly present, in all material respects, the financial position of the National Department of Transport (the NDoT) 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).

2. EMPHASIS OF MATTER

Without qualifying the audit opinion expressed above, attention is drawn to the following matters:

1. Incompleteness of income – driver's licence registration fee

As reported in previous years’ audit reports, due to insufficient records and inadequate controls over the completeness of receipts, it was again not possible to determine whether the three per cent of driver's licence registration fees due to the NDoT in terms of regulation 98(2) of the National Road Traffic Act, 1996 (Act No. 93 of 1996), as well as any outstanding fees from previous periods, had been received from all the driver’s licence testing centres.

2. Internal control shortcomings- financial audit

• The accounting officer is required by section 38 (1) of the PFMA to ensure that effective systems of financial management and internal control have been implemented in the NDoT. The following areas of concern were communicated to the accounting officer during the audit:

• A proper fixed asset register was not in place at the NDoT to ensure adequate control over the safeguarding of assets due to a lack of management policies and procedures.

• The evaluation of the internal control environment revealed that formal written policies as required by the PFMA and State Tender Board and procedures 36 (ST36) were not finalised and implemented by management for the year under review, proper delegations were also not in place.

• Although the NDoT has a procurement policy in place responsibility managers are not managing contracts effectively. This resulted in fruitless and wasteful expenditure amounting to R2,1 million (note 11.4 to financial statements).

The above audit was completed in March 2004 and the findings were brought to the attention of the accounting officer. The most significant weaknesses identified were the following:

• A formally approved and updated information technology (IT) security policy was not in place. The control over passwords was inadequate. Eight users had supervisory rights, which allowed them to perform any actions on the system without detection.

• A formal disaster recovery plan had not been developed, tested and implemented.

• No formal and approved user account management procedures existed.

• The backup tapes for the NDoT’s own systems were not tested and restored on a regular basis.

• Mainframe activity logs were not available to the NDoT management to follow up on instances of, for example, attempts to gain unauthorised access to the NDoT transversal system data. Procedures to ensure that transversal system backups would regularly be tested did not exist.

• Responsibility and accountability for actions performed on the network could not be determined. Duties were not appropriately segregated.

• A formally documented and approved system development life cycle (SDLC) methodology did not exist for the National Department of Transport (NDoT) as a whole.

• A comprehensive information systems risk analysis had not been conducted and appropriately documented.

• Prior to May 2003, when a new project manager was appointed, the role and responsibilities of the National Transport Register (NTR) project leader were not clearly specified.

• Although the NTR project charter, phase 2 – detailed design, included a broad guideline in respect of the data conversion, a comprehensive plan for the actual conversion did not exist.

• It was not possible to determine whether the project had been completed within budgeted costs.

4. Irregular expenditure

Irregular expenditure as disclosed in note 28 to the financial statements was incurred as a result of non-compliance with procurement and other regulations. Prior year’s irregular expenditure of R11.2 million was not adequately resolved in the current year. The NDoT applied for condonement of R5.7 million from the National Treasury of which only R0.6 million was granted and for the remaining R5.5 million no condonement was requested.

5. Unauthorised expenditure

Unauthorised expenditure amounting to R24 million incurred prior to PFMA implementation, as disclosed in notes 11.1 and 11.2 to the financial statements was as a result of non-compliance with procurement and other regulations. The NDoT did not initiate disciplinary steps and/or criminal proceedings.

6. Non-compliance with laws and regulations
1. Non-compliance with minimum requirements

As reported in the previous year’s audit report, it was once again found that many of the Driver’s Licence Testing Centres (DLTCs) still did not comply with the minimum requirements of the National Road Traffic Act 1996 (Act No.93 of 1996) (NRT Act). This was the result of the DLTCs not having the proper infrastructure in place. Even though the Inspectorate: Driver's Licence Testing Centres made recommendations in this regard (in accordance with regulation 97(1)(a) and (d) of the said act), the provincial administrations and municipalities did not always implement the recommendations at the relevant centres. The NDoT indicated that in approximately 42 percent (2003: 95 percent) of the cases recommendations were still not implemented. In addition, the NDoT indicated that if a driver’s licence had been issued contrary to the prescriptions of the act, the licence was void and had to be cancelled. Furthermore, should a driver holding such a licence be involved in an accident, it could have serious legal consequences for the NDoT and the state. This is of concern to me especially given the fact that I have been reporting on this matter for the past five years.

2. Non-compliance with transfer payment requirements

Section 38 (1)(j) of the PFMA states that before transferring any funds to an entity within or outside the government, the accounting officer must obtain a written assurance from the entity that the entity implements effective, efficient and transparent financial management and internal control systems. If such written assurance is not or cannot be given, render the transfer of the funds subject to conditions and remedial measurers requiring the entity to establish and implement effective, efficient and transparent financial management and internal control systems.

Funds amounting to R389 million were transferred to the Northern Cape, Kwa-Zulu Natal and Free State, although the head of the provincial departments did not certify the claims for correctness as required by paragraph 5.1.3(b) of the agreements:

Paragraph 6.1.5 of the agreement between the NDoT and the Provincial Departments states that, the provincial department shall utilise the Subsidy Management System (SUMS) for the verification of monthly claims in accordance with the subsidised services in order to prevent any manipulation by the operator of either the passenger fares or the approved subsidy values.

Due to information technology problems and capacity constraints experienced in some Provincial Departments of Transport, it occurred from time to time that the SUMS was not in operation. The SUMS was not used to verify the accuracy of monthly claims made by Gauteng, Northern Cape, Free State, Mpumalanga, Limpopo and Kwa-Zulu Natal, therefore these claims may have been manipulated. Furthermore the SUMS was not implemented timeously and the provinces did not have the hard and software to support SUMS.

According to paragraph 2.1.13 of the agreement between the NDoT and the provinces, the NDoT has to appoint a National Monitoring Team to act on its behalf for supervision and monitoring of interim, currently tendered, subsidised service and negotiated contracts in terms of adherence to the provisions of the PFMA. This team has not been appointed and may result in non-compliance with provisions of the PFMA by interim, currently tendered, subsidised and negotiated contracts. This is as a result of capacity constraints.

7. Audit committee and internal audit function

The audit committee (AC) did not meet all the responsibilities set out in Treasury Regulation 3 and

27, for example the AC did not approve internal audit’s annual and three-year strategic audit plan

and they only met twice in the year under review as opposed to the required three times as in the AC charter.

• The audit committee did not approve the three-year strategic plan and the annual plan before Internal Audit commenced with the audits. (The plan had still not been approved as at the date of this report.)

• Internal audit had not developed a structured procedure to schedule/allocate the resources

• The accounting officer had not approved the risk management strategy.
• The internal audit report had not been completed for the year under review.

4. PERFORMANCE AUDIT

A performance audit with regard to bus subsidies at the NDoT was conducted during the 2002/03 financial year. A separate report will be issued in this regard.

5. APPRECIATION

The assistance rendered by the staff of the NDoT during the audit is sincerely appreciated.