Report of the Auditor-General to Parliament on the Financial Statements of the Unemployment Insurance Fund for the year ended 31 March 2004

1. Audit Assignment The financial statements as set out on pages 35 to 56, 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 11(3) of the Unemployment Insurance Act, 2001, (Act No. 63 of 2001). These financial statements, the maintenance of effective control measures and compliance with relevant laws and regulations are the responsibility of the accounting authority. 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. 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.

3.1.1 Revenue contributions collected by the Commissioner for the South African Revenue Service (SARS) and by the Unemployment Insurance Commissioner (UIC) (a) Sections 8 and 11 of the Unemployment Contributions Act, 2002 (Act No.4 of 2002) provides for the collection of contributions, interest and penalties by the Commissioner for the SARS. (b) Section 9 of the Unemployment Contributions Act, 2002 (Act No. 4 of 2002) provide for the collection of contributions, interest and penalties from non-SARS registered employers by the UIC. (c) However, the system implemented by the SARS and UIC does not provide for the mentioned income to be collected and accounted for on an accrual basis of income recognition. Revenue contributions, interest and penalties thus collected and disclosed in note 3 to the financial statements have been accounted for on a cash basis of accounting. The effect of the departure from GAAP is not determinable nor is it practicable to subject this matter to extended audit procedures. (d) The above mentioned departure from Statements of GAAP also results in non-compliance with section 55 (b) of the Public Finance Management Act, 1999 (Act No. 1 of 1999) (PFMA) and Treasury Regulation 28.1.6.

3.2 Material breakdown in internal control systems and procedures As reported previously the Fund again experienced a fundamental breakdown in internal control systems and procedures with regard to the overall accounting process followed, the reconciling of bank balances, the administration of benefits payable and the management of fixed assets. This general deterioration could have resulted in accounting errors not being detected. Due to the large volume of transactions and an inability to place reliance on internal control systems and procedures as a result of the breakdown referred to above it is not possible to:
- perform sufficient alternative auditing procedures, and
- obtain satisfaction that material accounting errors did not occur during the period.

3.2.1 Inadequate accounting process followed (a) Except for cashbook payments generated by the Fund, all the bank transactions for the whole of the financial year were recorded from January 2004 onwards and by using bank statements instead of accounting source records generated by the Fund. In my opinion and after taking into account the volume and magnitude of transactions, the above mentioned process can be regarded to be a fundamental departure from generally accepted accounting practice. (b) As a result of the above, various unknown net debit entries totalling R10,0 million were incorrectly accounted for as bank charges and debit entries totalling R4,1 million were incorrectly accounted for as contributions received. (c) The inadequate accounting process and the resulting ineffective bank reconciliation process resulted in a material number of fraudulent cheque transactions on the bank statements not being timeously identified by officials.

3.2.2 Reconciling of bank accounts As a result of the general ledger not being updated on a weekly basis, the bank balances were only reconciled from January 2004 onwards, thereby resulting in reconciliations not being performed and reviewed on a weekly basis as required by the Treasury Regulations.

3.2.3 Benefit payments to contributors (a) Internal controls at regional offices: Internal controls at regional offices were again found to be materially inadequate. The completeness, accuracy and validity of benefits paid at regional offices could not be confirmed. (b) Benefits paid in error: Benefits paid in error, amounting to R44,7 million, have been written off as uncollectable without the approval of the Director-General as required by section 58 of the Unemployment Insurance Act, 2001 (Act No 63 of 2001).

3.2.4 Services rendered by the Department of Labour Personnel, administration and rental expenses: As reported previously it has been established that the allocation of the value of services rendered to the Fund by the Department of Labour is not scientifically calculated but on approximations in October 1999 by officials at different regions. Consequently, an audit to determine the reasonableness of this expense of R321,1 million (2003: R309,2 million) could not be carried out. It is also not possible to verify the correctness thereof since no written agreement between the Fund and the Department of Labour covering the arrangements could be presented for audit purposes.

3.2.5 Fixed assets I was unable to verify the existence of a large number of the movable fixed assets of the Fund as a result of an incomplete and inaccurate fixed asset register.

3.2.6 General computer controls A follow-up review of the weaknesses identified in information technology general computer control environment was performed. Progress had been made in resolving weaknesses identified but significant weaknesses in the general computer control environment of the Fund still exist in respect of:
- Programe change controls
- Security administration and monitoring
- Logical access security.

4. Disclaimer of Audit Opinion Because of the significance of the matters referred to in the above paragraphs, I do not express an opinion on the financial statements.

5. Emphasis of Matter Without further qualifying the audit opinion expressed above, attention is drawn to the following matters:

5.1 Non compliance with laws and regulations In addition to the areas reported above various sections of the Public Finance Management Act, 1999 (Act No. 1 of 1999) and Treasury Regulations, the Unemployment Insurance Act, 2001 (Act No. 63 of 2001) and the Unemployment Insurance Contributions Act, 2002 (Act No. 4 of 2002) have not been complied with. The extent of non-compliance with these legislations is of severe concern.
(a) Public Finance Management Act:
- Sec 50 (1)(a) – Not exercising duty of utmost care to ensure reasonable protection of assets
- Sec 51(1)(a)(i) – Effective and efficient systems of financial and risk management and internal control not implemented
- Sec 51 (1)(a)(iii) – Policies of the procurement and provisioning systems not always adhered to
- Sec 51 (1)(b)(i) – Effective steps to collect all revenue due not taken
- Sec 55(1)(b) – Non compliance with GAAP. (b) Treasury Regulations
- Par 28.1.5 – A materiality and significant framework not adopted yet
- Par 26.1.1 – Information on revenue and expenditure not submitted as required
- Par 26.1.2 – Quarterly report on statutory compliance not submitted
- Par 30.1.3 – Business plan not compiled in accordance with the Treasury Regulations
- Par 31.1.2(j) – Bank reconciliations not performed on a weekly basis
- Par 31.1.2(a) – Non-collecting of revenue when due
- Par 31.1.2(e) – Non pursuance of debtors with appropriate sensitivity and rigour. (c) Unemployment Insurance Act
- Sec 50 – The constitution of the Board not approved by the Minister of Labour
- Sec 58 – Uncollectable write-offs not approved by the Director-General. (d) Unemployment Insurance Contributions Act
- Sec 12 – Non-levying of interest on non-SARS late payments
- Sec 13 – Non-levying of penalties on non-SARS late payments.

6. Appreciation The assistance rendered by the staff of the Fund during the audit is sincerely appreciated.