REPORT OF THE AUDITOR-GENERAL FOR THE YEAR ENDED 31 MARCH 2005

AUDITOR-GENERAL

REPORT OF THE AUDITOR-GENERAL TO PARLIAMENT ON THE FINANCIAL STATEMENTS OF VOTE 17 DEPARTMENT OF LABOUR FOR THE YEAR ENDED 31 MARCH 2005

1.    AUDIT ASSIGNMENT


The financial statements as set out on pages 77 to 135, for the year ended 31 March 2005, have been audited in terms of section 188 of the Constitution of the Republic of South Africa, 1996 (Act No.1 08 of 1996), read with sections 4 and 20 of the Public Audit Act, 2004 (Act No. 25 of 2004). 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.

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

 
· 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.

The audit was completed in accordance with Auditor-General Directive No.1 of 2005.

I believe that the audit provides a reasonable basis for my opinion.

3. QUALIFICATION


3.1 Reconciliation between PERSAL and BAS

The reconciliation between PERSAL and BAS in respect of personnel expenditure for the period 1 April 2004 to 31 March 2005 has not been performed by the Department due to an inadequate internal control framework.

As a result, I am unable to verify the validity and accuracy of the amounts transferred from PERSAL to BAS by way of the interface between the two systems. No supporting documentation could be provided for material differences on a monthly basis between the two systems.

Consequently, I am unable to confirm the validity and accuracy of the compensation of employees.

Owing to numerous instances of non-compliance with policies and procedures that were noted in the human resource management function, I am unable to satisfy myself as to the accuracy of personnel expenditure as I could not perform alternative audit procedures.

3.2 Lack of supporting documentation

Sufficient supporting documentation was not provided for audit purposes for journals processed for claims recoverable amounting to R90 185 000 as disclosed in note 12 of the annual financial statements.

I am unable to confirm the validity of these journals.

4. Qualified audit opinion

In my opinion, except for the effect on the financial statements of the matters referred to in paragraph 3, the financial statements fairly present, in all material respects, the financial position of the Department of Labour at 31 March 2005 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 PFMA.     .

5. EMPHASIS OF MATTER


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

5.1 Non-compliance

The following non-compliance with laws and regulations were noted due to inadequate monitoring thereof by management:

Sec 76(4)(c) of PFMA - Procurement without tax clearance certificates

· Treasury Regulation 8.3.4 - Inadequate certification of payroll reports

· Treasury Regulation 8.3.5 - Not all pay-point certificates have been received on a monthly basis

· Treasury Regulation 16.6.5 - Non submission of reports to Treasury

· Treasury Regulation 33.2.1 - Inadequate reporting on financial misconduct.

5.2 Accounts payable amounts not confirmed

The Department of Labour collected on behalf of the Department of Public Works the rental and maintenance of buildings from the Compensation Fund and the Unemployment Insurance Fund. The amount of R7 611 407 is disclosed in note 16 of the financial statements and annexure 6, as amounts owing to other departments. A confirmation from the Department of Public Works could not be obtained due to the lack of a reconciliation made by the Department of Public Works.

5.3 Reconciliation between the asset register and the general ledger

Due to non-compliance with asset management policies and procedures, the fixed asset register is split and incomplete. Details of the asset number, accurate asset location, transfers in and out and additions are not always captured. There is no reconciliation between the two parts of the asset register to ensure a proper audit trail.

 


5.4 Unallocated funds


The amount accumulated in SETA Zero at the National Revenue Fund as at 31 March 2005 is disclosed in note 26 of the financial statements. The Department has not taken adequate action to investigate the nature of these monies to determine whether it is in fact Skills Development Levy income so that it could be allocated to the SETAs and the NSF where applicable as required by section 38{1) (c) (1) of the PFMA.

5.5 Expenditure of the National Skills Fund (NSF) and Sheltered Employment Factories

Expenditure relating to the operations of the NSF and personnel expenditure of Sheltered Employment Factories has been included as expenditure of the Department due to the lack of a legal form for both entities.

6. APPRECIATION

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

SA Fakie

Auditor-General

Pretoria

29 July 2005



AUDITOR-GENERAL

Report of the Auditor-general to Parliament on the Financial Statements of the Compensation Fund for the year ended 31 March 2005

I.     Audit Assignment

The financial statements as set out on pages 63 to 82, for the year ended 3 I March 2005, 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 13 and 20 of the Public Audit Act, 2004 (Act No. 25 of 2004) and section 20(2) of the Compensation for Occupational Injuries and Diseases Act, 1997 (Act No. 61 of I 997).These financial statements, the maintenance of effective control measures and compliance with relevant laws and regulations are the responsibilities 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 misstatements.
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.
Further more, 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.

The audit was completed in accordance with Auditor-General Directive No. I of 2005 dated 17 January 2005.

I believe that the audit provides a reasonable basis for my opinion.


3. Qualification

3.1 Accuracy
of contribution income

As a result of management policies and procedures not being adequately followed, a material breakdown in internal accounting controls occurred in the following areas:

· the monitoring, approval and the accuracy of assessment information.

 
· A sample of assessments tested revealed the existence of materially incorrect assessments that arose
from duplicate assessments and the inaccurate estimation of employers’ earnings.

Although audit exceptions detected have been corrected in the financial statements, the large volume
of assessments issued does not allow the performance of sufficient alternative auditing procedures to confirm the accuracy of contribution income. .

Consequently, I am unable to express an opinion on the accuracy of revenue contributions of R2, 567 billion.

3.2 Valuation of assessment debtor

As a result of management policies and procedures not being adequately followed, a material breakdown in internal accounting controls occurred that affected the monitoring of individual assessment debtors and debt collection. A sample of assessment debtors tested revealed the existence of materially incorrect assessment debtors and accounting entries due to human error. Although the exceptions noted have been corrected in the financial statements, the large number of assessment debtors does not allow the performance of sufficient alternative audit procedures to confirm the reasonableness of assessment debtors.

Consequently, I am unable to express an opinion on the valuation and accuracy of assessment debtors totalling R2, 466 billion.

4.    Qualified Audit Opinion

In my opinion, except for the effect on the financial statements of the matters referred to in paragraph 3, the financial statements fairly present, in all material respects, the financial position of the Compensation Fund at 3 I March 2005 and the results of its operations and cash flows for the year then ended, in accordance with South African Statements of Generally Accepted Accounting Practice and in the manner required by the Public Finance Management Act (Act No I of 1999).

5.    Matters of Emphasis

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

5.1 Material adjustments

The annual financial statements were submitted to the Office on 31 May 2005 as required by the PFMA. The following material adjustments were, however; made to these financial statements:

· Assessments incorrectly raised of R3 I 420 000.
· Increase in provision for impairment of receivable by R371 55 I 000.

· Increase in provision for outstanding claims by R 2 627 000.

The revised annual financial statement was received on the 20th of July 2005.

5.2 General computer controls

A follow-up review of control weaknesses identified in the information systems environment was done. Progress had been made in resolving reported weaknesses. Control weaknesses still exist due to the absence of documented procedures for:

· Security administration and monitoring

· Logical access security

· Monitoring of user and administrator activity.

5.3 Non-compliance with Treasury regulations.

The investment policy of the Fund as required by Treasury regulation number 31.3 was only approved by the accounting authority on 5 May 2005. For the year under review, investments with the PIC were not monitored in terms of an approved investment policy.

5.4 Processing of claims

The Fund is still experiencing a backlog in the processing of claims. Except for the actuarially calculated provision created for outstanding claims, it is not possible to determine the impact of the backlog on the completeness of claims due to the volume of transactions. As a result of the lack of an appropriately documented framework for third party claims, proper internal control procedures to support the complete and timeous lodging of

third party claims are not in place.

6. Appreciation

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

N. Manik for Auditor-General Pretoria

31 July 2005
 

REPORT OF THE AUDITOR-GENERAL TO PARLIAMENT ON THE FINANCIAL STATEMENTS OF THE SHELTERED EMPLOYMENT FACTORIES FOR THE YEAR ENDED 31 MARCH 2005

1.    AUDIT ASSIGNMENT


The financial statements as set out on pages 136 to 152, for the year ended 31 March 2005, have been audited in terms of section 188 of the Constitution of the Republic of South Africa, 1996 (Act No.1 08 of 1996), read with sections 4 and 20 of the Public Audit Act, 2004 (Act No. 25 of 2004). These financial statements, the maintenance of effective control measures and compliance with relevant laws and regulations are the responsibilities 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.

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
· 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.

The audit was completed in accordance with Auditor-General Directive No. 1 of 2005.

I believe that the audit provides a reasonable basis for my opinion.

3. QUALIFICATION


3.1 Financial statements


Due to the lack of an appropriate documented and approved policy and procedure framework, as well as the lack of independent checks and reconciliations at the Sheltered Employment Factories (the Factories), the following shortcomings relating to the financial statements were noted;
 
· Debtors: the validity, accuracy and completeness of debtors could not be verified due to lack of supporting evidence.


Interest is not being charged on amounts owing as required by section 80 of the Public Finance Management Act (Act 1 of 1.999) (PFMA) and Treasury Regulation 11.5 (TR 11.5).

Due to a lack of an appropriate documented and approved policy and procedure framework, the impairment of debtors disclosed in the financial statements of R 12,96 million includes a write-off of debtors of R 4,61 million which was done without authorization from the Accounting Officer (Director-General) in contravention of TR 11.4. Included in the R4, 61 million is a wages suspense account of R1, 58 million that could not be verified.

· Assets; Asset items transferred to the Pretoria Factory during the year were not recorded in the asset register.

With reference to note 2, assets of R2, 31 million was disposed during the year, but the disposal is not reflected on the cash flow statement and proceeds not recorded in the income statement. .

Assets were disposed without the authorization of the Department of Labour (Department) as required by the Memorandum of the Administration of the Sheltered Employment Factories (Memorandum) and the assets were also not disposed of by tender or auction as required by section 76 (1) (k) of the Public Finance Management Act and Treasury Regulation 10.2.1.

· Inventory; Assets obtained from government departments and refurbished for resale are neither recorded in the asset register nor in inventory

· Suspense accounts; The annual financial statements were compiled from a ledger that contained suspense accounts. These amounts included in the suspense accounts: R1, 6 million (debit) and R851 253 (credit) could not be verified due to a lack of supporting documentation.

·  Bank accounts; 11 bank accounts, amounting to R300 963, are not recognized in the financial statements. An investment account was opened in the financial year without the authority of the National Treasury.

3.2 Compliance with laws and regulations


The following non-compliance with laws and regulations were identified;

· Advance payments amounting to R1, 63 million was made to service providers in contravention of TR15.0.1.2.

· Several payments in excess of R2 000, amounting to R2, 97 million, was made by cheque, which is in contravention of TR 15.12.3 · Invoices were not settled within 30 days as required by TR 8.2.3. ·

 

· Government property was sublet to a private firm. No evidence could be provided that the
Director-General of the Department had approved this arrangement as required by TR 10.2.4. The rent of R500 per month was not recorded in the ledger and not recognised as income in the financial year.

· Payments amounting to R958 564, including VAT of R104 525, were made to non-VAT
vendors in contravention of the VAT Act (Act No 89 of 1991).

 
· The Pretoria Factory was carrying out a business of a medical scheme by effecting salary deductions from factory workers and defraying some or all of their medical expenses in contravention of the Medical Schemes Act (Act 131 of 1998).

 
· A lack of adequate monitoring and adherence to the State Tender Board Regulations and section 217 of the Constitution (Act No.1 08 of 1996) resulted in irregular spending. R39, 33 million was spent on the procurement of goods and services, mostly without adhering to prescribed procurement requirements.

3.3 Limitation of scope

Due to lack of sufficient supporting documentation, payroll expenses of R411 034, administrative expenses of R3, 52 million and purchase transactions of R201 557 could not be verified.

3.4 Leave provision


The Factories have approximately 1 300 employees who are entitled to an average of 15 days leave per annum. No provision for accrued leave was provided for in the annual financial statements.     .

3.5 Disclosure.

The following inadequacies relating to disclosure was noted:

· A related party note is not included in the financial statements to disclose a significant related party identified in respect of transportation services which cost the Factories R8,14 million.

· The accounting policy changed from compliance with South African Statements of Generally Accepted Accounting Practice (GAAP) in the previous year to utilisation of conventions other GAAP. A note indicating this change, the financial impact and whether comparatives have been restated or not has not been included in the financial statements.

· Material loans or advances of R1, 63 million were made to service providers. These loans and conditions attached to them have not been disclosed in the financial statements.

4.  DISCLAIMER OF OPINION

Because of the significance of the matters referred to in paragraph 3 above, I do not express an opinion on the financial statements.

5.    EMPHASIS OF MATTER


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

5.1 Internal control weaknesses


· Conflict of interest; due to no framework to facilitate segregation of duties, the majority of invoices from the transport corporations presented for payment, had been prepared and authorised by senior staff members of the Factories.

 

· Monitoring controls; controls to monitor performance, reconcile accounts to supporting documentation, develop budgets and analyse variances, pre-authorise and review journal entries and investigate and clear suspense accounts are lacking. This is due to lack of a control framework to perform independent checks as well as reconciliation.

· Preparation of management accounts and their review is not carried out. Reporting frameworks to enable the Department to monitor the "activities and financial operations of the Factories are also lacking.

· Procedure and policies; there is no documented and approved policies and procedures framework at the Factories to ensure that operations and transactions are effectively controlled.

·  Formal security and disaster recovery plans have not been developed, tested and documented to ensure that information system disasters are prevented detected or recovered from in time.

5.2 Governance structures

The Memorandum requires the Department to establish a management committee consisting of five members, the majority of wh9m will be external representatives of non-profit organisations. This oversight body has not been in existence in the year under review. There is no formal, documented and approved organisational structure in place to indicate reporting and responsibility structures at the Factories. Consequently the control environment is compromised.

5.3 Skills base


The skills base in the finance and administration function at the Factories is inadequate and the control environment is impacted negatively.

5.4 Performance Audit


Service delivery at Sheltered Employment Factories

The following shortcomings relating to the economic, efficient and effective utilisation of resources were noted:

Restructuring


The restructuring process, reported on in previous years, that has been ongoing since 1998, delivered no constructive results despite R484 546 having been spent in 2001 on the relevant feasibility study. This could, in part, be ascribed to the lack of a policy framework. Late acceptance of the tender to contract in the necessary expertise to take this process forward caused further delay.

Assets

Non-adherence to the Government disposal policy due to the absence of physical security regarding assets had the result that obsolete and redundant stock of R2; 2 million was kept for an unidentified number of years. This excludes undisclosed stock held at the defunct Crown Mines factory.
 
Information technology


Due to the lack of proper authorisation and capacity, a private firm was irregularly appointed and paid in advance for 1 800 hours of work. The segregation of duties was inadequate since the same consultant was responsible for, inter allia, maintaining both the system and application software, effecting changes, capturing data, passing journals and processing credit and debit notes.

5.5 Special investigation


During the financial year, the Department commissioned a special investigation into the financial and operating activities of the Sheltered Employment Factories. I will report on progress in my next report.

6. APPRECIATION

The assistance rendered by the staff of the Sheltered Employment Factories during the audit

is sincerely appreciated.    .

N Manik

for Auditor-General

Pretoria

19 August 2005



 

 

National Skills Fund: Report of the Auditor-General for the year ended 31 March 2005

AUDITOR-GENERAL

REPORT OF THE AUDITOR-GENERAL TO PARLIAMENT ON THE FINANCIAL STATEMENTS OF THE NATIONAL SKILLS FUND FOR THE YEAR ENDED 31 MARCH 2005

1. AUDIT ASSIGNMENT


The financial statements as set out on pages 153 to 174 for the year ended 31 March 2005 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 4 and 20 of the Public Audit Act, 2004 (Act No. 25 of 2004). These financial statements, the maintenance of effective control measures and compliance wit!]. 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.

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.

The audit was completed in accordance with Auditor-General Directive No.1 of 2005.

I believe that the audit provides a reasonable basis for my opinion.

3. QUALIFICATION

3.1 Structure and accountability of the National Skills Fund


·         it is a Fund established in terms of legislation (section 27(1) of the Skills Development Act)

 

·         substantially funded by way of a levy in terms of national legislation.

 

·         accountable to Parliament.


The Department of Labour has met on a regular basis with National Treasury to establish direction for the way forward. Due to delays at National Treasury this process was negatively impacted. The decision taken is that the NSF should prepare a business case, to indicate the impact of listing and to determine what systems of internal control and accountability should be put in place, by December 2005. Thereafter the legal form will be formalised.

Operating expenditure amounting to R998 986 000 (85% of the total operating expenditure) was tested. The completeness of operating expenditure could not be verified due to a significant audit adjustment of R3.4 million made. This was as a result of project expenditure incorrectly allocated to the Department of Labour.

However, the large volume of transactions processed within the Department of Labour does not permit the performance of sufficient alternative auditing procedures to confirm the completeness, validity and accuracy of expenditure reflected in title annual financial statements reflected in the Fund's annual financial statements.

3.2 Commitments to be transferred

In Note 15 to the annual financial statements of the National Skills Fund contracted commitments to be transferred as at year end, is disclosed as R779 034 000. The amount is overstated with R6 934 000 due to the confirmations obtained from the Sector Education and Training Authorities. An amount of R60 577 000 could not be verified through confirmations. This is a result of inadequate file administration and timeous approval of contracts.

3.3 Bank and cash

Bank and cash is disclosed in the annual financial statements of the NSF as an overdraft of R4.597 million (2004: R6.315 million). This is a balancing figure and no additional procedures could be performed to confirm this amount. All transactions (including non-cash transactions) processed by the NSF are processed through the bank account.

3.4 Accounts payable and receivable

The National Skills Fund uses a policy whereby advances should be paid back in the same year that it is granted. There was no movement in the accounts payable, amounting to R3 091 000 and the accounts receivable, amounting to R1 141 000 between the current and prior year. The NSF could not provide any supporting documentation to support these amounts.

For the items included in 3.2 to 3.4 no alternative audit procedures could be performed.

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. Funds not utilised - Manpower Development Authority of Bophuthatswana [MANDAB] : R41 605181

The amount of R41 605181 is included in Investments. This amount was transferred to the National Skills Fund from the North West Province on 1 November 1999 and was earmarked for training.

The Department established a MANDAB steering committee on 16 October 2002 to approve projects and to determine criteria for the disbursement of funds. It was the intention of the steering committee to allocate the total funds to training projects within 18 months. The MANDAB Steering Committee allocated R 34 211 740.00 on 2 February 2005 for skills development, into projects capitally funded by various stakeholders within the North West Province. At year end, only an amount of R1 218530 had been paid over for training projects.

5.2 Unappropriated funds

Attention is drawn to note 16 to the financial statements. As at 31 March 2005, the amount accumulated in Seta Zero was R45 513 375. As at year-end, the allocation of the balance of this account to the NSF and the Sector Education Training Authorities had not been done by the Department of Labour.

6. APPRECIATION

The assistance rendered by the staff of the National Skills Fund during the audit is sincerely appreciated.

N Manik

for Auditor-General
Pretoria

31 July 2005

AUDITOR-GENERAL

Department of Labour Annual Report 2004/05