REPORT OFTHE AUDITOR-GENERAL

ANNUAL FINANCIAL STATEMENTS for the year ended 31 March 2006

REPORT OFTHEAUDITOR-GENERAL TO PARLIAMENT ONTHE FINANCIAL STATEMENTS OF THE MARINE LIVING RESOURCES FUND FOR THEYEAR ENDED 31 MARCH 2006

1. AUDIT ASSIGNMENT

The financial statements as set out on pages 39 to 51, for the year ended 31 March 2006, 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) and section 10(7) of the Marine Living Resources Act, 1998 (Act No. 18 of 1998). These financial statements are the responsibility of the accounting officer. My responsibility is to express an opinion on these financial statements, based on the audit.

The supplementary schedule, set out on page 31 of the financial statements, is offered as additional information. However, this schedule has not been audited and consequently no opinion is expressed thereon.

2. SCOPE

The audit was conducted in accordance with the International Standards on Auditing read with General Notice 544 of 2006, issued in Government Gazette no. 28723 of 10 April 2006 and General Notice 808 of 2006, issued in Government Gazette no. 28954 of 23 June 2006.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.

 

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

3. BASIS OF ACCOUNTING

The Entity is required to prepare financial statements on the basis of accounting determined by the National Treasury, as described in the addendum to this report.

4. QUALIFICATION

4.1 Property, plant and equipment

4.1.1 Non-compliance with Statements of Generally Accepted Accounting Practice (GAAP)

·         The cost capitalised in respect of major classes of assets were not allocated to its significant parts and depreciated separately, as required by paragraphs 43 and 44 of IAS 16 (AC 123).

 

·         The residual value and useful life of assets were not reviewed, as required by paragraph 51 of IAS 16 (AC 123) and the accounting 'policy as set out in note 1.6 to the financial statements.

 

·         The possible impairment of assets at the reporting date and the estimate of the recoverable amount of the assets, where indications of impairment might exist, were not considered as required by paragraph 63 of IAS 16 (AC 123) and paragraph 9 of IAS36 (AC 128) and the accounting policy as set out in note 1.6 to the financial statements.

 

These shortcomings were due to the fact that major changes in the applicable accounting frameworks were not implemented on time.

4.1.2 Depreciation

Depreciation recalculated on the two vessels that were commissioned during the year and the accumulated depreciation according to the asset register and ledger differed by R 1,08m. This resulted from the fact that the asset register incorrectly included this amount as an opening balance for accumulated depreciation. Accumulated depreciation was therefore overstated and the accumulated surplus understated by this amount.

4.2 Revenue and trade and other receivables

The validity, completeness and recoverability of levies on fish products amounting to R69,15m, harbour fees amounting to R6.17m and the debtors relating to these revenue items amounting to R33,91 m (included in note 6. trade receivables) could not be verified due to the following:

(i) No debtors system and procedures were in place. which allowed for the continuous accrual and monitoring of levy debtors as debtors were only calculated on a manual basis from the data recorded in the Financial Resource System. The manual list prepared during this process was updated constantly as catch information changed.

(ii) Corrections were made based on the updated lists, but were limited to the pelagic sector only. No corrections were made for the other sectors.

(iii) Even though quota holders only paid when monthly catch information was sent through (based on catches landed) some quota holders showed a credit balance on the list prepared to raise the levy debtors.

(iv) The calculation of the accrual of levy debtors was based on four sectors only while it was based on eight sectors in the previous financial year. Satisfactory explanations for the decrease in sectors used to calculate the accruals of levy debtors could not be obtained. The catches landed for the four sectors used in the calculation amounted to R 18m, while the total levies on fish products amounted to R69m for the year.

(v) The debtors listing, subledgers or debtors age analysis could only be provided for debtors amounting to R20.57m, while it could not be provided for the remaining balance of R 13.33m.

(vi) The provision for bad debts was based on harbour fee debtors of R 15.95m that arose due to a dispute regarding tariffs in prior years. Of the remaining balance of R 17,95m the following debtors have been outstanding for a considerable period and appeared to be doubtful, but have not been considered during the quantification of the bad debt provision:

- R 1,07m of the 2005-06 accruals that were older than 90 days.

- R3,91 m of the 2004-05 accruals that were still outstanding and some of the balances have been handed over to debt collectors.

- R3.20m of accruals made in 2004-05 and prior years were still outstanding. These balances were all handed over to debt collectors.

No provision was made for the possible non-collection of these balances even though they have been outstanding for a considerable period.

(vii) Harbour fee invoices were only sequentially numbered since I June 2006. The invoices that could be identified on the ledger and that appeared to be sequentially numbered per harbour were only for the debtors that were outstanding at year-end.

(viii)Debtors amounting to R3,20m were raised as part of the adjusting entries to the original set of financial statements. A scrutiny of these debtors revealed that some of the accruals were for 2004-05, which were already included in the opening balance of debtors which might have been duplicated. Furthermore, the corresponding leg of the entry was credited as income for the 2005-06 financial year. As these balances related to debtors accrued in 2004-05 and earlier years, this should have been treated as a prior year error. The comparative figures for 2004-05 should therefore have been adjusted in terms of GRAP3. Harbour fees and the levy on fish products were therefore overstated by R 1,78m and R 1,41 m, respectively.

(ix) Harbour fees and levy debtors amounting to R2,55m and R7,46m respectively, were written off during the restatement of the opening balances for the 2004-05 financial year. Even though some of these debtors balances were brought back into the accounting records as part of the adjusting journals to the original statements, a part of the original balances was still written off and no authorisation could be provided.

These shortcomings were due to the fact that the fund did not have a proper integrated financial system that supported the accrual basis of accounting.

4.3 Trade and other payables

4.3.1 Supplier statements

Supplier statements for 24 supplier accounts totaling R8,36m could not be provided for audit purposes as no system was in place for the reconciliation of supplier accounts to supplier statements.

4.3.2 Reconciliation of supplier accounts

An accumulated difference of R8,65m was found between supplier statements and the supplier accounts for 29 suppliers whose balances amounted to RI4,26m at 31 March 2006. Explanations for the individual differences could not be obtained in all instances, as no system was in place for the reconciliation of supplier accounts with supplier statements. It was, however, found that an invoice amounting to R6,06m for one supplier was not accounted for, resulting in the understatement of vessel operating expenditure and trade creditors.

4.4 Expenses

4.4.1 Professional and special services - non-government and vessel operating costs

The reversal of an accrual for vessel operating costs of R28,61 m was incorrectly allocated to professional and special services - non-government. Vessel operating costs was therefore overstated and professional and special services - non-government understated by this amount. This shortcoming was due to the fact that the fund did not have a proper. system in place for the preparation, reviewing and approval of journal entries.

4.4.2 Commission paid

The incorrect entry made to account for commission paid to a service provider for the chartering of vessels was not reversed, resulting in the overstatement of commission paid and understatement of trade receivables by R6,40m. This shortcoming was due to the fact that the fund did not have a proper system in place for the preparation, reviewing and approval of journal entries.

4.5 Contractual commitments

Documentation to support and verify contractual commitments of R86,9m could not be provided for audit purposes. This was due to the fact that these amounts were only brought into the financial statements at a very late stage.

4.6 Inventories

Inventories for confiscated products were valued at zero. In terms of GAAP, inventory that was obtained for no consideration should be valued for financial statement purposes at fair value. No explanations or support could be obtained that the fair value for the confiscated assets should be zero.

4.7 Pay-As-You-Earn.(PAYE)

No employees' tax was deducted or withheld from the payments made to labour brokers as required by section I of the Fourth Schedule of the Income Tax Act, 1962 (Act No. 58 of 1962). Furthermore, no exemption certificates for these labour brokers could be submitted as provided for in section 2(5)(a) of the Fourth Schedule of the Income Tax Act, 1962 to allow for no employees' tax being deducted.

The amount of the possible obligation to SARS in this regard could not be determined as sufficient information was not available.

4.8 Cash flow statement

The cash flow statement has been prepared on the indirect method which was contrary to GRAP2.This was due to the fact that changes in the applicable accounting frameworks were not implemented on time.

4.9 Opening balances

The audit opinion relating to the financial statements of the previous financial year was disclaimed due to various limitations in scope that could not be resolved. Due to the fact that the validity and accuracy of the prior year's account balances could not be confirmed, uncertainty also existed regarding the completeness and accuracy of the opening balances for the 2005-06 financial year.

5. DISCLAIMER OF AUDIT OPINION

Because of the significance of the matters referred to in paragraph 4,1 do not express an opinion on the financial statements.

6. EMPHASIS OF MATTER

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

6.1 Weaknesses in internal controls

During the audit various weaknesses relating to the financial administration as well as non-compliance with applicable laws and regulations were identified and reported to the accounting officer. These shortcomings resulted from either a lack of adequately developed management policies and procedures, or relevant personnel not following management policies and procedures.

6.2 Non-compliance with laws and regulations

6.2.1 Performance information

The annual report of the fund did not report on the performance against predetermined objectives as required by section 55(2)(a) of the PFMA.

6.2.2 Budget

In terms of section 53( I) of the PFMA the executive authority granted the fund extension for the submission of the budget for 2006-07 until 3 I January 2006. The budget was, however, not submitted on time as the budgetary process was only concluded on 3 April 2006 and approved by the executive authority on I June 2006.

Proof could not be provided that the budgets for 2005-06 and 2006-07 were approved in concurrence with the Minister of Finance as required by section 10(3) of the Marine Living Resources Act of 1998.

No approved capital budgets for 2005-06 and 2006-07 could be provided for audit purposes and the capital expenditure incurred during the 2005-06 financial year could therefore be regarded as unauthorised expenditure.

6.2.3 Risk management strategy

The fund did not have a risk management strategy, which included a fraud prevention plan, as required by Treasury Regulation 27.2.1.

6.2.4 Non-compliance with GAAP

No information has been documented on the financial statements relating to the disclosure of related parties as required by IAS24 (AC 126) in terms of GAAP.

6.3 Audit committee

The terms of reference of the audit committee required that at least four meetings be held in a financial year, while only two meetings were held during the 2005-06 financial year.

6.4 Previous audit report

6.4.1 Financial and procurement accrual accounting system - paragraph 5.3 of the 2004-05 audit report

As reported previously since the establishment of the fund the basis of accounting had changed from the cash basis of accounting to the accrual basis of accounting. A firm of consultants was appointed in August 2002 to provide and implement an integrated core financial and procurement accrual accounting system. Since the commencement of this project the fund experienced numerous problems which resulted in the decommissioning of the system on 30 November 2004.Also refer to paragraph I (e) of the Report of the accounting authority in this regard. According to information provided by the fund the cost incurred on this system amounted to approximately R3,2m, which could possibly be regarded as fruitless expenditure. This expenditure has not been disallowed in the financial statements.

As an interim measure the fund outsourced the finance and procurement function to another firm of private accountants until 28 September 2005. The cost incurred in this regard amounted to approximately R 1,3m.

Approval was granted by the acting director-general of the Department of Environmental Affairs and Tourism on 29 June 2005 for the institution of legal proceedings against the initial service provider for damages and to recover all additional costs as a result of the failure to fulfill its obligations .in terms of the tender.A summons was served on the service provider on 23 September 2005. The defendant has, however, given a notice of intention to defend the matter during April 2006.At the date of compiling this report no further feedback had been received.

6.4.2 Ownership affixed assets - paragraph 5.4 of the 2004-05 audit report

As reported previously and as disclosed in note 4 to the financial statements the signed contracts relating to the purchase of various assets were entered into between the Department of Environmental Affairs and Tourism and the suppliers, and not with the fund. The construction costs relating to the purchase of various vessels have been paid by the fund and have therefore been capitalised in their books.

None of these contracts make any reference to the right of ownership vesting with the fund or that these contracts have been entered into by the department on the fund's behalf. At the date of compiling this report audit was unable to ascertain whether the fund legally owned all fixed assets recognised.

7.APPRECIATION

The assistance rendered by the staff of the Marine Living Resources Fund during the audit is sincerely appreciated.

I Jeewa for Audito-General

Cape Town

31 July 2006

AUDITOR-GENERAL