Third Report of the
Standing Committee on Public Accounts on the Report of the Auditor General on
the annual report and financial statements of the Energy Sector Education Training
Authority for the 2009/10 financial year, dated 16 March 2011
1. Introduction
The
Standing Committee on Public Accounts (SCOPA) heard evidence on and considered
the contents of the Annual Report and the Report of the Auditor-General on the 2009/10
financial statements of the Energy Sector Education Training Authority (ESETA).
The Committee noted the disclaimer opinion, highlighted areas which required
the urgent attention of the Accounting Authority, and reports as follows:
2. Comparative
figures and opening statements
The Auditor-General identified the following:
a)
ESETA had
a number of unadjusted audit differences relating to prior year annual
financial statements as reported in the prior year’s management report and
audit report.
b)
ESETA has
not adjusted the accounting records for the prior year’s unadjusted audit
differences and as a result, the opening balances as well as the comparative
amounts are inaccurate.
The Committee recommends that the Accounting Authority ensures that:
a)
All prior period errors are disclosed in a
note in the annual financial statements according to (Generally Recognised
Accounting Practise (GRAP 3).
b)
All
material audit findings from the external and internal auditors are addressed.
3. Accounting records
The Auditor-General identified the following:
a)
Management
could not provide supporting documents and explanation for journal entries
processed, totalling R5 279 000.
b)
The
financial statements components affected are employer grants and project
expenses, trade and other payables from exchange transactions, grants and
transfers payable, trade and other receivables from exchange transactions.
The Committee recommends that the Accounting Authority ensures that:
Management keeps complete, accurate and valid accounting records.
4. Administration expenses
The Auditor-General identified the following:
a)
Sufficient,
adequate and appropriate supporting documentation for an amount of R1 348 000
included as part of employee costs which forms part of the administration
expenditure could not be obtained.
b)
The entity
did not straight line the operating lease payments over the period of the lease
contract. As a result, the operating lease amount included in administration
expenditure is overstated by R263 000 and trade and other payable from exchange
transaction is overstated by R263 000.
c)
The
operating lease commitment as disclosed in note 24 is understated by
R397 000.
d)
An amount
of R353 000 relating to the cost of employment as disclosed in note 8.1 to the
annual financial statements was incorrectly calculated. As a result, cost of employment
included in administration expenses is overstated by R353 000 and trade and
other payable from exchange transactions is overstated by
R353 000.
The Committee recommends that the Accounting Authority ensures that:
Management assigns appropriate levels of authority and responsibility to
ensure that employees understand how they are accountable to facilitate
effective internal control over financial reporting.
5. Employer grants and project expenses
The Auditor-General identified the following:
a)
According
to the Skills Development Act Grant Regulation 7(5), a discretionary grant paid
in terms of sub-regulation 7(1)(a) to (n) must fund all project costs for any project
funded by a discretionary grant under sub-regulation 7(1) inclusive of project
administration costs for the discretionary project subject to the approval by a
SETA Board or Council.
b)
A separate
budget for the project administration costs not exceeding a maximum of 10% of
total project costs may be approved by the SETA Board or Council.
c)
The SETA
could not provide the Board’s approval for the administration expenses on
discretionary project for audit purposes.
d)
ESETA
recognised discretionary grant expenditure amounting to R1 283 000 which
relates to prior periods in the current financial year.
The Committee recommends that the Accounting Authority ensures that:
a)
The
organisational structure addresses adequate controls and procedures to ensure
the entity maintains full and proper record of its financial affairs.
b)
The entire
accounting record of discretionary grants and administrative expenditure is
reviewed and reclassified.
c)
Disciplinary
steps are taken in terms of section 51 (1)(e) of the Public Finance Management
Act (PFMA) against any employee who permits irregular expenditure or commits an
act which undermines the financial management and internal control systems.
d)
Irregular
expenditure is recorded and disclosed in the financial statements in terms of
section 55(2)(b)(i) and (ii) of the PFMA.
e)
The prior
year’s errors are adjusted against the reserves.
f)
The prior
year’s adjustments are disclosed separately in a note in the annual financial
statements according to GRAP 3.
6. National Skills Fund expenses
The Auditor-General identified that:
Sufficient, adequate and appropriate supporting documents for an amount
of R1 344 000 relating to a credit transaction, which was offset against
National Skills Fund expenditure in the annual financial statements could not
be obtained.
The Committee recommends that the Accounting Authority ensures that:
Controls are in place for the reliability of the operating system, the
accuracy of the data outputs and the protection of files.
7. Trade and other payable from exchange
transactions
The Auditor-General identified the following:
a)
The
existence, obligation, completeness and valuation of the following amounts
included in trade and other payable from exchange transactions as a result of
lack of supporting documentations and explanation could not be determined:
§
A
difference of R4 288 000 for discretionary payables as disclosed in note 18 to
the annual financial statements was identified between the accruals listing and
the annual financial statements.
§
A
reconciliation between the accrual listing and the amount in the financial
statements was not performed.
§
An amount
of R8 205 000 relating to discretionary grant creditors with debit balances
included in note 18 to the annual financial statements.
§
Discretionary
grant creditors with debit balances were incorrectly classified as creditors
instead of debtors.
§
As a
result of these errors trade and other payable from exchange transactions
payable and other receivables from exchange transactions are understated by R8 205
000.
§
An amount
of R6 094 000 for other payables as disclosed in note 18 to the annual
financial statements.
§
An amount of R3 286 000 for mandatory grants
creditors as disclosed in note 18 to the annual financial statements.
§
An amount
of R1 140 000 for payroll liabilities as disclosed in note 18 to the annual
financial statements.
b)
ESETA
incorrectly classified mandatory grants payable of R595 000 as discretionary
grants payable.
The Committee recommends that the Accounting Authority ensures that:
a)
All amounts
disclosed as accounts payable actually exist.
b)
All
transactions are reviewed before they are captured in the accounting system.
c)
Adequate
training is provided to staff for the necessary skills for proper and accurate
accounting records.
d)
Adjusting
entries are processed to correct errors identified.
8. Trade and other receivables from exchange
transactions
The Auditor-General identified that:
ESETA recognised payments made in the current year for
services delivered in prior years as prepayments. This resulted in an
overstatement of prepayments and trade payables from exchange transactions by
R1 050 000.
The Committee recommends that the Accounting Authority ensures that:
a)
Adequate
training is provided to staff for the necessary skills for proper and accurate
accounting records.
b)
Management
reviews the entire accounting record to guarantee that it is complete, accurate
and valid.
9. Reserves
The Auditor-General identified that:
Included in the mandatory grants disbursed amounting
to R76 678 000 which is disclosed in note 7 to the financial statements, is an
amount of R7 215 000 which should have been accounted for as a prior period
error in terms of GRAP 3. As a result, prior periods mandatory grants
expenditure is understated by R7 215 000 and the opening reserves are
overstated by R7 215 000.
The Committee recommends that the Accounting Authority ensures that:
a)
Adequate
training is provided to staff for the necessary skills for proper and accurate
accounting records.
b)
All the
mandatory grants payments are automated and the accuracy of the system is
audited regularly.
10. Provisions
The Auditor-General identified the following:
a)
ESETA did
not record leave taken by its employees in the payroll system during the year
under review.
b)
Following
a recalculation of leave balances based on manual leave forms, a difference of
R612 000 was identified between the amount as disclosed in note 20 to the
annual financial statements and Auditor-General’s calculation.
c)
The
discrepancy was a result of inadequate controls over the recording of
transactions.
d)
As a
result, provisions are overstated by R612 000 and cost of employment included
in the administration expenses is overstated by R612 000.
The Committee recommends that the Accounting Authority ensures that:
a)
Adequate
training is provided to staff for the necessary skills for proper and accurate
accounting records.
b)
Adjusting
entries are processed to correct errors identified.
11. Commitments
The Auditor-General identified that:
Sufficient and appropriate
documentation to support commitments amounting to R79 113 000 as disclosed in
note 23 to the annual financial statements could not be obtained.
The Committee recommends that the Accounting Authority ensures that:
Amounts disclosed as
commitments are valid and complete.
12. Prior period error
The Auditor-General identified that:
Sufficient and appropriate audit evidence for the following amounts
included in the prior period error note 28 to the annual financial statements
could not be obtained:-
a) An amount of R4 278 000 for the line item “prior
profit/loss not accounted for”.
b) An amount of R10 281 000 relating to the line item
“movement of reserves”.
The Committee recommends that the Accounting Authority ensures that:
a)
ESETA staff
is adequately trained in financial reporting.
b)
All the
work that has been done by employees is reviewed by a senior person.
13. Irregular expenditure
The Auditor-General identified the following:
ESETA did not disclose the irregular expenditure amounting to R5 036 000
which was incurred during the year under review. The regular expenditure
resulted from the following:-
a) The quotation and/or bidding processes were not
adhered to in the procurement of goods and services amounting to R4 370 000.
b) Tenders were not always advertised in the government
Tender Bulletin.
c) Approvals were not always obtained for administration
expenditure prior to expenditure being incurred on projects as required by the
Skills Development Grant Regulation. Where approvals were obtained prior to administration
expenses on projects were incurred, they were still classified as employer
grants and project expenses instead of administration expenses. The correct
classification of these expenses will result in ESETA exceeding the allowable
12,5 % for administration expenses as per the Skills Development Act by an
amount of R666 000.
The Committee recommends that the Accounting Authority ensures that:
a)
Irregular
expenditure is disclosed in the annual financial statements.
b)
Supply Chain
Management policies are adhered to and disciplinary measures are taken against
employees who contravene policies.
c)
There is
proper classification of administrative expenses.
14. Cash flow statement
The Auditor-General identified that:
a)
According
to GRAP 2, only actual cash receipts should be included as cash received from
stakeholders.
b)
Not all
actual cash flows and movements in net working capital and finance leases were
taken into account by ESETA in preparing the cash flow statement.
The Committee recommends that the Accounting Authority ensures that:
a)
Adequate
training is provided to staff for the necessary skills for proper and accurate
accounting records.
b)
Adjusting
entries are processed to correct errors identified.
15. Disclosure
The Auditor-General identified the following:
a)
The
amounts per the disclosure notes to the financial statements must agree to the
statement of financial position, statement of financial performance, statement
of changes in net assets and the cash flow statement.
b)
The
reserves balance at 31 March 2009 of R45 797 000 as disclosed in note 28
differs by an amount of R9 453 000 as compared to the amount disclosed in the
statement of changes in net assets.
c)
The
restated amount at 31 March 2009 (after taking into account the prior years
errors) differs by an amount of R1 058 000 as compared to the amount disclosed
in the statement of change in net assets.
The Committee recommends that the Accounting Authority ensures that:
a)
Adequate
training is provided to staff for the necessary skills for proper and accurate
accounting records.
b)
Adjusting
entries are processed to correct errors identified.
c)
Disclosure
issues identified are corrected in the annual financial statements.
16. Statement of changes in net assets
The Auditor-General identified the following:
a)
Included
in the statement of changes in net assets is a line item “movement of reserves”
amounting to R22 138 000 and a line item “allocation of unappropriated surplus
or deficit not reflected” amounting to R20 252 000 which were incorrectly
adjusted against the discretionary grant reserve.
b)
As a
result, the grant reserve is overstated by R1 886 000.
The Committee recommends that the Accounting Authority ensures that:
a)
Adequate
training is provided to staff for the necessary skills for proper and accurate
accounting records.
b)
Adjusting
entries are processed to correct errors identified.
17. Human resources and related issues
The Auditor-General identified the following:
a)
The Chief
Financial Officer position was vacant as at 31 March 2010.
b)
ESETA does
not measure performance of management and staff.
c)
Not all
leave taken by employees was captured accurately and in full.
d)
Reconciliations
between the payroll system and the general ledger were not done. Control accounts
as posted to by the VIP system were not cleared on a monthly basis.
The Committee recommends that the Accounting Authority ensures that:
a)
The position of the Chief Financial Officer is
filled by appointing an appropriately qualified permanent official.
b)
Leave forms are timeously and correctly captured on
PERSAL and measures be taken against employees who fail to capture records.
c)
Human Resources policies, including performance
management, are developed and implemented.
d)
Department of Public Service and Administration
policies and procedures are complied with.
e) Monthly
reconciliations are made between the payroll system and the general ledger.
18. Supply Chain Management (SCM) issues
The Auditor-General identified the following:
a)
In three instances,
quotations were not invited in all instances.
b)
A list of
prospective suppliers from whom to invite price quotations was not in place.
c)
The
preference point system as required by the Preferential Procurement Policy
Framework Act (Act No. 5 of 2000) was not applied in the procurement of all
goods and services above R30 000.
d)
Contracts
were amended, extended or renewed without approval by a delegated official.
e)
SCM policies
and procedures were in conflict with legislation.
f)
The fraud
prevention plan did not include specific measures for preventing and detecting
fraud in the procurement process.
g)
Services
were still being procured after the contract has expired.
The Committee recommends that the Accounting Authority ensures that:
a) The entity’s
SCM policy is updated, encompassing all the elements of the PFMA, Treasury
Regulations, Preferential Procurement Framework Act, Preferential Procurement
Regulations and SCM practice notes issued by the National Treasury that will
ensure an appropriate procurement and provisioning system which is fair,
equitable, transparent, competitive and cost effective.
b) A proper
filing system for all information supporting SCM related transactions is kept.
c) Monthly
reconciliations are done in order to avoid non-compliance with SCM requirements.
d)
Internal audit scope with regards to SCM is
increased to ensure that day to day controls are effectively implemented and
all procurements comply with SCM legislative requirements.
19. Conclusion
The Committee is concerned that ESETA has had a disclaimer
of audit opinion for years. The audit has consistently highlighted a lack of
leadership by both management and the ESETA Board and a lack of adequate skills
which is a result of improper employment practices.
The Committee further recommends that the Executive Authority
submits a progress report on the implementation of the above recommendations to
the National Assembly within 60 days after the adoption of this report by the
House.
Report to be considered.