Report of the Committee on Public Accounts on the annual report and financial statements of the National Student Financial Aid Scheme 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 National Student Financial Aid Scheme (NSFAS). The Committee noted the disclaimer opinion and highlighted areas which required the urgent attention of the Accounting Officer. The Committee reports as follows:

 

2. Student loans- initial measurement of student loans

 

The Auditor-General identified the following:

 

a)       NSFAS did not make a fair value adjustment on initial recognition to student loans, as disclosed in note 7 of the financial statements, as required by International Accounting Standards (IAS) 39 Financial Instruments: Recognition and Measurement.

b)       The fair value adjustment required student loans and the corresponding adjustments to related classes of transactions and disclosures could not be determined.

 

The Committee recommends that the Accounting Authority ensures that:

 

a)       NSFAS determines the fair value of the loans receivables at initial recognition by applying a reasonable and reliable valuation technique. It may be appropriate to discount the expected future cash flows, in respect of the instrument, using a rate that the market would price these loans at.

b)       Loans issued are recognised upon initial recognition at a significantly lower fair value amount than the cash actually issued with the difference being recognised in profit or loss. The loss on initial recognition is effectively a cost of delivering on the NSFAS’s mandate and this cost is not recognised as and when the expenditure occurs as this would misrepresent the financial performance of the entity.

 

3. Revenue from exchange transactions: Interest income on student loans

 

The Auditor-General identified the following:

 

a)       The entity did not accrue for interest in revenue using the effective interest rate method as required by GRAP 9 Revenue from exchange transactions.

b)       The entity recognises the accrued interest on student loans in the financial statements only when a loan repayment is initiated, and not over the term of the loan.

c)       The revenue from interest income on student loans was materially misstated by R565,6 million (R2008-9: R437 million).

 

The Committee recommends that the Accounting Authority ensures that:

 

a)       The accounting policy for interest income is amended to comply with GRAP 9 and IAS 39 and all interest charged on outstanding student debtors balances should be recognised in the accounting records and the financial statements.

b)       A retrospective adjustment is done in respect of the change in the accounting policy.

c)       The accounting records and the financial statements are adjusted to correct the understatement of interest accrued for the year.

 

4. Impairment of student loans and provision for doubtful debts

 

The Auditor-General identified the following:

 

a)       In determining the impairment of student loans and the provision for doubtful debts as stated in note 7 of the financial statements, management made certain assumptions that could not be corroborated with reliable supporting documentation.

b)       The impairment of student loans included a further write off of interest accrued on student debtors that had initiated payment, amounting to R589,3 million. The entity could not provide reliable evidence in support of this write off.

c)       The valuation of the student loan could not be determined.

 

The Committee recommends that the Accounting Authority ensures that:

 

a)       A review of the assumption made by management in determining the impairment of student loans is done

b)       A review of the calculations of interest accrued on student debtors is done.

 

5. Interest Income

 

The Auditor-General identified that:

 

The interest income in the statement of performance and as disclosed in note 14, is materially understated by R181 062 545 as a result of the interest income.

 

The Committee recommends that the Accounting Authority ensures that:

 

a)       The accounting policy for interest income is amended to comply with GRAP 9 and IAS 39 and all interest charged on outstanding student debtors balances should be recognised in the accounting records and the financial statements.

b)       A retrospective adjustment is done in respect of the change in the accounting policy.

c)       The accounting records and the financial statements are adjusted to correct the understatement of interest accrued for the year.

 

6. Reconciliation of student loans

 

The Auditor-General identified the following:

 

a)       The entity could not provide sufficient appropriate audit evidence to support a reconciling amount of R42 294 803 between the student loans in the General Ledger and the student loans in the sub-system where the student loans are managed on a daily basis.

b)       The existence, rights, completeness and valuation of student loans could not be obtained sufficiently.

 

The Committee recommends that the Accounting Authority ensures that:

 

a)       The reconciliation between LMS and the General Ledger is performed on regular basis.

b)       NSFAS investigates how the capital balance is calculated for reporting purposes and determine whether the calculation does not result in material misstatement of the student loans reported in the financial statements.

 

7. Compliance with laws and regulations

 

The Auditor-General identified the following:

 

a)       According to Treasury Regulations 27.2.1, the Accounting Authority must ensure that a risk management strategy which includes a fraud prevention plan is implemented.

b)       The entity’s materiality and significance framework has not been submitted or approved by the executive authority as required by Treasury Regulations 28.3.1.

 

The Committee recommends that the Accounting Authority ensures that:

 

a)       The risk management strategy which includes a fraud prevention plan is developed and implemented.

b)       The entity’s material and significance framework is submitted and approved.

 

8. Supply chain management issues

 

The Auditor-General identified the following:

 

a)       In three instances, suppliers were not reviewed regarding contract performance nor rotated on a regular basis.

b)       An award was made to one supplier who failed to provide a tax clearance certificate.

c)       The fraud prevention plan does not include specific measures relating to the procurement of process.

d)       In three instances, invoices issued under contracts were not reconciled to the approved contracts prior to payment being made.

e)       Internal audit did not evaluate the controls, processes and compliance with laws and regulations with regard to SCM.

f)         National Treasury’s code of conduct not adopted by SCM  officials

 

The Committee recommends that the Accounting Authority ensures that:

 

a)       The departmental 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 checklist of all legislative requirements is kept for all SCM related transactions, signed by both the preparer and reviewer.

c)       A proper filing system for all information supporting SCM related transactions is kept.

d)       Monthly reconciliations are done in order to avoid non-compliance with SCM requirements.

e)       Internal audit scope, with regards to SCM, is increased to ensure that day to day controls are effectively implemented and all procurement comply with SCM legislative requirements.

 

9. Information Systems Audit

 

The Auditor General identified the following:

 

a)       While NSFAS has implemented back up procedures, there is currently no review or testing of the back-ups.

b)       Control weaknesses have been identified with the logical access controls within the IT environment and these include user access rights reviews which are not performed.

c)       There is no password authentication to gain access into certain applications and super user activity reviews are not performed.

d)       No IT steering committee has been established to assist the board with governance of IT.

 

The Committee recommends that the Accounting Authority ensures that:

 

a)        An IT governance framework is developed that directs the positioning of IT, resource requirements, service continuity in instances of data loss and risk and internal control management.

b)       The access control security is strengthened to ensure that no unauthorized access takes place.

c)       The IT steering committee is established to assist the board with IT governance.

 

10. Conclusion

 

The Committee further recommends that the Accounting 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.