Eighth Report of the
Committee on Public Accounts on the Annual Report and Financial Statements of the Department of Water Affairs
and the Special Investigations and the report of the Auditor-General on the Financial
Statement of the Department of Water Affairs for the 2009/10
financial year, dated 22 June 2011
1. Introduction
The Committee on Public Accounts (the Committee)
heard evidence on and considered the content of the Annual Report and the
Report of the Auditor-General (AG) on the 2009/10 financial statements of the
Department of Water Affairs( the Department), the Water Trading Entity and the
Special Investigations Report by the AG. The Committee noted the qualified
audit opinion, highlighted areas which required the urgent attention of the Accounting
Officer, and reports as follows:
2 . The Department of Water Affairs
2.1 Immovable assets
The Auditor-General was unable to verify the existence
and completeness of immovable capital tangible assets stated at R33 499 000 (2009:
R5 043 122 000) as disclosed in note 32 to the financial statements.
The Committee recommends that the Accounting Officer
ensures that:
a)
The
Department maintains asset registers for each category of assets as required by
the Department’s Financial Reporting Framework Guide; and
b)
The assets
on these registers are verified regularly and correspond to financial records
of the Department.
2.2. Movable
Assets
The Auditor-General identified the following:
a) The
closing balance for all movable tangible capital assets of R90 724 000 as
disclosed in note 30 of the financial statements, does not correspond with the
balance of R48 257 427 per the asset register.
b) The
Department did not provide sufficient and appropriate evidence to explain the
difference between the disclosure note and the underlying asset register of
R42 895 573.
c) The
Department’s record did not perform the application of alternative procedures
to verify the existence and completeness of movable assets.
The Committee recommends that the Accounting Officer
ensures that:
a)
The asset
register is reconciled frequently to the financial records in order to identify
and correct any discrepancies; and
b) All officials who record transactions are provided
training on the use of Standard Charts of Accounts (SCOA) codes.
2.3. Goods
and services
The Auditor-General identified the following:
a) The
additions for movable tangible assets of R33 800 000 as disclosed in note 30 of
the financial statements does not correspond with the additions of R16 160 794
in the asset register.
b) The
difference is a result of misclassification of expenditure on goods and
services as capital expenditure.
c) The
Department incomplete records did not allow for the application of alternative
procedure.
d) The effect
of the misclassification on the tangible assets balance and on the goods and
services amount contained in the financial statements could not be determined.
The Committee recommends that the Accounting Officer
ensures that:
a) The asset
register is reconciled frequently to the financial records in order to identify
and correct any discrepancies; and
b) All officials who record transactions are provided
training on the use of SCOA codes.
3. Water Trading Entity (The Entity)
3.1
Suspense
Accounts
The Auditor-General identified the following:
a) Treasury
Regulation 17.1.2 requires the source of the transactions in a clearing account
to be readily identifiable, as well as monthly reconciliations to confirm the
balance of the account. This information could not be provided for the
transactions in the clearing account disclosed as part of the unallocated
receipts note 10.2 of the financial statements.
b) The
transactions that have been journalised out of this clearing account could not
be supported by adequate supporting documentation.
c) The
entity’s records did not permit the application of alternative audit procedures
regarding the clearing account.
d) Sufficient
appropriate audit evidence to satisfy existence, obligations, completeness,
valuation and allocation of the clearing account could not be obtained.
The Committee recommends that the Accounting Officer
ensures that:
a) The Chief Financial
Officer (CFO), Finance Director and Revenue Directors closely monitor the exercise
of clearing of suspense accounts by designing and implementing action plans to
ensure that these accounts have insignificant balances at the end of the
financial year;
b) Adequate
policies and procedures for the clearing of suspense accounts are designed; and
c) Adequate
reviews of suspense accounts are performed, timeously.
3.2
. Water related services revenue
The Auditor-General identified the following:
a) An amount
of R231 791 894 relating to “return to sender” invoices was excluded from water
related services revenue.
b) The South
African Statement of Generally Accepted Accounting Practice (GAAP) and the International
Accounting Standards (IAS) 18 require that revenue should be recorded when it
is probable that economic benefit will flow to the entity.
c) There was
an inadequate system of control to assess the probability of recording these
amounts as revenue which is reliable for audit purposes.
d) Audit
evidence to support the completeness of water related services revenue of
R1 643 715
as disclosed in the statement of comprehensive income could not be obtained sufficiently.
The Committee recommends that the Accounting Officer
ensures that:
a)
Adequate
evidence exists to conclude when it is probable that economic benefits will
flow into the entity for a specific invoice;
b)
Revenue
recorded is complete; and
c)
The Entity
complies with IAS 18.
3.3.
Unrecorded
liabilities
The Auditor-General identified the following:
a) There was
no system of control over the recording of outstanding invoices at year-end.
b) There were
no satisfactory audit procedures to obtain reasonable assurance that all
outstanding invoices have been accrued or provided for.
c) The
completeness of the accrual liability in the annual financial statements could
not be concluded.
The Committee recommends that the Accounting Officer
ensures that:
a) Adequate
cut-off procedures to guarantee that all transactions for the financial year
are recorded in the annual financial statements; and
b) Adequate
creditor reconciliations is done for all significant creditors at 31 March in
order to ensure that all outstanding liabilities have been recorded in the
annual financial statements.
3.4.
Accounts
Receivable
The Auditor-General identified the following:
a)
The
completeness, existence and valuation of water user debtors as disclosed in
note 10.1 of the financial statements could not be verified.
b)
A limited
amount of debtors confirmed their balances and the alternative audit procedure
did not render satisfactory results
c)
Reasonable
assurance that debtors balance exists and are disclosed at the correct value in
the annual financial statements
d)
The
completeness of the trade debtors due to the limitation in the completeness of
the water related services revenue could not be concluded.
The Committee recommends that the Accounting Officer
ensures that:
The monthly debtors’
reconciliations are prepared and reviewed through regular monitoring to ensure
that the debtors’ balances are correct at the end of the financial year.
3.5. Irregular expenditure
The Auditor-General identified that:
As disclosed in note
27 of the financial statements, irregular expenditure to the amount of R6 907
000 was incurred, as proper tender processes had not been followed.
The Committee recommends that the Accounting Officer
ensures that:
a)
The Entity has an updated Supply Chain Management
Policy encompassing all the elements of the Public Finance Management Act
(PFMA) (No.1 of 1999), the
Treasury Regulations, the Preferential Procurement Framework Act, the
Preferential Procurement Regulations, and Supply Chain Management (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)
Appropriate
disciplinary measures are taken against employees who were responsible for
incurring irregular expenditure in terms of section 38(1)(h)(iii) of the PFMA;
c)
The
Department implements effective, efficient and transparent financial and risk
management processes; and
d)
The Department
strengthens its internal control systems in order to avoid incurring further
irregular expenditure.
3.6.
Restatement of corresponding figures
The Auditor-General identified that:
As disclosed in note 23 of the
financial statements, the corresponding figures for the year ended 31 March
2009 have been restated as a result of errors discovered during the year ended
31 March 2010 in the financial statements of the Water Trading Entity at, and
for the year ended, 31 March 2009.
The Committee recommends that the Accounting Officer
ensures the following:
a) The
financial statements and other information included in the annual report are
checked and reviewed for completeness and accuracy prior to the audit process; and
b)
All amendments to financial statements and
information are effected before the audit process commences.
3.7.
Material losses through write-off of debtor balances
and impairment of infrastructural
assets
The Auditor-General identified the following:
a)
As
disclosed in note 7 of the financial statements, impairment of infrastructure
assets of R446 533 000 occurred as a result of assets not being able to
functionally perform as contemplated when they were initially designed, mainly
because of limited utilisation and loss of functionality due to siltation.
b)
As
disclosed in note 10.1 of the financial statements, R115 197 000 of long
outstanding debt has been written off due to management’s assessment that the
recoverability of these amounts are slim.
The Committee recommends that the Accounting Officer
ensures that:
a)
Infrastructure
assets are serviced and maintained by approved service providers on a regular
basis to prevent further impairment of infrastructure assets;
b)
Effective
and appropriate steps are taken timeously to collect all money due to the entity,
including maintenance of proper accounts and records of all debtors as required
by Treasury Regulations 11.2.1(a);
c)
Monthly
debtors reconciliations are prepared and reviewed on a regular basis; and
d)
There is
continuous monitoring of debtors accounts to guarantee that account balances are
correct at the end of the financial year.
4. Special Investigation Report
The Auditor-General
reported on the under-mentioned investigations and identified the following:
4.1. Supply Chain
Management (SCM)
As
required by section 38 (1) (a)(iii) of the Public Finance Management Act
(PFMA), a Procurement User manual exists
at the Department of Water Affairs (DWA). Instances were identified where
officials of the DWA did not always appropriately
adhere to the DWA Procurement User manual and the procurement directives issued
by the National Treasury. The PFMA stipulates that, where procurement
prescripts are contravened, the expenditure incurred should be regarded as
irregular expenditure. The irregular expenditure can be condoned ex post facto.
The appointments of the service providers are mentioned below:
4.2. Extension of contract with Arivia.kom
a) According
to the DWA Procurement manual, contract periods may only be extended for a
maximum period of a year. The DWA
Delegation of Authority indicates that the original contract value may not be
increased by more than 50%.
b) According
to an unsigned contract, the DWA entered into a contract with Arivia.kom for a
period of 36 months ending 28 February 2006 for an amount of R180 million.
According to the above regulations, the contract could only be extended until
c) 28
February 2007 for an amount of not more than R90 million (50% of the original
value).
d) The
contract was extended by 49 months and the original value was increased from
R180 million to R1, 056 billion (587% instead of 50%).
e) The former
Director-General (DG) approved the extension from 01 March 2009 to
f)
30 November 2009 (9 months) for an amount of R344
million in contravention of the DWA Procurement User Manual and the DWA
Delegation of Authority.
g) The
suspended acting DG approved a further extension of the contract for the period
01 December 2009 to 31 March 2010 for an amount of R80 million in contravention
of the DWA Procurement User Manual and the DWA Delegation of Authority.
h) Although AGSA reported in May 2010 that the
contract was extended in contravention of the DWA Procurement User Manual and the
DWA Delegation of Authority and constitutes irregular expenditure, the contract
has not been cancelled.
4.3. Appointment of Solexperts AG
a) The chairperson
of the departmental bid adjudication committee (DBAC) approved the request to
approach a sole provider on 31 October 2008 and the appointment of Solexperts
AG as the sole provider for the upgrading of the Trivec Surveillance System on
15 December 2008.
b) No
significant deviations were identified except that DWA could not provide the
contract with Solexperts AG.
4.4. Appointment of Dr Olver
a) The DWA
paid Dr Olver an amount of R289 902 before a contract was signed. The former DG
approved the appointment and this was not disclosed in the DWA’s annual report
2008/09.
b) The former
DG and Dr Olver were co-directors and strategic partners in Tourism and Nehanda
Group and therefore a personal relationship existed.
c) No
evidence could be found that the former DG excused herself from the appointment
of Dr Olver.
4.5. Appointment of PISM
a) The DWA
requested PISM to submit a proposal without following a bidding process.
Reasons for not inviting competitive bids were not recorded as required
according to DWA Procurement User Manual.
b) Although a
bidding process was not followed, the DBAC rectified and approved the
appointment of PISM on 23 June 2008.
c) The
proposal submitted by PISM was for an amount of R3 890 740 (VAT inclusive),
however the contract was signed for an amount of R4 356 932 (VAT inclusive) and
PISM was paid an amount of R4 115 378 (VAT inclusive).
4.6. Appointment of Duma Travel, Connex Travel
and Sure Flywell Travel for the rendering
of travel reservation services
a) An open
bidding process was followed. The BEC recommended that Travel with Flair should
be appointed as the other bids did not comply with the bid specifications.
b) The former
DG did not agree with the composition of BEC and ordered the proposals to be
re-evaluated by a different BEC established by her.
c) The second
BEC appointed Duma Travel, Connex Travel and Sure Flywell Travel. The service
providers did not comply with Preferential Procurement Policy Framework Act
(Act No 5 of 2000).
d) The former
DG approved the appointment of Duma Travel, Connex Travel and Sure Flywell
Travel for an amount of R120 million for a period of 24 months on 1 December
2008.
The Committee recommends that the Accounting Officer
ensures that:
a) Appropriate
corrective action is taken against officials of the DWA for approving the
extension of the contract on various occasions in contravention of the DWA
Procurement User Manual and the DWA delegation of Authority;
b) Contract
period extensions, where appropriate, are finalized well in advance before the
contract expires and should be approved properly by the DBAC and the DG;
c) The total
amount paid to the service provider for the period when the contract was
extended in contravention of the DWA Procurement User manual and the DWA
Delegation of Authority is reported as irregular expenditure in terms of the
requirements of the PFMA;
d) The DWA takes
appropriate corrective action against officials of the DWA who were responsible
for contraventions of the Treasury Regulations and the practice notes issued by
the National Treasury;
e) As SCM prescripts
were contravened in the appointment of the service providers, all payments made
to the service providers amounting to R85, 6 million are regarded as irregular
expenditure and reported in accordance with the stipulations of the PFMA;and
f)
The DBAC is composed of functional teams comprising
of senior officials, of whom one must be a Supply Chain Management
practitioner.
4. Conclusions
The Committee notes that the AGSA concluded, following
a Special Investigation, that massive irregular expenditure had been incurred
in both contracts and procurement practices in the DWA, and further that these
irregularities are alleged to have involved officials at the highest level of
the administration of the DWA. The Committee urges the Minister of the
Department of Water Affairs to apply corrective measures necessary to recover
all and any monies found to have been irregular expended.
The Committee further recommends that the Executive
Authority submit 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.