Audit Outcomes 2010/11: briefing by the Deputy Auditor-General
The Deputy Auditor-General met with the Committee to present the audit outcomes of national and provincial governments for the financial year ended 31 March 2011. The four audit areas looked at were qualified, financially unqualified with findings, financially unqualified with no findings (clean audits) and disclaimer/adverse audit findings. Clean audits decreased from 16% of national departments in 2008/09 to 8% in 2010/11. Nationally, eight departments received qualified audits and 25 departments received financially unqualified audit opinions with findings. Only three departments received audits financially unqualified with no findings (clean audits) and one department received a disclaimer. Unauthorised expenditure decreased from R8.9 billion in 2009/10 to R3.8 billion. However, irregular expenditure increased from R13 billion (2009/2010) to R21.1 billion (2010/11). Fruitless and wasteful expenditure also increased from R0.5 billion to R1.5 billion.
AGSA used the performance of Education, Health and Public Works national and provincial sectors (all with huge spending areas) to illustrate progress over a three-year period. Public Works had declined the most over the three years with 30% of its 10 departments receiving a ‘financially unqualified with findings’ audit in 2009/10 increasing to 50% of its departments receiving this audit in 2010/11, with also disclaimers increasing. Areas of material misstatements in Capital assets, Current assets, Liabilities, Other disclosure items, Revenue, Expenditure, and UIF were presented and the area receiving the biggest percentage of qualifications was capital assets at 22%, with UIF misstatements corrected during the audit at 51%. Auditees with findings on non-compliance with laws and regulations were highlighted. Categories of predetermined objectives were also presented, namely non-compliance, variances not explained, performance information not useful and performance information not reliable. A total of 38% of national departments showed non-compliance and 20% of legislatures had variances not explained. A total of 57% of national departments had performance information that was not useful and 45% of provincial departments had performance informational that was not reliable.
The Auditor General presented a summary of consolidated findings on supply chain management: 12% of departments had limitation on planned scope of audit of awards; 34% had awards to state officials and their close family members; 76% of departments were found to have uncompetitive or unfair procurement processes and 30% had inadequate contract management. Other findings presented were related to IT control and HR management. The four critical focus areas that needed work were procurement, especially supply chain management, HR challenges, HR resources specifically governance and capacity and performance information and performance reporting.
Members were dissatisfied by the overall performance of departments. They asked questions on auditing methodology and whether the changes in methods had an impact on audit findings. They asked if principles and standards were acceptable. Members noted that the management of vacancies was poor and this had to be addressed urgently as it affected the functioning of departments. Members asked why the Department of Police had not received a qualified audit as it had been involved in an unfavourable procurement process.
Opening remarks
The Deputy Auditor General, Mr Kimi Makwetu, said that the Office of the Auditor General had improved in presenting audit findings to the Portfolio Committees. The Auditor General was supposed to present to the National Assembly but presenting to Committees provided a greater opportunity as the main objective was to share insight with the Committees about audits and assign responsibility to Members regarding oversight. He then presented all Corporate Executives to whom certain departments had been assigned. These Corporate Executives were Mr George Lourens, Mr Barry Wheeler, Jan Van Schalkwyk, Mr Vusi Msibisi, Mr Paul Serote and Ms Alice Muller.
Audit outcomes of national and provincial government: presentation
Mr Makwetu gave a briefing on the audit outcomes of national and provincial government, legislatures and public entities for the financial year ended 31 March 2011. Audit outcomes were:
Financially unqualified with no findings – 3 (8%)
Financially unqualified with findings – 25 (67%)
Qualifications – 8 (22%)
Disclaimer/Adverse – 1 (3%)
For provincial departments:
Financially unqualified with no findings – 14 (13%)
Financially unqualified with findings – 63 (55%)
Qualified – 31 (28%)
Disclaimer/Adverse – 4 (4%)
For legislatures:
Financially unqualified with no findings – 5 (50%)
Financially unqualified with findings – 5 (50%)
For public entities:
Financially unqualified with no findings –140(36%)
Financially unqualified with findings – 209 (53%)
Qualified – 30 (8%)
Disclaimer/Adverse – 12 (3%)
Mr Makwetu said that the departments overall were still far from where they needed to be as the audit showed that they could handle accounting standards but could not implement internal controls effectively. There were areas on non-compliance with laws and regulations that was troubling.
Slide 3 shows that clean audits decreased from 16% of national departments in 2008/2009 to 8% in 2010/11. Legislatures had been struggling to get clean audits and they were at a point now where half received clean audits. Three spheres of government with huge spending areas were education, health and public works. These departments were ‘financially unqualified with findings’ and the performance information reported in annual reports did not make sense. Financial management was not good. A disclaimer was allocated for 10% of education departments. Areas of material misstatements in financial statements included capital assets and UIF (Unauthorised, Irregular and Fruitless expenditure).
Mr Makwetu gave the auditees with findings on compliance with laws and regulations. Categories of predetermined objectives were: non-compliance, variances not explained, performance information not useful and performance information not reliable. The national departments were the biggest culprits when it came to non-compliance as well as performance information not being useful. Provincial departments biggest problem area here was performance information not being reliable and legislatures had fared the worst when it came to variances not explained.
Mr Makwetu gave the outcomes of compliance with laws and regulations of auditees with and without findings overall. Legislatures had done the best with 50% of its auditees having no findings on compliance and national departments doing the worst at 92% of its departments found to having not complied with laws and regulations.
Unauthorised, irregular and fruitless and wasteful expenditure (slide 11) showed that unauthorised expenditure decreased from R8.9 billion in 2009/10 to R3.8 billion in 2010/11. However, irregular expenditure increased from R13 billion in 2009/10 to R21.1 billion in 2010/11. Fruitless and wasteful expenditure increased from R0.5 billion in 2009/10 to R1.5 billion in 2010/11. The majority of irregular expenditure was found to be in provincial departments at R16.2 billion.
Mr Makwetu gave a summary of findings on supply chain management for departments and public entities as well as progress made in implementing key controls (slide 13 to 15). The findings on IT control focus areas for all auditees were discussed. IT governance had improved from 88% in 2009/10 to 94% in 2010/11. However, security management had gone down from 88% to 83% as well as user access management from 96% to 95% and IT service continuity from 100% to 93%. HR management showed that all areas had gone down except performance management which had risen from 24% in 2009/10 to 29% in 2010/11.
Mr Mawketu said that there were four spotlight areas which the AG had recommended needed work. The first area was procurement, especially supply chain management. Departments had issues with their asset registers and this needed to be assessed and rectified. The second area was IT challenges. The use of consultants had to decrease as this was costing departments more money in the long run. It was suggested that departments create their own IT portfolios and some departments had now created the position of Chief Information Officer to play this role. The next challenge was human resources. Governance and capacity had to be strengthened in this area of expertise. The last challenge was performance information and performance reporting. During the audit it was found that many departments did not have performance monitoring measures in place.
Auditees audit outcomes per department (Annexure 1): presentation
Mr Barry Wheeler presented a document containing the audit outcome for each government entity for the past two years. He looked at the audit outcomes of four departments: Departments of Defence, Correctional Services, Sport and Recreation and Social Development.
The Department of Defence had received a qualified audit. He added that this department was quite large extending outside of the borders of the country (the army). The department had brought in consultants as there was a problem with the assets register. The work had not been well done nor controlled. During the audit itself, assets on the military bases was not on the assets register and vice versa. There were two major problems. Firstly serial numbers did not match and secondly military assets were found to be 59.6% of the rand value. A three phase plan was implemented and ended in March 2011, but it was incomplete as the nature of coding was in conflict with the charter of accounts. There were four different systems of assets registers and a warehousing system on top of these four systems. The Minister was aware of this problem and was working towards resolving it. The systems were being updated all the time but there was still a lot of work to be done.
The Department of Correctional Services had received a qualified audit. There were issues with assets and the IT system. National Treasury got involved because two systems were duplicating asset information. Information in the financial statements was found to be inaccurate.
The Department of Sport and Recreation received a ‘financially unqualified with findings’ audit. There was a range of smaller issues of concern. The main concerns were weaknesses in reporting predetermined objectives and not following laws and regulations. Leadership was not giving attention to performance in the department and governance had to play a bigger role. Information had to comply with regulations. The Director General post had been vacant; monitoring and review processes was lacking and a stable authority was not in place. The monitoring and compliance checklist needed to be uplifted. Problems occurred with purchases and liabilities. Adjustments had to be made to the financial statements. Boxing South Africa received a qualified audit because of losses and expenses, due to difficulties in capacity.
The Department of Social Development received a qualified audit. The South African Social Security Agency (SASSA) had an error of R10.5 billion in 2010 and R895 in 2011. The errors were because of a lack of supporting documents for grant payments in the agency. Additional staff and interns were appointed to review and check all grant recipients and new grant applications. Leadership had changed for the better and there was greater interaction and oversight over SASSA. The National Department was held accountable as they were responsible for SASSA.
Mr Wheeler said that all four departments had problems with predetermined objectives and there was a lack of permanent skilled staff to bring together information and analyse ongoing monitoring. The Department of Defence had major irregular expenditure as there was too much IT consulting; the department needed to employ IT skilled persons. Progress was seen in all departments. Changes in large departments’ accounting standards and guidelines by National Treasury changed often. Financial statements were presented but there were material errors and departments must adjust for these but they do not.
Mr Jan Van Schalkwyk presented the audit findings for the Departments of Agriculture, Forestry and Fisheries, Basic Education and Higher Education, Energy, Home Affairs, Labour, Public Enterprises, Public Service and Administration and Rural Development and Land Reform.
The Department of Agriculture, Forestry and Fisheries received a ‘financially unqualified with findings’ audit. There were problems in the takeover change and the challenges were with compliance and predetermined objectives. The criteria were contradictory with new strategic objectives.
The Department of Basic Education and the Department of Higher Education received ‘financially unqualified with findings’ audit. The old department still remained because of old debt. The departments experienced staff shortages because the old department spilt and so it was 50/50. Compliance was weak as old policies were adopted but it was found that these policies were not the best for these two departments.
The Department of Energy received a ‘financially qualified audit with findings’. This department had improved slightly as capacity was improved. The Department of Mineral Resources’ audit had not yet been finalised by the 15 September 2011. This was as a result of revenue related to mining resources. Mining houses had to adjust their statements because of late payments made to the South African Revenue Service (SARS). A clean up on performance compliance was needed especially with regards to SARS and mining licences.
The Department of Home Affairs received a ‘financially unqualified with findings’ audit. This department traditionally had a record of disclaimers and had moved out to qualified and now unqualified. This was a reflection of good leadership by the Minister and the Director General. This department had improved a lot but there was still work to be done. There were problems with compliance with regulations and reporting.
The Department of Labour received a ‘financially unqualified with findings’ audit. This department had improved as they used to have a qualified audit. There was still a problem with the Siemens computer contract but the Minister had cleaned it up. There was a performance handover and change in the labour environment.
The Department of Public Enterprises received a financially unqualified with no findings audit. They had a well settled system going. However, information from SOE’s needed to come through and governance still needed to be strengthened.
The Department of Public Service and Administration received a ‘financially unqualified with findings’ audit. There were challenges with compliance, HR appointments and performance information reporting. The huge changes in projects were not helpful. HR policies and instruments provided them with what was needed. IT sector would roll out IT governance framework.
The Department of Rural Development and Land Reform received a qualified audit. There were issues with immovable assets and the department was trying to settle what they had control over. Compliance was at 50% for supply chain management and 50% of departments showed irregular expenditure. Material losses were incurred due to interest on land bought by the department.
Mr Paul Serote presented the audit findings for Departments of Public Works, Women, Children, and Persons with Disabilities, Justice and Constitutional Development, Trade and Industry, Human Settlements, The Presidency, Cooperative Governance and Traditional Affairs, Economic Development.
The Department of Public Works received a disclaimer for the 2010/11 financial year. There were problems with immovable assets, but the department had tried to fast track the register. However there was no progress and the system put in place did not put fixed assets into the register correctly. The Government Immovable Asset Management Act set out what needed to be done. A set process had to be followed and a clear understanding was needed. The different spheres of government had to take ownership between provinces and municipalities. Irregular expenditure was mostly found in procurement. The department could not provide invoices for leases and other expenses. There was a vehicles issue as the department had an inability to account correctly.
The Department of Women Children and Persons with Disability received a ‘financially unqualified with findings’. This was a new department and all financial statements required adjusting. Other matters included irregular expenditure.
The Presidency received a ‘financially unqualified with findings’ audit. There were problems with predetermined objectives and non-compliance with laws and regulations. Other matters included financial statements and over spending.
The Department of Justice and Constitutional Development received a qualified audit. Third party funds were a recurring issue. The Minister and Director-General had made commitments and were starting to get information for auditing third party funds next year. The country had over 500 magistrate’s courts which were a lot and the result was that procurement resulted in irregular expenditure.
The Department of Trade and Industry received a ‘financially unqualified with findings’ audit. The department showed irregular expenditure and problems with predetermined objectives and compliance
The Department of Human Settlements received a ‘financially unqualified with findings’ audit. The department showed non-compliance with laws and regulations and their sanitation budget was under spent.
The Department of Cooperative Governance and Traditional Affairs received a qualified audit. Irregular expenditure and an inaccurate total for irregular expenditure was one of the main reasons. This was as a result of non-compliance to the Division of Revenue Act (DORA) and internal audits.
The Department of Economic Development received a ‘financially unqualified with findings’ audit. They struggled with predetermined objectives and compliance with laws and regulations. This department did not comply with payments within 30 days and lacked accurate performance information.
Ms Alice Muller presented the audit findings for the Departments of Arts and Culture, Communications, Health, Independent Complaints Directorate, Police, Science and Technology and Water Affairs.
The Department of Arts and Culture received a ‘financially unqualified with findings’ report. This was mainly due to unauthorised and irregular expenditure. Key positions in the department were vacant, namely the Director General, Chief Financial Officer and a number of Deputy-Director General positions. Entities under the department were not static, and portfolios were not moving. The department could not provide support.
The Department of Communications received a ‘financially unqualified with findings’ audit. This department had improved. The Director General position was vacant, and there was no Chief Financial Officer. The department had largely under spent its budget and predetermined objectives were not achieved. All entities under this department, except Telkom, showed irregular expenditure. A total of R123 million was wastefully spent.
The Department of Health received a qualified audit. Three of its provincial departments had improved namely the Eastern Cape, Free State and Gauteng. These departments had moved from disclaimer to qualified. However, Limpopo worsened and moved from a qualified audit to a disclaimer. There was a problem with the asset register as the department had moved buildings and ran out of time to update the asset register. The audit was signed late. The Health department accounted for 25% of all departmental irregular expenditure.
The Independent Complaints Directorate received a ‘financially unqualified with findings’ audit. They did not adhere to predetermined objectives and comply fully with laws and regulations. The only good thing was that there were no adjustments needed on the financial statements.
The Department of Police received a ‘financially unqualified with findings’ audit. There was major irregular expenditure for Police Day and the 2010 Soccer World Cup. Predetermined objectives were not met from individual police stations to national level.
The Department of Science and Technology received a financially unqualified with no findings (clean) audit. Last year there was a problem with predetermined objectives but this year the department showed none. No adjustments to financial statements were needed.
The Department of Water Affairs received a qualified audit. The department currently had a huge vacuum as the positions of Director General, Chief Financial Officer, and Information Systems Officer were vacant. The Minister was involved with the resolution of the problems. The Water Trading Entities was one contribution to the problem. There was deterioration in the internal audit control environment.
Mr Vusi Msibisi presented the audit findings for the National Treasury, Department of International Relations and Co-operation (DIRCO), Transport, Statistics South Africa, Tourism, and Environmental Affairs.
The National Treasury received a ‘financially unqualified with findings’ audit. There was material irregular expenditure not disclosed as well as material losses and liabilities not accounted for. One of the predetermined objectives not achieved was that quarterly reports were not submitted. The payouts of special pensions were problematic as R3.5 million for special pension beneficiaries were wrongly paid.
DIRCO received a ‘financially unqualified with findings’ audit. It had problems with material capital assets and disclosures. The fixed asset register had not been updated. The measurability of predetermined objectives was not time bound.
The Department of Transport received a ‘financially unqualified with findings’ audit. They had no material statements and R20.6 million irregular and wasteful expenditure. The department struggled with predetermined objectives and compliance with laws and regulations.
Statistics South Africa received a ‘financially unqualified with findings’ audit. There were problems with pre-payments and disclosures were not made. In supply chain management, R6.2 million was spent irregularly.
The Department of Tourism received a ‘financially unqualified with findings’ audit. There was irregular expenditure R200 000. The department did not meet its predetermined objectives and did not comply with laws and regulations.
The Department of Environmental Affairs received a financially unqualified with no findings (clean) audit. They had done well to fulfil predetermined objectives and had complied with laws and regulations.
Discussion
Mr N Singh (IFP) asked whether the executive had been given this briefing.
Mr Makwetu replied that they had been given this briefing the previous week.
Mr Singh said that it seemed things were getting worse. He wanted to know whether this was as a result of the change in methodology in the Office of the AG or was it the departments getting worse.
Mr Makwetu replied that the methodology was guided by international accounting standards and it made sure that funds were presented fairly in all material respects.
A DA member noted that the terminology changed a lot, making it difficult for him to follow. He wanted the definition of “financially unqualified”. Did it mean good and sound financial management?
Mr Makwetu replied that financially unqualified with no findings meant that the department received a clean audit whereas ‘financially unqualified with findings’ meant that although they received an unqualified audit there were still findings related to predetermined objectives not being met and / or non-compliance with laws and regulations; it was a sort of a red flag for departments to pay attention as the situation may get worse in the following financial year.
Ms A Muthambi (ANC) said that it was concerning that most funds spent irregularly would not be recovered. She noted the improvement in the Department of Defence as their predetermined objectives had been met.
A DA member asked why the irregular lease agreement in the Department of Public Works had reflected in the department’s audit yet the Department of Police’s lease scandal had not been taken into consideration as it had received a financially unqualified audit.
Ms Muller replied that the lease agreement had been signed but the transfer of funds had not occurred. There was no money spent on the lease.
Ms Muthambi noted that the Third Party Funds of the Department of Justice and Constitutional Development had never been audited in the past. She wanted to know whether it was now being audited.
Mr Makwetu replied that this fund had not submitted financial statements for the past three years. A project was now under way to bring the fund up to speed.
Ms A Dreyer (DA) commented that she was concerned about the management of vacancies reflected on slide 18.
Mr Van Schalkwyk replied that there was a slight improvement in HR management; 44% was not good but the Department of Public Service and Administration was helping this department. They knew where the resources were available.
The meeting was adjourned.
