Department of Defence & Military Veterans, Armscor & Castle Control audit outcomes: Auditor-General briefing

Meeting report

Audit outcomes Departments of Defence, Military Veterans, Armscor, Castle Control Board: Office of Auditor-General (AGSA) briefings
Mr Solly Jiyane, Senior Manager, AGSA, commenced with a brief explanation of possible audit results each department may receive from the Office of the Auditor-General. These were: unqualified opinion with no findings (clean audit), unqualified opinion with findings, qualified opinion, adverse opinion and a disclaimer opinion.  He then explained the terms as follows:
- A clean audit is awarded when the auditee produces credible financial statements without material misstatements and complies with key legislation
- An Unqualified opinion with findings is awarded when an auditee provides financial statements without material misstatements, but fails to report on their performance targets or fails to determine which legislation should be complied with.
- A Qualified opinion is awarded if the auditee could not produce credible financial statements, had material misstatements or failed to comply with key legislation.
- An adverse opinion is awarded if majority of the financial statements provided by the auditee has material misstatements
- A disclaimer opinion is awarded if the auditee could not provide financial statements and failed to comply with key legislation.

Ms Mbali Dlamini, Senior Manager, AGSA, indicated that there has been a general improvement in the audit outcomes for the defence sector entities. The Castle Control Board (CCB) received an unqualified audit with no finding, in comparison to their previous 2014/2015 unqualified audit with findings. Armscor also received an unqualified opinion with no findings. The Department of Defence (DoD) received an unqualified audit with findings. The Department of Military Veterans (DMV) received a qualified audit. The Special Defence Account received a qualified audit due to an inherent scope limitation, as it operates within in a confidential environment.

In terms of compliance with key legislation, two of the five entities, namely DoD and DMV, had material findings, meaning that certain key issues were discovered. These issues related mainly to internal controls, supply chain management and unauthorised, irregular, fruitless and wasteful (UIFW) expenditure. The non compliance of the DoD occurred mainly in the form of late payment penalties which could have been avoided. However, the DoD corrected material misstatements during its audit.

When considering the quality of the annual performance plans of each entity (excluding the SDA which is exempt from producing such plans) the AGSA noted that material findings were discovered for DMV. This was mainly because delays in implementation of proper systems and approval of standard operating procedures resulted in unreliable performance plans and reports. Despite this material finding, there was still an improvement from the 2014/2015 period, in which both DMV and DoD had material findings.

Despite improvements, intervention is still necessary in order to improve key control areas such as leadership and financial and performance management. This is especially necessary for the DoD and DMV who regressed in leadership and financial and performance management areas. The likely cause for this regress in the DMV is vacancies in key positions which resulted in lack of leadership and oversight, while poor oversight over financial reporting and compliance was the likely cause of the DoD’s regress. 

AGSA also commented on the assurance provider levels, which were the level of providing accurate and current information to stakeholders in regard to the efficiency and effectiveness of their policies. The DMV was found to provide no assurance at all, while SDA and DoD provided some. Armscor and CCB fared well by providing assurance. The conclusion on assurance provider levels revealed that accounting officers and senior management in the DMV failed to implement adequate internal controls to ensure adequate financial and performance reporting, and there was thus a need for improvement in this area.

The performance of more specific entity programmes and objectives were considered. In the DMV, material findings  were evident in Programme 2: Socio-Economic Support and Programme 3: Empowerment and Stakeholder Management . The material findings arose owing to important targets being unspecific, poorly defined and thus immeasurable. These programmes thus remained stagnant. No material findings were reported for the DoD’s Programmes 2 to 4, Armscor’s Goals 1 to 6 and CCB’s Programme 2 to 4, which had in fact shown improvements.

No unauthorised expenditure was identified, but a total of R8 million in fruitless and wasteful expenditure and R916 million in irregular expenditure was identified. The R8million in fruitless and wasteful expenditure was  an improvement on the 2014/2015 amount of R58 million. However, the R916 million irregular expenditure was much more than the 2014/2015 amount of R748 million. The conclusion was that the increased amount resulted from, amongst others, competitive bidding processes not being followed correctly, and improper litigation proceedings by the DMV.

AGSA pointed out that ideally investigations should have been done by the DMV into the root causes of the increases, but this had not been done. Four root causes were identified by the AGSA itself. First to be identified was slow response by management (accounting officer and senior management) in addressing core issues. The recommendation was that those charged with governance should exercise oversight over audit action plans to ensure that audit recommendations were implemented. The second root cause was instability and vacancies in key positions. The recommendation was that vacancies in senior positions should be filled timeously. Thirdly, lack of consequence for poor performance and transgressions was identified, since no proper investigation follow-up on cases of transgressions and poor performance was done. The recommendation was that consequence management should be implemented in instances where management fails to address audit recommendations. Lastly, key officials were found to be lacking appropriate competencies. It was recommended that the departments must ensure that any vacancies are filled by competent officials who are capable of dealing with financial and performance reporting.

Key commitments made to address the 2014/2015 findings were implemented and the filling of vacant posts by the DoD internal audit was in progress. A task-team was appointed to assist the DMV in addressing matters affecting their performance, and this had been in operation for a year.

Discussion  Mr S Esau (DA) noted that recommendations had been made to the various departments, but  suggested that it would be helpful if a checklist was provided to the departments, to allow them to check and monitor whether they were complying with the recommendations.  Furthermore the Committee has stressed the need for DMV to fill the vacancies, as this will undoubtedly have a negative impact, yet there seemed to be continued and unexplained delays.

Mr Esau further referred to slide 9 of the AGSA presentation, indicating that DMV had good ICT governance. He disagreed with this, asserting that this was surely not possible if it did not have an ICT system, and this was a statement that would need to be corrected by AGSA. The State Information Technology Agency (SITA) had complained that it could not implement an efficient working programme because of constraints within the DMV. Intervention is required for the DMV in this regard and in many other areas –even senior management.

Mr Esau expressed the view that although there had been improvement by other departments, DMV was still the worst performing, so he questioned the finding on slide 9 indicating that DMV had improved in terms of risk management. When the DMV failed to contain its assets and internal coordination and controls were not in place it was not clear how it could be said that there had been any improvement in risk management. He felt that it would be more accurate to say that intervention is required in terms of risk management.

Mr Esau stated that if the SDA does not wish to have a meeting with the Committee or if the SDA wants a closed meeting due to the confidential nature of their work, then that can be arranged. At present, he was concerned that there was currently no report back to the Committee and the Committee did indeed require an understanding of the SDA and the nature of its work.

Mr Esau also expressed the need for the AGSA presentation to give clear key indicators when presenting graphs and figures, so that it was easier for Members to follow the presentation. He cited the example of slide 14, pointing out that although amounts had been indicated there is no indication of which departments had contributed to irregular, fruitless and wasteful expenditure. The word ‘other’ is also mentioned on the slide however no definition of ‘other’ has been provided.

Ms Mbali Dhlamini, in response to Mr Esau’s opinion on risk management in DMV, stated that risk management plans and strategies were present but that it had been found that managers were not implementing them. For example, if there were issues surrounding assets that were identified, then nobody was taking these issues any further. Risk management was taking place, but the problem rather lay in a lack of follow-up action on the part of managers. Furthermore, she noted that there was reporting by the SDA taking place, but that that this was not readily available because sensitive information is discussed. Generally it was problematic to get reporting on sensitive information in government and this was no different with the SDA. The SDA is looking at other countries for a comparative analysis, to examine how they deal with reporting on matters of a sensitive nature and they will hopefully devise a reporting strategy accordingly.

Ms Dhlamini responded to Mr Esau's request that a breakdown be given on which departments had been responsible for the irregular, fruitless and wasteful expenditure. In terms of irregular expenditure: DoD had R671.8 million, DMV R123.6 million, Armscor R13.2 million, SDA R108.1 million and the Castle Board R57 000.With regard to fruitless expenditure: DoD had R7.1 million, DMV had R801    000 and Armscor R822.00.

Mr N Koza (EFF) agreed with the views expressed by Mr Esau that it is difficult to appreciate the improvements when there is instability in management. He was pleased to note that the root causes had now been identified.

2015/16 Annual Reports of the entities: Parliamentary Content and Research Team briefing
Mr Wilhelm Janse van Rensburg, Parliamentary Researcher, introduced the research that he had conducted, being an analysis of Armscor 2015/2016 Annual Report and an analysis of the DoD 2015/2016 Annual Report.

Department of Defence
Speaking to the DoD Annual Report, he noted that he had focused on seven key issues: virements, flying and sea hours, procurement, human resources, expenditure concerns, Defence Review implementation and policies and strategies.

There were substantial virements from three programmes i.e. Force Employment, Air Defence and Maritime Defence. The virements from the Air Defence are alarming as these funds were removed from key sub programmes – all of whom need the funds.

Flying and sea hour targets were not met for 2015/2016. 4 785 of the required 6 500 flying hours were flown, which is a decrease from 2014/2015 figure of 5026 hours flown. 10 710 sea hours were attained against a target of 12 000.

Although procurements policies had not been updated, the DoD obtained a 94% target for the 90-day procurement policy. HR renewal was marked as a priority for 2015/2016 however three major concerns remain. These include the fact that more personnel are leaving in comparison to the personnel being appointed. There is a critical skills shortage especially with engineers and crew with technical skills and only 41 disciplinary hearings had been finalised. However the latter should be resolved once more military judges are appointed.

There has been extremely slow progress with finalising and updating policies. Three key policies that were not completed were: the Cyber Warfare Strategy, Overarching Logistic Strategy and Updating of the Procurement Policy. Furthermore, despite the fact that 2015/2016 was the designated period in which the Defence Review implementation plan was to be presented to Parliament, it has not yet been presented.

Armscor
He then moved to an analysis of the Armscor 2015/2016 Annual Report, six key issues were also identified. These include: SA Navy Support, Alkantpan, DIP Agreements, Loss of Revenue, Defence Review and the Armscor Audit. In previous years there were issues with the capabilities of the dockyard. However, this has changed due to an agreement between SA Navy, Denel and Armscor who now worked together to maintain the dockyard. However, there was a discrepancy: SA Navy continues to complain about the dockyard capabilities while Armscor was boasting about 97.3% of dockyard capacity. He recommended that the Committee should ask for clarification on this discrepancy.

The Alkantpan Test Range is a success story as it generates a large amount of income by allowing the testing ground to be used by private entities. However, the testing range falls within the Square Kilometre Array (SKA) focus area. Radio signals and other factors at Alkantpan might affect SKA research. He recommended that the Committee ask for clarification and look into the future viability of Alkantpan in that area.

The Defence Industrial Participation (DIP) refers to the obligation of a foreign supplier to reciprocate defence related business in South Africa. Currently, Armscor is administering 16 DIP agreements. However there is an outstanding DIP agreement with an European based missile developer dating back to 1999. There seems to be difficulty in locating an area in which this business can invest, in South Africa. He recommended that the Committee ask for clarification on this, since it would provide an opportunity for investment in the country.

Armscor’s revenue has decreased from R1.525 billion in 2014/2015 to R1.395 billion in 2015/2016. This is due to amongst others, a decrease in sales of goods and services by Armscor. He recommended that the Committee ask for reasons why Armscor was unable to increase sales of its goods and services. Due to Armscor losing funds, the key question remained whether Armscor can survive financially if it were to implement Milestone 1 of the Defence Review.

Department of Military Veterans
Mr Peter Daniels, Content Advisor, Portfolio Committee on Defence and Military Veterans, said that instead of adhering to the presentation format strictly, he would rather highlight and explain why he had certain questions.

He said that the DMV should be commended for the support given to graduates and veterans. Its report, however, was not clear in many aspects. No context was given regarding houses with mortgages being repossessed by banks, and he recommended that the Committee should ask for clarity regarding this. Furthermore, the DMV states that they employed 133 of 227 veterans and listed this as an achievement. However, the role of the Department is to facilitate employment, and not employ veterans itself, so this begs the question whether this is actually an achievement. DMV stated that it had provided temporary shelter to veterans but had not indicated what was intended to happen next and whether the veterans will receive assistance to get employment opportunities. Furthermore, no indication is given as to the number of veterans receiving shelter. The Committee is urged to ask for further clarity in this regard.

The DMV has established an Appeal Court and Advisory Council but no information was provided either on the type of appeals brought before the Appeal Court or on the type of advice given by the Advisory Council. Furthermore, a Turnaround Task Team established on 1 September 2015 and due to come to an end in December 2016 has failed to provide information and clarity on the work that had been carried out.

Eight farms had been awarded to military veterans by the DMV but no further information on this was made available. The Committee was urged to ask about the context in which these awards were granted. Furthermore, eleven Memorandums of Understanding were concluded between the DMV and government departments and private sector. Although the DMV had revealed the names of the government departments the same had not been done or the private entities. More detail is needed in this regard. The DMV stated that it was faced with legal claims amounting to R205 million but provided no breakdown of the amount or any explanation. The Committee is strongly urged to ask for more information in this regard, particularly given the substantial amount.

Mr Daniels pointed out that 60% of the DMV’s budget had been spent, but only 50% of targets had been met, although the DMV had put this figure at 60% of targets. This raises the question of whether the taxpayer received fair value for money. DMV has confirmed that a skills audit will take place and the Committee is encouraged to ask for the results of that audit.

Only 98% of the DMV’s database had been verified, and Mr Daniels recommended that further questions be asked around this, such as when the database will be finalised, since it was absolutely necessary that this database must be complete and accurate. Mr Daniels furthermore pointed out that the DMV has also performed poorly in its Socio-Economic Sub-Programme to provide housing- since only 130 out of the target of 10   000 houses were provided; this was particularly alarming given the fact that the aim of the DMV is to provide support to military veterans. The reason provided by the DMV, that ‘there are challenges in Human Settlements’ is not considered adequate and he urged the Committee to request further clarity on these points.

The DMV indicates that it has a lack of adequate human capital. This may be the reason for the poor performance of the Department. However, in terms of performance rewards, 93% of staff had received performance bonuses to the value of R1.4 million. This raised two issues. Firstly, the DMV was said to be under spending on its budget, but a considerable amount has been spent on performance rewards; and secondly, staff receiving the performance rewards were mainly those in senior, supervisory and management positions, and the question was why they were getting such awards when overall the DMV's performance is so low? In addition to this the DMV states that it has spent no money on consultants, which was incorrect since R1.6 million was spent on consultants.

Castle Control Board Annual Report
Mr Daniels moved on to the summary and analysis of the Castle Control Board Annual Report 2015/2016, the Castle Control Board is regarded as a success story, as it had received a clean audit from the Auditor-General, had successfully launched the Castle’s 350 Commemoration programme and had met its KPI targets dealing with the operations of the CCB. However, the CCB was not without challenges. The CCB does not control the entire precinct, which complicates its effective management of that area. The CCB has also not created a list of strategic risks and action plans to address this risk. Furthermore, its revenue has also decreased; however, it had raised salaries.

Discussion
The Chairperson requested that the researchers should consolidate their reports in a dashboard form so that the Committee could have a working tool which could be used to do oversight. Areas in which there was good performance should also be demarcated, so that the Committee can ensure the sustainability of those areas, and those in which there was poor performance should equally be shown separately so that the Committee can look into those areas.

Other business
The Chairperson announced the passing of Committee Member Mr B Nesi (ANC), and he noted that the funeral would be held on Friday 14 October 2016.

The meeting was adjourned.