AGSA on UIF & CF matters before SCOPA

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Employment and Labour

28 May 2021
Chairperson: Ms M Dunjwa (ANC)
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Meeting Summary

Video: Portfolio Committee on Employment and Labour, 28 May 2021 

25 May 2021

UIF 2019/20 audit hearing; with Minister

19 May 2021

Compensation Fund 2019/20 audit disclaimer: hearing with Minister

The Committee convened in a virtual meeting to be briefed by the Auditor-General of South Africa (AGSA) on the adverse audit findings for the Unemployment Insurance Fund (UIF) and the Compensation Fund (CF) which had been highlighted in earlier meetings by the Standing Committee on Public Accounts (SCOPA).

The Committee enquired about the errors in the UIF's financial statements which had led to the qualified audit opinion, and wanted clarity on the ten years of adverse management reports and the mistakes in the financial statements of the Compensation Fund. Members questioned the status of consequence management at the two entities, and the outcome of investigations into corruption surrounding the payment of the Temporary Employer/Employee Relief Scheme (TERS) benefits, which had led to the scheme's suspension last September.

Members commented that AGSA's briefing cast a bad reflection on the two Funds, and was also an embarrassment for the Portfolio Committee, which appeared not to have taken the required action.

They sought clarity on the level of the staff at both entities -- whether they were sufficiently qualified to occupy their various positions, or if it was a case of human resources who were not committed to their work. A Member commented that the Compensation Fund seemed like a complete and unmitigated disaster, and the Committee would need to reflect on the sustainability of the institution.

The Chairperson said that her office would communicate with Members in due course on the next step, and the possibility of calling the Department and the leadership of the CF and UIF to a meeting before proceeding on recess. She observed that a number of the issues raised were quite alarming, but she hoped that when the entities were called, they could add more clarity to the AG’s report. The Committee would also have to review the recommendations of SCOPA.

It would meet next Wednesday to receive responses from the Department on the issues that had been raised.

Meeting report

Chairperson’s opening remarks

The Chairperson welcomed the Committee Members and everyone to the meeting, despite the short notice. She said the briefing was very important, and apologised to Members who had received the presentation very late.

She said that in his budget vote, the Minister had reflected on the challenges faced by the entities, particularly the Compensation Fund (CF), which had had a disclaimer for almost ten years. Though Members were not part of the Committee in the past term, leadership responsibility demanded that the Committee show concern about outstanding matters affecting the entities. The Committee would therefore hear from the entities, in order to inform its deliberations.

An apology had been received from Mr M Bagraim (DA).

AGSA on UIF and CF 2019/20 audit outcomes

The Auditor General of South Africa (AGSA) briefed the Committee on the 2019/20 audit outcomes of the Unemployment Insurance Fund (UIF) and the Compensation Fund.

 The annual audit report covered three areas:

  • Fair representation and the absence of significant misstatements in financial statements;
  • Reliable and credible performance information; and
  • Compliance with laws and regulations governing financial matters.

The audit outcomes of portfolio over five years showed that the Compensation Fund had obtained a disclaimer audit opinion. The previous eight financial years were disclaimed, and two were adverse opinions. Material non-compliance with legislation was identified in the areas of preparation of annual financial statements, no effective expenditure management, and insufficient evidence of consequence management.

In the financial statements of the UIF, material misstatements were identified, and audit outcomes remained stagnant with repeated qualifications. Material non-compliance with legislation included annual financial statements, expenditure management, consequence management, and strategic planning management,

With regard to credible financial reporting, the UIF had obtained a qualified audit opinion because of material misstatements in the audit. Qualification areas included investment in associates, interest in joint ventures and other financial assets, impairment of investments in associates, interest in joint ventures and other financial assets, and income from equity accounted investments and interests.

The CF had obtained a disclaimer opinion because they had failed to provide audit evidence to support amounts reported in the annual financial statements. Disclaimers were received in the areas of revenue and receivables from non-exchange transactions, consolidation of investment in associates, and investments in financial assets and associates.

Referring to the funds' financial health, AGSA said that the UIF had registered an operating deficit for the current year. The CF was not assessed due to a disclaimer of opinion expressed on the financial statements. Fruitless and wasteful expenditure of R21 million had been recorded for current year.

Recommendations

Compensation Fund

There was an urgent need to review the control environment and strengthen preventative and monitoring controls; ensure accurate and complete financial and performance records were maintained; the implementation of responsive action plans and continuous monitoring; and the implementation and monitoring of consequence management.

Unemployment Insurance Fund

There was a need for continuous monitoring and evaluation of investments; internal control processes should be revisited and reviewed; and there must be implementation and monitoring of consequence management.

Portfolio Committee

The Committee had to obtain quarterly reports from entities on progress made on finalising pending investigations and on progress made on the implementation of action plans. It also needed to obtain assurance from leadership and governance structures that the action plans implemented were effective, and that Committee resolutions were implemented.

AGSA said it was not expressing an opinion on the Compensation Fund, but on the UIF. For eight of the ten-year period, the Compensation Fund had received a total disclaimer, which meant that AGSA could not associate itself with the financial statement and the annual performance report (APR) submitted. The two years of the ten had been adverse, because the reports were totally misleading.

It was important to appreciate the difference between the two entities. The Compensation Fund had been inactive for a long time, and something had to be done to unlock that particular environment so that the users could be correctly informed about what was happening. The UIF had had a five year period during which they were unqualified, and it was the view of AGSA that if they unlocked only the highlighted areas where they had struggled, it was unlikely they would continue to regress.

These entities were examples of areas where transparency needed to be unlocked so that matters could be properly addressed, and areas of clear weakness could be identified. AGSA would make itself available when the entities came before the Committee.

Discussion

Ms H Denner (FF+) said that according to the report, there were mistakes which could not be corrected in the UIF's financial statements, which had led to the qualified audit opinion. She asked if the Committee could be provided with an example of such mistakes in the financial statements.

Mr N Hinana (DA) observed that the presentation was a bad reflection on the two entities. Though the report showed that “risk management”, and “internal credit control” were factors that needed to be implemented, the Compensation Fund had been unable to rectify these factors in the past ten years. He wanted to know the proposed remedies or interventions proposed to remedy the two entities.

Ms C Mkhonto (EFF) said that the current state of the entities had been discussed at the Standing Committee on Public Accounts (SCOPA) level, and it was embarrassing for the Committee. The impression had been created that the Committee was not working. However, she thanked the Chairperson for the opportunity to hear the reports.

She asked for clarity on the interactions and the relationship that existed between the two entities with respect to management reports, and commented that a ten-year period of adverse management reports from the Office of the AG was a bit embarrassing.

Dr M Cardo (DA) said that one of the recommendations made in the presentation was that consequence management should be implemented and monitored on employees who had transgressed by incurring irregular, fruitless and wasteful expenditure, and other financial misconduct. However, UIF payments had been suspended last September because of alleged fraudulent claims, but a couple of weeks ago the chief financial officer (CFO) and chief operating officer (COO) had returned to work discreetly and nothing had been mentioned of the pending disciplinary charges or hearings they faced. He said that the disciplinary hearings were supposed to have taken place in February, and asked if the AG’s office followed up on consequence management. He also asked if the AG’s office was carrying out further investigations to expose the corruption covering the extended period of the Temporary Employer/Employee Relief Scheme (TERS) benefit.

He commented that the Compensation Fund seemed like a complete and unmitigated disaster, and the Committee would need to reflect on the sustainability of the institution.

The Chairperson wanted clarity on the control and level of the staff in both entities. She wanted to know if they were sufficiently qualified to occupy their various positions, or if it was a case of human resources who were not committed to their work. What had been the response of the internal audit unit of the Compensation Fund to the eight years' disclaimer and two years' adverse findings? She said that the problem with both organisations was systemic, and the Committee would need to decide what should be done, while interacting with the AG.

AGSA's response

AGSA responded to the question on errors that could not be corrected, which were highlighted on page 12 of the presentation. However, there was need for close monitoring of investments in terms of how they were performing, and ensuring that reliable information was being received. This would ensure that a better and more reliable report was produced at the end of the year. The UIF had over the years reported correctly on benefits, but in the current year, they had changed the method of reporting on this area, which had resulted in them reporting incorrectly up until the time when the audit process and report was closed.

Contingencies had also been highlighted. The audit allowed for correction, but it had to be done within the time frame given. However, the corrections were not done correctly within the specified timeframe.

On page 18 of the presentation, what was expected from the Compensation Fund was addressed. Normally when the audit was issued, two types of reports were prepared -- a public document that was included in the annual report, and a management report which was detailed and showed all the issues. From the management perspective of the Compensation Fund, an action plan was supposed to be put in place which would address the root cause. In the case of the Compensation Fund, the root cause was control based. Consequently, the control features would need to be identified and enhanced to respond timeously. However, the action plan of the Compensation Fund had been found to be unresponsive and unable to arrest the situation, because it did not address the root cause.

Regarding the UIF and the comments on the consequence management, the issue of the suspension of the management and their return would be handled at the management level. However, from the AGSA perspective, once a finding was made, the executive or management were given an opportunity in line with the Act to decide on the consequence. AGSA could not impose what the consequence would be on a particular person.

The proactive special report on the TERS had been released, and follow-up was ongoing. The audit would also show AGSA’s position on management's follow-up on all the findings.

AGSA dealt with human resources (HR) as an internal control assessment. When confirmation was received from HR that the right process of hiring the right people had been followed, AGSA would not investigate further into their culture of excellence to find if they delivered on their assigned tasks. However, because not all documents went through audit, it was possible that not all staff were doing what they were supposed to do.

The internal audit report and the audit committee minutes showed that some of the findings of AGSA had already been highlighted by internal audit during the year, but management's response to the implementation of the recommendations may not have been adequate.

A CompEasy audit had been done in 2020, but its effect on reporting was not evident in the 2021 financial year. AGSA had, however, started testing some of the controls in preparation for the full reporting, and had given management their feedback on areas where improvement was needed. CompEasy’s full performance was expected in the 2021 financial year.

When audits were conducted, the provider was expected to develop an action plan that would address the identified root cause, following which management would implement the action plan. The internal audit unit must be committed to seeing that an effective action plan was developed, and there should be leadership overseeing the effectiveness of the action plan.

Some of the recommendations provided for the Portfolio Committee include obtaining an action plan and monitoring its progress, and to request expert advice from assurance providers like the audit committee and internal audit on the effectiveness of the action plan implemented.

The Chairperson commented that the Compensation Fund had been in its current state for more than ten years, and she was of the view that there should have been some interaction with the Board of the entity. She asked if there had ever been an interaction with the board.

AGSA responded that the Board had been engaged last year, and they had been briefed on the state of the Compensation Fund. AGSA would have disengaged if not for the legislation that prohibited it from disconnecting from any entity. However, it had interacted with the Minister and were hopeful that following the sessions with the Ministry and the Director General, action would be taken.

Chairperson’s closing remarks

The Chairperson said that her office would communicate with Members in due course on the next step, and the possibility of calling the Department and the leadership of the CF and UIF to a meeting before proceeding on recess. She observed that a number of the issues raised were quite alarming, but she hoped that when the entities were called, they could add more clarity to the AG’s report.

The Chairperson also expressed concern about the HR matters, and expected that all Members of the Committee would be committed to the reports developed. The Committee would also have to review the recommendations of SCOPA.

The Committee would meet next Wednesday to receive responses from the Department on the issues that had been raised. The Committee was not yet deliberating.

The meeting was adjourned.

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