Department of Higher Education and Training 2014/15 audit outcomes: Auditor General briefing

Meeting report

The Chairperson explained the meeting with AGSA is the first step the Committee is taking in preparing for the new financial year’s budgetary review. AGSA would report on last year’s expenditure.

Department of Higher Education and Training (DHET) 2014/15 audit outcomes: AGSA briefing
Ms Michelle Pillay, AGSA Senior Manager, said that AGSA's mandate is to strengthen the country’s democracy by enabling oversight, accountability and governance in the public sector through building public confidence. This was the basis of its engagement with the Committee. The report is given annually following an assessment of departmental performance. One of the major roles of the AGSA is to assist the Committee in its oversight role over governmental departments. The Committee can then prepare its Budgetary Review And Recommendations Report (BRRR) which can then be presented to the National Treasury.

Ms Pillay said audits done by AGSA identify key internal control deficiencies to be addressed, report on noncompliance with relevant key legislation, report the annual performance report is reliable and useful, and provide assurance that the financial statements are free from misstatements that would affect users. The presentation would give insight into the 2014/15 audit outcomes in order to understand what gave rise to the outcomes, to enable the Committee to exercise its oversight going forward, also to inform concerned stakeholders of the expectations for the portfolio.

The overall audit outcomes show general improvement from the past three financial years. Unqualified with no findings went from four entities in 2012/13 to nine in 2014/15. Likewise, qualified with findings went down from six to two entities. The biggest root cause for audit failures was slow response from management – both the accounting officer and senior management. AGSA clarified that action plans to remedy audit findings and their implementation was slow going and that management was not making these a priority.

The quality of submitted financial statements improved in 2014/15 when compared to 2013/14. Without corrections, 2013/14 had twenty financially qualified with finding areas as opposed to seventeen in 2014/15. After corrections, only three were left in 2013/14 and two in 2014/15. Fifteen auditees avoided qualification by correcting material misstatements in 2014/15 and 17 in 2013/14. During both years, 16 of the 27 performance reports submitted by auditees were reliable and useful.

In terms of expenditure, unauthorized expenditure refers to any expenses that are not in accordance with the budget vote – basically, spending over and above what the budget allows. None of the entities were guilty of this. However, all entities had issues with irregular expenditure which is expenditure incurred in contravention of key legislation where prescribed processes are not followed. The DHET had R1 252 000 in irregular expenditure; the Sector Education and Training Authorities (SETAs) and the National Skills Fund (NSF) had R349 194 578; and other public entities had R504 000 which had gone down from previous years. The DHET had no instances of fruitless and wasteful expenditure; SETAs had R26 690 301 worth; and other public entities had only at R990. Overall, there was a total of R350 950 578 for irregular expenditure and R26 691 291 for fruitless and wasteful expenditure.

The major root cause for these audit findings is the slow response by management in addressing poor audit outcomes from previous years. AGSA recommends the remedy for this would be the timely compilation of an action plan, implementation of the action plan as well as constant monitoring of the implementation. The second cause was the lack of consequences for poor performance and transgressions. AGSA recommends the strengthening of performance management processes of staff to incorporate internal controls and responsibilities into performance contracts for all staff. Finally, the third cause was the instability or vacancies in key positions. This could be remedied by filling all vacant positions with individuals who have the appropriate skills and qualifications – this should be done urgently. A gap analysis should be performed on the current level of skills and competencies. An action plan should be put in place to address the gaps identified.

Discussion
Mr N Khubisa (NFP) noted that there is a fair amount of information presented that the Committee is not privy to as the presenter kept augmenting on what was on the slides. What is clear is that there is a problem with some SETAs and the technical vocational education and training (TVET) colleges that has been going on for some time. Has AGSA made any recommendations for improvement? He conceded that there has been some improvement with SETAs but the TVET colleges are either stagnant or not improving at all. He understands that AGSA cannot make improvements but can they not make recommendations?

Dr B Bozzoli (DA) expressed unhappiness that the Minister had yet again failed to appear for a meeting where his department was under scrutiny. The Minister had undertaken to attend such meetings and should, therefore, be present. As far as the AGSA observations on all these programmes and the department itself, worst of all were the TVET (Technical Vocational Education Training) colleges. She asked for some notion as to what the real problem is? In the TVET colleges, the South African Institute of Chartered Accountants (SAICA) has been assisting the Department to improve the financial management of TVET Colleges by recruiting chartered accountants to support the financial function in the colleges and help train these colleges on how to get a clean audit. But it seems as though these members of SAICA have come across enormous problems in management, poor quality of staff, in irregular expenditure and forms of corruption, with people getting kickbacks. It seems, as a result, that the chartered accountants put in there by SAICA seem not to be able to fix the problem. AGSA may need to recommend to the Committee some further steps that the Department can take in addition to employing SAICA members. They cannot leave it up to a single CFO to solve all the problems of mismanagement and ineptitude that seem to be the case in the worst of these institutions. Her third question was on the lack of consequence management. It looked as though AGSA's 2013/14 recommendations were only taken up right towards the end of the 2014/15 year and therefore AGSA finds that the addressing of the recommendations has been so inadequate. Perhaps the Director General would like to talk about that? Why has there been a slow response? What do they intend to do about this? What does the Auditor-General recommend, and how will it be remedied next year so they do not have the same happen again?

Mr E Siwela (ANC) said that it was clear from the presentation that there are concerns that were raised previously with the entities and, obviously, not attended to by some. This is why AGSA recommended that top management fast track, or implement the action plans earlier so that by the time they report, there is some action taken to correct the audit findings. This, however, is not happening. He wanted to find out who should be responsible for enforcing these things - making sure the action plans are getting done. AGSA cannot come and lament every time about people not doing their jobs but still getting to keep them. That is a concern for him. Secondly, the presentation stated that some TVET colleges, particularly in East Cape Midlands, do not provide financial reports as required and on time for AGSA to be able to do its work - what happened there? Does AGSA wait for them until these are provided at an opportune time and then start auditing? What happens in this process? Do they leave the circumstances like that? His concern was that these colleges are using the "public purse” and anybody who is being given such funds should account.
 
Mr K Mahumapelo (AGANG) inquired about the two SETAs that were unable to make their corrections with regard to their financial statements. What are those two SETAs and how come they did not correct the errors? Which errors were identified? The presentation also explains that internal control will be developed, implemented then monitored within a month’s time. Mr Mahumapelo wanted to know what mechanisms the Department was going to use to speed up the process this time. During the Committee’s oversight visit to the Western Cape, TVET colleges reported that there is a challenge in the interpretation of the auditing requirements. Apparently, what was accepted by internal auditors before, is no longer accepted by AGSA. Has AGSA explained their interpretation to the TVET colleges? Were any AGSA workshops held with TVET colleges before the colleges were audited? If yes, would AGSA explain the nature of those workshops?

Mr M Mbatha (EFF) also wanted to know why some of the entities continued to falter. Based on the age of the employees as well as the setup of the entities themselves, it might be necessary to take harsher action against them. There is no reason why they are continually failing audits. It is not rocket science who should be responsible in each entity. If a CFO’s work is unsatisfactory, it is the responsibility of his supervisor, the CEO and the audit team to handle it. What has been AGSA’s experience with repeat offenders? Before the Portfolio Committee steps in, there is existing oversight there. What sort of questions does AGSA ask? What are the responses of the entities? These consistently-failing SETAs and TVET colleges are not just doing so financially, they are also failing in other areas. They do not benefit their communities, only the cronies of the officials and board members of the SETAs. The presentation noted errors have consistently appearing in the submitted financial statements. Is this because the majority of the entities do not have an internal audit unit? How many of these entities have internal audit units in the first place?

Ms S Mchunu (ANC) was grateful for the clarity the presentation gave on how public funds are used by the Department for Higher Education. She noted that during the Committee’s visit to North Link TVET College, the management commented that AGSA audits are expensive. They were charged R4 million. She asked AGSA to explain this figure. Second, since the Department explained that a big challenge with these entities was the minimal internal audit control in most entities – which explains the failed attempts at improvements in so many of them - do they have a plan to address it? The failure reflects badly on the Department. She says that this is not something they should be talking about all the time, some action needs to be taken. What is AGSA’s recommendation?

Mr C Kekana (ANC) was disappointed that the Minister and Deputy Minister could not attend. He had thought cabinet meetings were on Wednesdays and feels like the Department should have given the Committee an opportunity to set a time when the Minister could attend. It is important that the Minister attend and next time they should make sure that the meetings do not overlap. The Minister needs to hear all the concerns raised in the meeting. His absence makes it hard for cooperation between him and the Committee. He asked the Department to explain why the migration of colleges from provincial to national jurisdiction, which was supposed to help improve colleges, was not making a difference? The Committee had been told that by bringing outsourced professionals to the TVET colleges, they would be able see success in the performance of such colleges. Have they not had enough time to make the promised impact? Do they need more time?

Ms Pillay replied about the root causes saying the main challenge is repeat findings. This is an issue that goes back to process and consequence management processes and their robustness in addressing internal control deficiencies identified by AGSA or internal audits. AGSA found no link there. There are three phases in the external audit processes – planning, interim audit and final audit phase. AGSA will highlight, at each phase, the areas in which the controls are not working and need to be changed. However, no audit action plans are drawn by management until the final audit process. They recommend that management continually look at the internal control deficiencies that are being reported by AGSA. They also need to look at the reports submitted by the internal audit unit and implement an action plan to address the findings. AGSA has recommended to the SETAs to have the accounting authority take responsibility for the implementation of the action plan. The SETAs need to ensure that management is actually implementing those action plans and that internal deficiencies are being addressed. They also need to play a role in ensuring that consequence management is also being addressed.

Ms Pillay said that if the entities in the department wait until the report, this gives only four months to address the issues entailed in the action plans – it is not enough time and results in the observed repeat failures. She reiterated that adhering to internal controls of the organization is the responsibility of each individual member of the entity – not just higher management. However, the implementation of those is the responsibility of the DG and Minister for the whole department, and the CEO is the Accounting Authority for the entities.

On the question about the two SETAs that had a qualified opinion – the PSETA and W&RSETA, she said that PSETA is a recurring qualification relating to funds they received towards a specific project. PSETA could not produce records showing their spending since for the 2005/6 financial year and are still have trouble producing such documents. They have been in contact with NSF to see how they can resolve the issue. W&R SETA’s issue was with the discretionary grant commitment – the challenge was that the project management does not happen throughout the year. Many errors that were found in their financial statements during the audit and they could not correct those errors because those controls are not functioning.

AGSA’s recommendation for a mechanism for speeding up the process is that the action plan has to be implemented within a month of receiving feedback from the audit. It usually takes a while for the action plan to be finalised and implemented and that has been the issue here. In response to the question on internal audits, Ms Pillay answered that each entity does have internal audit. However, these are effective only if management actually implements them. If management fails to implement these suggested changes, that is where the same problems persist in the following year. But, internal audits start halfway into the year and therefore the results are late in coming. This could also be linked to management readiness for the audit. In regards to the irregular expenditure question, the majority of the R350 million related to Culture, Arts, Tourism, Hospitality and Sport SETA (CATHSETA) and the Safety and Security SETA (SASSETA), about R250 million of which is again related to that discretionary contract. Both SETAs have been placed under administration relating specifically to the governance issues that the MP pointed to. This was specifically to do with irregular expenditure in the way contracts are awarded which was not in line with the regulations. The other challenge was noncompliance with supply chain management processes. There should be some kind of checklist to ensure that management has complied with all the requirements.

Mr Sbongile Manzi, AGSA Senior Manager, answered the questions relating to TVET colleges. AGSA’s recommendation during audits is, amongst others, the improvement of records management. Most issues are due to colleges not being able to provide the evidence needed to support what is written in the financial statements. So the colleges need to invest time in finding ways to improve these procedures and guide the staff in what documents need to be kept specifically for audit purposes. Another recommendation is to actually implement action plans. The principal and council must monitor the implementation of action plans. At the end of every audit, AGSA gives the colleges the audit findings and the colleges have to respond with what they are going to do to address those findings in the form of an action plan. At the moment, however, not enough is being done to actually implement their commitments and monitor the implementation of the action plan. The principal and the council need to hold the staff accountable. The schools themselves need to have an adequate number of skilled staff. There needs to be improvements in the monitoring of compliance.

On the question of stagnation, Mr Manzi referred back to implementation of action plans. If they are not implemented, the issue will arise again and again. So, it really needs to be prioritized. He said that SAICA members used to just be consultants with no decision-making powers. So, if management was unwilling to implement, then nothing would happen. But now, with the new appointment, they should have some decision making powers and hopefully with that intervention, there will be some improvements at the TVET colleges. On who should ensure that things get done, the primary responsible source is the council and the principal.

When colleges do not provide the required information and reports, AGSA escalates the issue to the Department. AGSA is not in a position to force colleges to provide such information. The Department however, with its influence over the colleges, is in a good position to use that influence to encourage the college to provide the necessary documentation in a timely manner. Tshwane North has a backlog in its audits because AGSA has not received the outcomes for 2012/13. The auditor is still trying to finalise that audit. Until that backlog is cleared, they cannot move forward with the new audits.

In answer to the question about audit expectations changing because AGSA is a new auditor for these entities, Mr Manzi explained that AGSA audits are more detailed and in depth. Which is also why the fees tend to be higher. While on the subject of fees, the TVET colleges tend to provide very poor information and usually they have to go back and correct it. This takes up much time and is costly. After these corrections, AGSA has to run the audit once again. Migration from provincial to national jurisdiction only started in the next financial year from April 2015 so the impact of that was not reflected quite yet. In the 2015/16 audit next year, migration will be included in the results and therefore, they should have a better picture of how it is affecting the colleges. There are fourteen colleges that are being audited by AGSA this year and AGSA will be holding workshops with these colleges in December. They had wanted to start the workshops this month but the Department has other issues that need attending to in October and could not provide staff needed for the audit until early December.

Mr Paklo Leung (AGSA AGSA Senior Manager) addressed the question about workshops. They did have a workshop for all the colleges that they audit and they invited both the CFOs and the SAICA support team. They covered the AGSA auditing processes and gave feedback on last year’s audit outcomes. After the audits though, they did notice the need to have workshops with individual colleges to go over their results and the processes and how they can improve as a specific college. He reemphasized the need for action plans and their implementation.

Mr Sazi Ndwandwa (AGSA Deputy Business Executive) specifically addressed the North Link TVET college. He said that the council at the college was appointed late and that, as a result the whole internal audit committee was appointed late and there was no internal audit. So, there was no guidance given by an internal audit before AGSA came. North Link had an acting principal last year and the CFO that had gone through the audit with AGSA last year has also resigned. Many findings from last year remained unchanged as a result. Before each audit, AGSA sits with the college and goes through how the audit is going to happen – they set expectations as to what they are going to do. After each audit, they then have a debriefing where the college talks about what worked and what did not work and what kinds of things they can do to improve in the future. They want to audit according to the accounting framework. As far as the R4million audit fee, it depends on the issues identified. AGSA sits down with management before the audit and lets them know what they are going to do and how the fees are going to look. The process is standard for every college. Should there be additional work that needs to be done, they agree on how they are going to bill it as it is outside the standard budget. The R4 million fee was actually a combination of the last two audits – The first one was supposed to be R1.4 million but ended up being R2.6 million instead. The problem there was that after AGSA had found some irregularities, management had wanted to change them and the audit had to be rerun all over again. That was the major issue. So, the audit fee ended up being more than what had been expected. For this 2014/15 audit, it took North Link until 13 August to submit the financial statements that were due on 31 March. Even then, AGSA still found many errors but would not allow the college to make any changes since it was clear that the audits were not, in the long run, helping the college improve.

Dr Bozzoli asked, based on what the presentation document said, why the NSF did not receive a more unfavorable opinion. Her second question was about the universities, which they do not really discuss because they do their own independent audits but is there a chance that AGSA could have an influence on them too? Finally, she wanted to know how the DHET compares to other government departments. Is it one of the best? The worst? Mediocre? The problem is that the Committee does not get a report on the other government departments so they do not really know how well the DHET is doing, in relation to the others.

Mr Mbatha said that according the presentation, the main offenders were identified based on very unjustifiable activities relating to expenditure. According to Treasury, these are very serious offences and they carry very serious consequences for the executives. He wanted to know what AGSA’s experience was in relation to the steps taken in the TVET colleges and SETAs (the boards in particular) towards disciplinary measures. When they report, are any steps taken? What exactly has been the response of boards to the audit reports? Do they identify the individuals responsible for the negative results in their report?

Ms Mchunu referred to action plans and their implementation and said that there should a block placed on serial defaulters. What, currently, are the implications for the entities that are continually failing? Does AGSA have some contact with National Treasury to say that certain institution’s funding should be held back or minimized? If there are no consequences applied, institutions have no incentives to make any improvements.

Mr Khubisa was also concerned about lack of consequence management. Are these issues escalated to the Department? What exactly is done? If the CEOs, CFOs and management are not taking any action, eventually, everything is reported to the Department. What does the Department do?

Ms Pillay’s response on the NSF question was that NSF was able to make the necessary corrections. Had they not been able to, they would have received a more unfavorable opinion. They are required to be on the accrual basis of accounting in terms of their reporting. During the year, they keep their records under the cash basis of accounting. At the end of the year, they need to convert that into the draft required. This is why there were so many errors. The NSF is also only an establishment of 57 so what is expected of them and what they need to do does not always connect. They also need to look at whether they have people with the required skills, specifically on performance reporting – they need the right individuals to coordinate performance between the entities. On DHET performance relative to other departments, AGSA does release a general report that shows the performance of all the government departments which would give the MPs a good response in terms of how well everyone else is performing. However, the DHET is not like all the other departments. It has 100 entities that it is responsible for – no other department has that large a responsibility. Given this information, Ms Pillay thinks that it would be unfair to compare them with other departments. AGSA does have a process of submitting issues that are hard deal with to the chair. However, ultimately all they can do is give recommendations. It is the Accounting Authority’s responsibility is to act.

The Chairperson concluded by saying that the Committee does understand that there have been general improvements. However there’s still room for improvement. Maintenance of the status quo is not okay – things definitely have to change and improve. Quarterly reports need to be submitted on progress. Within one month, there should be an action plan. Where there are timeframes, you should deliver. That is why timeframes are there. Regular fruitless and wasteful expenditure should be avoided at all costs. Another area of improvement is management planning. There should be close monitoring of implementation of action plans because the Committee cannot be told year after year that the plans were not implemented yet again. The hike from R1.6 million to R4 million in audit fees is not okay and should be avoided in the future. She said that the Committee proposes that the next engagement should be with the internal auditors who should come and report too. Their job is to do this every month.

Meeting adjourned.