Departments of Human Settlements and Water and Sanitation Audit outcomes: AGSA briefing

Meeting report

Opening remarks

The Chairperson welcomed the Members and said that the meeting would be an engagement with the Auditor General of South Africa (AGSA). A moment of silence was held. The Chairperson said that as part of the Budget Review and Recommendations Report (BRRR) preparations the Auditor-General (AG) had been invited to brief the Committee on the performance of the Department for 2019/20 financial year.

Apologies were noted from Members.

The Chairperson welcomed everyone present and handed over to the AG team.

AGSA opening remarks

Mr Londoloza Songwevu, Senior Manager, AGSA greeted those present and said that himself and the team were having technical issues connecting to the meeting and he hoped the rest of the team would be able to join. He said that he was the senior manager responsible for the Human Settlements portfolio at the AGSA.

AGSA presentation

Mr Songwevu began by outlining the AGSA’s reputation promise, and its role in the process of reporting.

The audit outcomes for 2019/20

Mr Songwevu outlined what the AGSA examined in the annual audit process and the different audit opinions that were possible. He said that it was important to note that the percentages in this presentation were calculated based on the completed audits of five auditees, unless indicated otherwise. The five auditees in this portfolio were the National Department of Human Settlements (NDHS), National Home Builders Registration Council (NHBRC), Estate Agency Affairs Board (EAAB), National Housing Finance Corporation (NHFC) and the Community Schemes Ombud Service (CSOS).  According to AGSA, accountability had a wheel which involved planning, doing (internal controls and supervision), checking (monitoring) and acting (consequences) which then provided a basis for outcomes.

Audit outcomes of the portfolio for the last five years

Over the five years, no entity had managed to obtain a clean audit within the portfolio. This indicated that the accountability wheel he had mentioned was not functioning as it should. The AGSA encouraged leadership across the portfolio to set the right tone and provide the necessary oversight support in ensuring that the accountability wheel was implemented effectively. 60% of the five auditees managed to obtain unqualified audit outcomes but with material misstatements on performance information or laws and regulations. The NDHS submitted financial statements which were free of errors and did not have any contravention of laws and regulations but the systems to ensure performance information was useful and reliable required major improvement. This was something that the Department had to work on and if this happened it would receive a clean audit.

The NHBRC and NHFC submitted financial statements where material errors were identified but management had subsequently corrected the errors, resulting in an unqualified with findings audit opinion. This was attributed to inadequate and lack timely review processes, as well as the ineffective use of the internal audit function. The AGSA felt that because these two entities were battling with financial statements the internal audit function had to play a bigger role and once this had been done there would be an improvement. The challenges were with the CSOS and EAAB which both received a qualified opinion because of inadequate controls and processes around revenue management. Both entities had no permanent Chief Financial Officer (CFO) appointed which could be a contributing factor to the inadequacies of the financial statements.

Credible financial and performance reporting

Mr Songwevu said that if one zoomed in on the financial statements of entities, there was no movement and that it was similar to the previous audit cycle.

The NDHS submitted financial statements with no errors and did not contravene laws and regulations that govern financial matters. On key qualification areas, the EAAB revenue was materially understated as penalties for late renewals of fidelity fund certificates by estate agents were not always raised. The qualification in 2018-19 on commitments had been resolved. Similar to prior years, CSOS revenue was materially understated as not all levies from community schemes were identified and collected. Though still qualified, some improvement was noted towards addressing the finding.

There had been a significant improvement in performance reporting as in the prior year only one entity had a report without material findings. For the 2019/20 four out of five entities had received an unqualified opinion for performance reporting. Mr Songwevu added that due to Covid-19 only one programme was selected across the entities to audit in the current year. The issue remained with the NDHS as he had mentioned before.

Disregard for compliance with legislation

In terms of the disregard for compliance with legislation, the findings on compliance with key legislation reported that top three non-compliance areas were outlined. The findings were similar to the previous year.

Status of internal controls

Mr Songwevu said that overall, there was stagnation as although monthly controls and effective leadership had improved, the proper record keeping had reduced. This was related to the NDHS and performance information. The AGSA could not obtain sufficient audit evidence to do testing as part of the ensuring the reliability of performance information.

Assurance provided

Mr Songwevu said that at the NHFC and EEAB it was reported that management had not developed adequate controls to ensure that the quality of both financial and performance reports were submitted for audit. Its initial submissions had issues which were identified and corrected by management.

On accounting authority, he said that the focus was on the EAAB Board which did not take adequate steps to ensure that the overall control environment was improved. The entity had to focus on the overall control environment and not just areas flagged by the auditors. EAAB did not have internal auditors throughout the year which could be a contributing factor towards why the financial statements could not be fixed in time.

Financial Management

Mr Songwevu also reported on the financial management of entities and said that there had been a decrease in irregular expenditure over the two years. The major contributor for irregular expenditure was contravention of Supply Chain Management (SCM) legislation through deviations and irregularities in the procurement process at NHBRC, CSOS and EAAB, as well as NHFC’s continued use of contracts after expiry dates.

Fruitless and wasteful expenditure

There was a decrease in fruitless and wasteful expenditure decrease over two years, much of the disclosed fruitless and wasteful expenditure for the current year was caused by interest and penalties charged on late payment to creditors at NHFC.

Supply Chain Management

Most common findings on supply chain management were: procurement without inviting at least the minimum prescribed number of written price quotations from prospective suppliers, and the deviations were approved even though it was possible to obtain the quotations (NHBRC, EAAB); Contracts were amended or extended without approval by a delegated official (NHFC);  Procurement without inviting competitive bids, and the deviations were approved even though it was practical to invite competitive bids (CSOS).

Overview of findings

Mr Songwevu gave an overview of the findings in the portfolio. He outlined the root causes for why there were no improvements in outcomes which were a slow or no response to improving key controls and addressing risk areas and the instability or vacancies in key positions such as CFOs.

Implementation of amended Public Audit Act

The implementation of the amended Public Audit Act was outlined. No Material irregularities were identified at the NHBRC but risk areas identified were irregular expenditure which incurred R1.4 million and resulted in a balance of R711.5 m but this could not be determined as material irregularities.

Insights from the First Special Report on Covid-19 Audit

Mr Songwevu took the Committee through the management and delivery of key programmes and insights from First Special Report on Covid audit (see presentation for details). As a result of the scope reduction due to COVID 19, it could not continue with sector audit work and focused on the special report on Covid expenditure. He added that the lack of uniform indicators across the sector contributed to issues regarding performance information. The Department had committed after the last audit that when the business plans of the provinces were approved there would be an inclusion that the provinces include Estimates of National Expenditure (ENE) indicators as an annexure to their Annual Performance Plans (APPs). It appeared that this commitment was not carried through which led to the current situation. 

Focus of the real time audit

On the real time audit, Special Report One, in relation to Covid-19, it was determined that the initiative had not made much process as there was a lack of urgency with construction and relocating of people and the AG struggled to obtain expenditure information when it had to report. The observations, recommendations and commitments from the audit were outlined.

The overall message from the report stated that the national department did not alter its monitoring processes in response to the emergency nature of the initiative which was evident as there was non-completion of the project as of 30 June. Human Settlements Command Centre was not effective as it should have been. The tracking of expenditure was also an issue that arose. There was a fraud risk which was informed by the fact that there was weak coordination and accountability at sector level for the allocation of budgets and the tracking of expenditure incurred on this initiative.

On how the Special Report Two would be conducted, Mr Songwevu said that Temporary Residential Unit (TRU) construction would no longer be done in response to Covid-19 but reverted to the upgrading of informal settlements programme. The projects selected for the Special Report would no longer form part of the Covid-19 response and would be reported on in the 2020/21 regulatory audit and not in the Special Report going forward. He provided a guide on preventative controls which could be used going forward.

AGSA recommendations

The AGSA recommended that the Department and its entities should have urgency in responding to messages about addressing risks identified and improving internal controls. Furthermore, vacancies in key positions had to be filled timeously with relevant qualified and skilled personnel, management track action plans and ensure timely implementation and finalise the appointment of internal auditors at EAAB, and enhance the use of internal audit function. The Portfolio Committee had to request accounting officers/authorities and the Minister to provide feedback on the implementation and progress of action plans to ensure improvement in the audit outcomes of the portfolio.

The overall message

The inability for the portfolio to improve overall audit outcomes, as demonstrated by a lack of clean audits, was a cause for concern. An increased level of oversight was required. Effective corrective actions to address internal control deficiencies identified had to be implemented with the requisite urgency. Leadership should enhance oversight and adopt a zero tolerance approach when it comes to non-compliance with legislation. The effectiveness of the work performed by the various assurance providers such as audit committee and the internal audit had not yet yielded the desired results, due to management’s failure to adequately implement their recommendations. The processes by the Department to collect and collate information in respect of reported achievements were not always adequately implemented resulting in material findings reported. In crafting indicators management should ensure that processes are simultaneously designed to ensure that evidence as reflected in the technical indicator descriptions can be provided.

Discussions

The Chairperson gave thanks for the report from the AGSA.

Mr D Bryant (DA) said that he was pleased with the report. He said that despite detailed information being shared about the performance of the various entities, he was concerned about the lack of information shared regarding the financial and non-financial performance of NDHS. He wanted to know why this had been the case.

Ms G Tseke (ANC) thanked the AGSA for the comprehensive report. She added that even though there was no movement in the Department and most of the entities, the Department was not performing as bad as other departments. She suggested that the Department still needed more room for improvement. She highlighted that it was the Committee’s responsibility to ensure that the Department implemented the AG’s recommendations.

Reflecting on a recent meeting with the Department of Planning, Monitoring and Evaluation, Ms Tseke said that one thing that came from the meeting was that the government needed to fix intergovernmental systems. The NDHS entities were not implementing agencies as such as money was disbursed to provinces and in most cases it was on the municipality level that it failed but it was responsible for monitoring. Did the AGSA think the implementation of the District Development Model would assist government going forward?

Since the audit report excluded the audit of the Social Housing Regulatory Authority (SHRA) and the Housing Development Agency (HDA), she wanted to know who was responsible for auditing of the two entities and why audit opinions were not received.

Ms N Sihlwayi (ANC) appreciated the report and the clarity provided about AGSA. She said that the objectives sections of presentations were often missed as the focus was on addressing issues and raising questions. On areas where there seemed to be no movement in relation to the action plan, particularly governance, she wanted to know whether there were any reasons for these deviations, which were not corrected, and whether they had been corrected. She gave an example of the NHBRC which did not have an internal audit structure and CSOS which did not have a Chief Executive Officer (CEO). She said that she had noted the plea made to the Committee to ensure that action plans were monitored. She questioned why it had taken so long for entities to make appointments such as the CEO appointment as there might be a procurement issue.

Ms Sihlwayi further added that there had been an indication of R711 million appearing under a report on NHBRC, however, there were no qualms regarding utilisation. Why was the amount this high? She understood that the AGSA had a role to advise on challenges that entities faced.

Ms S Mokgotho (EFF) gave thanks. Referring to slide 13 of the presentation, status of internal control in respect of proper record keeping of both the Department and its entities, she said that this was concerning. She asked why this was the case, and wondered how the internal audit committee had missed these issues and not picked it up timeously. Was the quality of internal audit committee reports in ineffective or was what was proposed and raised in its reports discarded? Referring to slide 33, she asked whether there had been any costly investigations, litigations or disciplinary action within the Department or its entities for 2019/20.

The Chairperson welcomed the report. She said that what stood out was the material finding regarding performance information in the report, which was a repeated finding. What was the AG’s observation about this and what had to be done? Was it a lack of capacity on the Department’s part?  She welcomed the decrease of irregular and wasteful expenditure. The performance of NHBRC was worrying. On the repeated findings of CSOS and EAAA, she asked what the AG thought was the problem and how the Committee could assist it in addressing these matters.

AGSA’s response

Mr Songwevu thanked the committee for sharing its concerns and for appreciating the report. On financial and non-financial performance in the NDHS, he said that from a financial point of view, the auditors did not come across any issues in its financial statements. The NDHS did not have any material findings for irregular expenditure and fruitless and wasted expenditure. This was why it was not mentioned much when transgressions were presented. The issues it had were related to non-financial issues which was the performance report. Mr Songwevu said that this had been an issue for the past number of audit cycles.

On the SHRA and HDA, he said that the AGSA had decided not to audit any of these entities. This decision was taken after looking at the available resources and risks in relation to these entities. These entities were then audited by private firms and not the AG who was only involved except for in the process in an oversight role instead. The reason for the entities’ reports not being tabled was likely due to the reports not being completed and being signed off.

The objective of the AG in the process (referring to slide 3) was stated under the role of the AG. As the Committee had to produce the BRRR, the AG was providing the information that it had identified in its audits which had to be taken into account. This in essence was the objective for the AG appearing before the Committee.

On uncorrected deviations, he said that examples were provided about the lack of an internal audit and non-appointment of a CEO and CFO at certain entities. He said what had been found on the ground was that, for example at EAAB, disagreements between those in governance positions such as the audit committee and management regarding the process undertaken to appoint the internal auditors. The disagreements continued until the time ran out and there was a lack of agreement on the process followed by management. At CSOS, he said in one case where a CFO was recommended, the process took too long and the candidate found another job, leading the entity having to begin the recruitment process from scratch. He said in certain instances, this process had to be endorsed by a shareholder member which could delay the processes again.

On the R711 million at NHBRC, he said that in the previous years, awards were given to entities that related to members of the accounting authority. In essence these awards were irregular. These took place five years ago but the processes dealing with addressing the consequences of this had been slow, with some individuals having left the organisation. This was ultimately up to National Treasury to see if it condoned this expenditure before it could be removed from the financial statements of NHBRC.

On record keeping, he said that it was an issue across the portfolio. This audit cycle occurred under lock down which affected the provision of information as everyone had been working remotely, and the information required was physical material within offices. The most concerning case was the Department itself when it came to supporting evidence for performance information.

On the non-implementation of internal auditors reports, he said that generally internal auditors had have been assessed as providing the necessary assurance across the portfolio. There were internal audit reports which would be confirmed and that assisted the AG’s audit process hence there were not issues with effectiveness of the internal auditors. The function was not present in EAAB hence the issue. The issue arose with the implementation of the action plans. The reports and recommendations of the internal auditors were perhaps delayed by the creation of management’s action plans. The issue was the implementation of the reports.

No investigations have been noted in the reports. The two entities that normally conducted investigations, the NHBRC and the NDHS, used internal units therefore additional costs were not incurred.

On the lack of capacity in responding to the Audit of Predetermined Objectives (AOPO) at the NDHS, he said the issue was related to the implementation of the targets. The issue the Department was grappling with was crafting useful indicators especially since it was not an implementer but had a monitoring role over its entities.

On the worrying performance of the NHBRC, he said that the concern and risk was about enrolment of all projects. No concerns were identified for enrolled projects.

He outlined where the Committee could assist the EAAB and CSOS in conjunction with the AG or auditors. For EAAB it was the control environment and ensuring stronger controls. The focus had to be root causes and not flagged areas only. On CSOS, strides had been made as there was a unit created which focused only on schemes which had been capacitated. The Committee had to conduct oversight over this unit to ensure progress.

Another official from the AGSA elaborated more on issue regarding performance information at the Department. Referring to the presentation, reference was made to actual targets that were achieved by combining the achievements of the various provinces. The primary responsibility of the National Department was to ensure that when it reported information such as that 54 000 housing opportunities were created through its Upgrading of Informal Settlements Programme (UISP), it had the information at its disposal at its level. This year there was an expectation that the AGSA would have sourced the information from the provincial counterparts of its office. However, when management submitted an annual performance report the assertion made was that the information contained in the reports was valid, accurate and complete. Management also had to be in a position to support the assertions it made.

This matter had been highlighted several times in engagements with the Department. The Department was made aware that when it reported on the achievements of targets that involved information from provinces, the supporting documentation, which were audit evidence, were expected to be provided by it. The extension of the AG’s audit work to engage with provincial counterparts would be used to address the risk on its own side which was to address the completeness of the reported information in the NDHS’s APP. This did not however, happen. The AGSA was tracking verification closely but the last time it had sight of any report that spoke to verification was in quarter one but it was not mentioned in remaining quarters of the year. This was why the AGSA had issues with the NDHS’s provision of supporting evidence.

The Chairperson asked if the Members had any follow up questions but there were none.

Mr Songwevu added that the auditing firm for SHRA was Nexia SAB&T and Ngubane and Company for the HDA respectively. He said that there would be a follow up with the firms on why the reports had not been tabled.

The Chairperson asked who was responsible for the quality assurance.

Mr Songwevu said that the AG did the quality assurance as many firms were uncomfortable with this. He knew that HDA had not signed because he had done a review for it on Monday hence it would have not tabled the report.

The Chairperson said that it would be the Committee’s resolve to adopt the recommendations of the AGSA. She asked if there were objections but the Members supported the adoption.

Closing remarks

The Committee conveyed its condolences to the family and the AGSA on the passing of the outgoing Auditor- General, Mr Kimi Makwetu. A moment of silence was observed in honour of the good work done by Mr Makwetu in raising the flag of South Africa.

The Chairperson thanked the AGSA team and congratulated the new Auditor-General, Ms Tsakani Maluleke, and ensured that Committee would continue working with it.

The Committee then discussed changes to its programme for the following week and the changes were adopted before the meeting was adjourned.