Audit Outcomes 2016/17: Auditor-General briefing

Public Accounts (SCOPA)

17 October 2017
Chairperson: Mr T Godi (APC)
Share this page:

Meeting Summary

The report of the Auditor-General of South Africa (AGSA) for the 2016/17 financial year showed that there had been little improvement over the past four years in the most common areas of qualification among the government departments and state-owned enterprises (SOEs) which it had audited. What was of concern was that the challenges that AGSA faced included threats of litigation by entities that contested audit findings, attempts to interfere in audits, personal threats and intimidation, and delays in providing documentary evidence, such as financial statements.                                                   

19 SOEs had been audited, and five of them had obtained clean audits. These were ARMSCOR, NTP Radioisotopes, Gammatec NDT Supplies, Land Bank Life Insurance and PetroSA Ghana. Those that had outstanding audits included the Independent Development Trust (IDT), South African Airways (SAA), South African Express Airways (SAX), Air Chefs, SAA Technical and Mango Airlines. Irregular expenditure at SOEs had amounted to R2.884 billion, which had been incurred by 14 entities. The top contributors to this had been the Airports Company of SA (ACSA), which had incurred R1.169 billion, the SA Post Office (SAPO) on R719 million, and the SA Broadcasting Corporation (SABC), with R687 million. PRASA, which had incurred R14 billion in irregular expenditure in the 2015/16 financial year, was not included, as its audit reports had not yet been finalised. The SAA group, with the exception of Mango Airlines, had not submitted their financial statements, as there was uncertainty as to whether they would continue to operate in the future. Eleven of the SOE’s had incurred a deficit during the financial year, including ARMSCOR and the Nuclear Energy Corporation of SA (NECSA).

The financial health of government departments was deteriorating, and there was growing concern that 11% of the departments would struggle to operate because of financial constraints. The Free State was the province with the most serious concerns, with 12 of its 13 departments experiencing financial health concerns. 17% of the departments used more than 10% of their budgets to cover shortfalls. Unauthorised expenditure totalling R1.467 billion had been identified in the 19 departments audited.

Five specific programmes had been included in the audit:

  • Water infrastructure development (Department of Water and Sanitation);
  • School infrastructure (Basic Education);
  • Expanded Public Works Programme (Public Works);
  • Food security and agrarian reform (Agriculture, Forestry and Fisheries); and
  • Human settlement delivery support (Human Settlement).

The total budget for the five programmes was R58.516 billion. The budgets had been spent, but not all targets had been achieved, with the water and school infrastructure programmes recording the lowest achievements. Only 22% of the targets had been achieved. The EPWP programme had not reported on the number of jobs created, and its information was unreliable. A total of 211 projects executed by provincial departments had been audited, and the budget for these had been R30.752 billion, but only 70% of the targets were achieved.

The Committee expressed concern at the trend of involving lawyers in matters that were strictly accounting and auditing matters. There was a need to do more oversight and engage further with assurance providers. Members bemoaned the late submission of financial statements by entities like SAA and Mango Airlines, which were in financial difficulties. The lack of penalties for the late submission of financial statements was worrying. It was also suggested that the use of words such as “irregular, fruitless and wasteful expenditure” was not helpful, as it placed a veil over the seriousness of the matters which involved breaches of the law. Theft had to be called “theft” and fraud must be called “fraud,” instead of using language such as “irregular expenditure.”

Meeting report

The Chairperson expressed happiness that the Standing Committees on Public Accounts (SCOPA), the Auditor General and Appropriations had the opportunity of coming together with the Auditor General of South Africa (AGSA), saying they were two sides of the same coin and that they needed to explore more ways in which they could complement their work going forward for Parliament to enhance its effectiveness in its work of exercising oversight.

2016/17 PFMA Audit Outcomes: AGSA briefing

Mr Kimi Makwethu, Auditor-General (AG), said the 2016/17 Public Finance Management Act (PFMA) report had not yet been officially launched, but he would give an analysis of the audit outcomes for all the provinces, as well as all the national departments and their entities. He also revealed that some of the technical and vocational education and training (TVET) colleges that had previously been audited by private firms, were now being audited by AGSA.

The audit environment in 2016/17 was marked by an intensification of the trend of contestations from the reports of the previous year. The contestations were experienced at different levels -- from the board level to the chief financial officers, and even to Members of the Executive Committee (MEC) at the provincial level. It was normal for auditees to question and challenge audit outcomes if use was made of good accounting interpretations and good legal grounds, but in some instances, pressure was placed on the audit teams to change the conclusions just to avoid negative audit outcomes. There were even threats of litigation based on the assumption that the audit teams had ulterior motives or that they were not qualified to carry out the audits.

The threats of litigation were experienced particularly where third parties were involved and had been contracted to undertake projects over which the entities had no expertise or capacity. Money that was paid to third parties was subject to the same stringent conditions as money utilised internally by the entities. He said it was wrong to start using lawyers on accounting issues. In some cases, there were delays in providing documentary evidence. There were also instances where personal threats were issued. Contestations were attributed to political pressure to improve audit outcomes, the negative impact of poor audit outcomes on performance bonuses, and the potential effects of bad press coverage. The total PFMA budget that was subject to audits totalled R1 015 billion.

State-Owned Entities (SOEs)

There were 19 SOEs that were audited, and 26% (five) of them obtained clean audits. These were ARMSCOR, NTP Radioisotopes, Gammatec NDT Supplies, Land Bank Life Insurance and PetroSA Ghana. Those that had outstanding audits included the Independent Development Trust (IDT), South African Airways (SAA), South African Express Airways (SAX), Air Chefs, SAA Technical and Mango Airlines.

Irregular expenditure amounted to R2 884 million, which was incurred by 14 auditees. The top contributors to this were the Airports Company of SA (ACSA) which incurred R1 169 million, the SA Post Office (SAPO), which incurred R719 million, and the SA Broadcasting Corporation (SABC), which incurred R687 million. Most supply chain management (SCM) findings involved written quotations that were not invited, suppliers who were not tax compliant, uninvited competitive bidding and recommendations not made by delegated or committee officials.

Regarding the financial health of the SOEs, it was reported that the SAA group -- with the exception of Mango Airlines -- had not submitted their financial statements as there was uncertainty as to whether they would continue to operate in the future. 58%(11) of the SOEs incurred a deficit during the financial year, including ARMSCOR and the Nuclear Energy Corporation of South Africa (NECSA). The average senior management vacancy rate was 17%, and six of the SOEs did not have a chief executive officer at the end of the year.

Departments

Generally the financial health of departments was deteriorating and there was growing concern that 11%of the departments would struggle to operate because of financial constraints. The Free State was the province with the most serious concerns, with 12 of its 13 departments experiencing financial health concerns. 17% of the departments used more than 10% of their budgets to cover shortfalls. 34% of the departments had a deficit, if accruals were taken into account.

The unauthorised expenditure was caused by overspending, with R1 467 million being overspent by 19 departments. This figure compared unfavourably to the R758 million that was overspent in the 2015/16 financial year. Natal had the highest figure, accounting for 31% of the total unauthorised expenditure, equivalent to R448 million, followed by the Free State which accounted for 22% of the unauthorised expenditure, amounting to R316 million. The Eastern Cape was third with 12% of the unauthorised expenditure, amounting to R175 million. There was no unauthorised expenditure in Limpopo Province and the Western Cape.

Concerning national projects, water and sanitation and infrastructure managed by Basic Education were audited. There was non-compliance with SCM legislation on 80% of the projects, with irregular expenditure on the Nwamitwa project reaching R155.9 million, and R43.6 million on the Tzaneen project. Contractors were either overpaid or paid for services that they never rendered.

The full extent of the fruitless and wasteful expenditure had not yet been established. The number of provincial projects audited was 211, with grants provided for the Expanded Public Works Programme (EPWP), school infrastructure, agriculture and human settlement. The total amount provided for projects undertaken by provincial departments totalled R30 752 million. 25 projects received grants for school infrastructure, with 11 not achieving their targets. The projects experienced poor quality work, inadequate planning and poor project management. SCM non-compliance was most prevalent on school infrastructure and human settlement.

Outstanding Audits

There were 26 audits that were still outstanding as at 31 August 2017. The reasons included:

  • Late or non-submission of financial statements. The entities involved included the Passenger Rail Agency of SA (PRASA), SA Express, South African Airways and its subsidiaries, and five TVET colleges;
  • Information outstanding to determine if the auditee was a going concern;
  • Disagreements on accounting or legal matters. Among those involved in this regard were the Department of Defence (DoD) and the SA Revenue Service (SARS);
  • Late submission of information for auditing, or delays in audit.

Seven audits were subsequently finalised, resulting in:

  • Four unqualified audit reports involving the Department of International Relations and Co-operation (DIRCO), the Department of Transport (DoT), Ithala Development Finance Corporation and Ithala;
  • One qualified finding at the Department of Cooperative Governance and Traditional Affairs (COGTA);
  • One adverse at the Property Management Trading Entity (PMTE);
  • One disclaimed opinion at the IDT.

Financial Statements, Performance and Compliance

78%, or 128 entities, had findings regarding their annual financial statements (AFS), while 55%, or 90 entities, had no findings regarding their annual performance reports (APRs), and 45%, or 74, had findings. Regarding compliance with key legislation, 34%, or 56, had no findings, while 66%, or 108, had findings.

The report indicated that there was little improvement over a period of four years regarding the most common qualification areas.

For the departments, the main areas of concern remained:

  • Property, infrastructure, plant and equipment at 16%;
  • Irregular expenditure at 9%;
  • Contingent liabilities and commitments at 8%;
  • Expenditure at 7%.

For public entities the areas were:

  • Property, infrastructure, plant and equipment at 13%;
  • Payables, accruals and borrowings at 13%;
  • Receivables at 12%;
  • Revenue at 12%.

The AG reported that his office had also done an assessment on the reliability and usefulness of the performance reports by the departments and entities. It was discovered that 25% of the reports by the departments were useful, and 42% were reliable. 15% of the reports from the entities were useful and 24% were reliable. The findings showed that the reported achievements were not reliable, the indicators were not well defined, some performance targets were not measurable and some indicators were not verifiable.

There were some areas of improvements in the areas of non-compliance. The prevention of unauthorised, irregular, fruitless and wasteful expenditure improved in 91 departments. The quality of financial statements improved in 79 departments. The management of procurement and contracts improved in 48 departments. The management of grants improved in 19 departments. The quality of financial statements improved in 104 public entities. The management of procurement and contracts improved in 65 entities. Revenue management improved in 29 entities, and the prevention of unauthorised, irregular, fruitless and wasteful expenditure improved in 63 entities.

Supply Chain Management (SCM)

Out of 396 auditees, 36% had material findings, 35% had findings and 29% had no findings. The findings revealed:

  • Uncompetitive or unfair procurement processes;
  • Inadequate contract management;
  • Awards to close family members and employees;
  • Suppliers’ tax affairs were not in order;
  • Contracts were amended or extended without approval by delegated officials.

The amended Public Service Regulations prohibit employees of departments from doing business with the state. 698 employees in 24 departments had continued doing business with the state despite these regulations. Another 649 employees in 32 departments had secured new awards to do business with the state. 43% of the auditees had not complied with the preferential procurement regulations that encouraged local procurement.

Fraud and Consequence Management

There were 124 auditees that had findings on non-compliance with legislation on consequence management, with 31 having material findings. There were allegations of financial and SCM misconduct in 99 auditees.  In 32% of the cases, allegations were not investigated, in 33% of the cases the investigations took longer than three months, and in 7% of the confirmed cases, disciplinary proceedings were not instituted. Of the cases of unauthorised, irregular and fruitless and wasteful expenditure reported, 75% were investigated in 218 auditees and 25% were not investigated in 72 auditees.

Irregular Expenditure and Role of Committees

Irregular expenditure during the 2015/16 financial year had been R46.6 billion, and that figure was inclusive of PRASA, but PRASA was not included in the 2016/17 financial audit outcomes. The PRASA audits had not yet been signed off, hence their exclusion from the 2016/17 report. However, it was important to note that PRASA had accounted for R14 billion of the R46.6 billion of irregular expenditure that was recorded the previous year.  Therefore the figure of R45.6 billion that had been recorded for 2016/2017 could change considerably, once the PRASA audits were finalised.

The AG took the opportunity to explain the meaning of irregular expenditure in an effort to encourage the Members to conclude the process of the audits. He explained that at the point the auditors arrived at the conclusion that expenditure was irregular, it meant no one knew what was behind that expenditure. At that point, the only thing that the auditors had established and identified was that there was a practice in the supply chain that was different from the prescribed rules of SCM. Irregular expenditure meant they had gone through the audit process and had not got satisfactory answers and that none of them knew who was behind it and it was reported as irregular. He further explained that this was the reason why AGSA reported to the committees so that they could find out. Irregular expenditure meant that the persons behind it, and the reasons behind it were unknown, and the AG reported to the people who were charged with governance, the committees, so that they could pursue investigations.

The AG conceded that it was difficult for the auditors to do this in the prescribed 60-day period they were given. He said SCOPA had already started doing this work of “peeling the onion”. He was there personally when SCOPA had interacted with the SABC, where they “peeled the onion” of irregular expenditure. That was the message he was trying to communicate.

He said AGSA had neither the power nor the capacity to get to the bottom of irregular expenditure. He encouraged the Members, saying they had also done it with SAA and that was why they had got to know the source of some of the fruitless and wasteful expenditure that SAA was incurring. They got to know that if someone flew to Brazil or any other destination without the proper documentation because the customs officials did not do their work, it became the responsibility of SAA to bring such a person back and in the process SAA incurred fruitless and wasteful expenditure. Rigorous probing by the committees could bring out such information.

He reiterated that nothing was concluded on irregular expenditure until such time that investigations were done and those items were concluded. It was only then that they could determine whether the irregular expenditure was as a result of incompetence, or weak internal controls or fraud. He advised that the sectors that needed to be pursued in particular were education, health and public works, which gobbled up most of the budget. There was a need to establish the factors that were influencing irregular expenditure in these sectors.

The AG expressed concern at the slow pace of investigations, saying that when there were delays, information and evidence got lost or concealed. He bemoaned the lethargy of management in following up and rectifying audit finding. Management often ignored recommendations that were made by the auditors, leading to repeat findings. He also attributed the poor audit findings to instability in management structures where there was a high turnover of management staff in key positions, as well as vacancies that left gaps that were exploited. He also cited poor consequences for transgressions, and said more needed to be done in this area.

 The AG disclosed that the official PFMA report would be ready only in November.

Discussion

The Chairperson thanked the AG and stressed the need for the committees to put their foot down on irregular, fruitless and wasteful expenditure. He expressed disappointment that entities like PRASA remained stagnant. He echoed the AG’s concern about cyber security, as IT remained an area where fraud could take place. He also expressed concern at the trend of involving lawyers in matters that were strictly accounting and auditing matters. There was a need to do more oversight and engage further with assurance providers.

Ms M Manana (ANC) thanked the Chairperson for inviting the other committees to the meeting. She said the government was committed to achieving the goals of the National Development Plan (NDP), and it was a plan that was expected to be implemented by government entities through practices of good governance and good financial discipline. The report of the AG had shown them the areas where irregular, wasteful and fruitless expenditure were happening, and that it was up to them to act. They had information that could be used effectively in oversight, and they had nothing to complain about concerning the AG’s work, as it was good.

Mr V Smith (ANC) said he did not have much to say apart from two points. The first one was about the court challenges by the auditees, and he wanted the AG to give some reasons for this. The second one was about the late submission of financial statements, and he gave examples of SAA and Mango Airlines, which were in financial difficulties. The lack of penalties for the late submission of financial statements also worried him, and he asked for action on this matter. He added a third point concerning the language used to describe financial impropriety. He said the use of words such as “irregular, fruitless and wasteful expenditure” was not helpful, as it placed a veil over the seriousness of the matters which involved breaches of the law. He argued that theft must be called “theft” and fraud must be called “fraud,” instead of using language such as irregular expenditure. He urged the committees to have another look at the issue which dealt with organisations and individuals breaking the law.

Mr T Brauteseth (DA) referred the AG to his report on contestations against audit findings. He particularly cited attempts made to interfere with audit findings, intimidation and personal threats to audit staff, and delays by entities in providing documentary evidence. He acknowledged that it was not possible for the AG to provide names of individuals who were culprits, but he requested the AG to name the entities where interference with audits and intimidation of audit staff occurred. He also requested that the AG write a report about this. He also asked the AG to clarify the figure of 60% which was related to fraud in one of the diagrams that the AG presented in his report. In his experience, he had never seen fraud at 60%, and he needed clarification.

Ms N Mente-Nqweniso (EFF) inquired whether criminal investigations had been instituted against those that had been involved in interfering with audits and intimidating staff from AGSA. On the audit findings, she said that PRASA and SA Express were the most problematic.

A Member of the Standing Committee on Appropriations said she had frequently listened to presenters from the departments and their entities challenging the findings of the audit reports, saying that they were going to engage in further discussions with the AG on the findings. She asked whether the AG did engage with the departments and entities once the audit reports had been released. On the failure by the departments and entities to achieve their targets, she wondered why they were setting so many targets and yet failing to achieve them. She observed that the departments and entities were failing to reach their targets and yet they were still able to exhaust their budgets. She complained that each time the entities were asked why they had not achieved their targets, their response was always that they were working to ensure that those targets were met. She wondered how much time they needed to meet those annual targets. She also expressed her displeasure that it was becoming a norm that people would come before the committees and say they were still negotiating with the AG over audit reports that had already been published. She regretted that irregular expenditure was becoming a common feature among the entities.

AGSA’s Response

The AG responded to the question concerning the failure to meet the targets by the entities, and advised the committees that the tools at their disposal were the quarterly reports that they received. He urged more rigorous conversations with the entities whenever they appeared before the committees to present their quarterly reports. Some issues could be identified and checked with more probing. He asked the committees to look out for “red flags,” such as an entity claiming that it had money and yet had failed to reach its targets. In such cases, there was a high chance that the money may have been misappropriated or diverted to some other project, hence the failure to reach the target.

Answering the question on the negotiations that the departments and entities were having with the AG’s office, he emphasised that once an audit was signed there could be no further negotiations for that financial year. There could be negotiations going forward, but there could be no negotiations over audits that had been concluded and signed. When entities came before the committees and said they were negotiating with the AG, that was not true. He stressed that engagement was only for following years.

Addressing concerns about the reported incidents of intimidation and interference with audit outcomes, he said these matters had not reached proportions that required criminal investigations and eventually court cases. Contestations were normal in auditing, but they sometimes reached extreme degrees. He recalled that problems often arose when third parties were involved in the execution of projects and contracts that the departments were undertaking. The entities were claiming that they had no power over how funds which had been paid to third parties were utilised and accounted for, once these funds had been released. It was in such cases that threats of litigation were arising, with the contention that entities could not be legally held liable for money that had already been paid to a party to a contract. He also observed that in the past there had been no contestations, because it had been believed that nothing would be done about the audit outcomes and people really did not mind what sort of findings were recorded. He said the situation had changed and now people believed that negative audit outcomes would have repercussions.

On the IT questions, he said it was important that departments and their entities established secure systems to protect electronic information, as it was possible for people to change information regarding invoices and even to make bank transfers electronically and the banks would be none the wiser, because they would recognise the source as legitimate. He bemoaned the carelessness with which staff members handled important passwords. He noted that passwords that reflected people’s birthdays were often written on pieces of paper which clever people could easily work out. He disclosed that AGSA had commenced an analysis of the IT environment in public bodies.

He said that PRASA and SA Express had not yet revealed any financial statements. It had been expected that these would be ready by the end of May 2017, but they had not been forthcoming. The AG said they had continued doing the audits, but when the financial statements were not being released they had decided to withdraw, and as of now there was no functioning board at PRASA.

The Chairperson responded that in the absence of a financial statement, the chief executive officer had to take responsibility.

Mr E Kekana (ANC) said the threats of litigations and contestations were just cases of people running away from their responsibility to account for how they had used public resources. If these people did not volunteer information, they should be investigated. His opinion was that they were not undermining the office of the AG, but that they were undermining Parliament. He demanded that they be held to account.

Ms N Khunou (ANC) expressed support for Mr Kekana’s views and picked up on the statement made by the AG that when the document outlining the audit findings was signed, then the audit was completed. She agreed that there could be no negotiations once audits were concluded. She said departments were just dodging accountability by outsourcing services. She wanted more information on the issue of the departments engaging third parties that resulted in contestations.

The Chairperson thanked the AG for his input and thanked the Members for their presence and work.

The meeting was adjourned.

Download as PDF

You can download this page as a PDF using your browser's print functionality. Click on the "Print" button below and select the "PDF" option under destinations/printers.

See detailed instructions for your browser here.

Share this page: