National Treasury and Accounting Standards Board: meeting

Meeting report

PUBLIC ACCOUNTS STANDING COMMITTEE
1 June 2005
NATIONAL TREASURY AND ACCOUNTING STANDARDS BOARD: MEETING

Chairperson: Mr F Beukman (ANC)

Documents handed out:
Presentation by National Treasury
Consolidated Financial Information of National Treasury (see www.treasury.gov.za)

SUMMARY
National Treasury officials presented on the consolidated financial information of all public entities in 2004. Consolidation of financial information in the public sector complicated by use of different accounting methods employed by departments. The Treasury continued to provide financial management support to government departments and provinces. The Chief Financial Officers' Forum has been helpful in establishing a uniform mechanism of uniform financial management system in public entities. The drafting of an asset register was still outstanding and certain properties of South Africa were unaccounted for overseas. The Public Finance Management Act (PFMA) needed overhauling for proper regulatory framework of public entities. The National Treasury continues to provide financial management training to finance staff within departments. This training is meant to improve capacity in financial management systems.

The listing of all public entities was critical to improvement of consolidation of financial information within the public sector. The Registrar of Public Entities had to publish listings in the Government Gazette as well on the Treasury website on an ongoing basis. Unauthorised expenditure within the public sector was increasing at an alarming rate. Budget under spending by departments and provinces could lead to poor delivery of services. Therefore Members implored the National Treasury to combat fiscal dumping and encourage compliance with statutory provisions of the PFMA.

The Accounting Standards Board then gave a briefing on accounting standards for public entities. The board had issued three standards for accrual accounting and had proposed standards for industries like agriculture, investments and joint ventures within the public sector.

MINUTES

National Treasury briefing: Consolidation of public entities' financial information
Mr L Kganyago (Director-General) gave a presentation on the consolidation of all public entities. The consolidation of all financial information regarding public entities was done on annual basis. The Minister of Finance also tabled the Report on Financial Statements of Public Entities before Parliament. The draft report by the National Treasury was also submitted before Parliament in October 2004. The consolidation of financial statements of state agencies is a statutory requirement in terms of the Public Finance Management Act (PFMA). Consolidation for previous years had been outstanding at the time of passing of the PFMA. Mr Lesetja Kganyago (Director-General) noted that Treasury had concluded outstanding consolidations this year.

It had been agreed with the Auditor-General (A-G) that consolidation process of state departments be divided on basis of accrual accounting and cash basis. The Treasury discovered that consolidation of certain government department revealed non-compliance with generally accepted accounting principles. The A-G expressed the view that it was almost impractical for them to formulate an opinion based on such financial statements. Hence the A-G issued a disclaimer for certain departments and provinces. Therefore the mandate of the Treasury as expressed in the PFMA enabled us to provide various interventions. Mr Kganyago expressed the view that although the Treasury was intervening proactively in department the final responsibility remains with accounting officers in their respective departments. Consolidation was a mechanism for harmonising financial information within various public entities. The Treasury was happy to report that all outstanding financial information was consolidated and backlog was successfully cleared.

Unauthorised Expenditure
Mr F Du Plessis reported that R48 billion is lost in unauthorised expenditure for financial year 2003/2004. A significant increase in financial years 1999/2000 had been stated in the consolidated financial statements of the Treasury. Non-compliance with TSB resulted in unauthorised expenditure of R8.633 by Public Enterprises. In the Department of Justice, there had been over-expenditure of R43.2 million on personnel staff. During the financial years 2001/02 and 2002/03, Public Works had accounted for in unauthorised expenditure. Statistics SA had overspent R2.9 million on the Census. Public Works had expended R227 008 on its budget less than contractual obligations.
There was some decrease in unauthorised expenditure of R40.3 million for peacekeeping operations not budgeted for in Department of Defence. The Department of Trade and Industry overspend amount of R4.2 million to pay interest arising from its contractual obligations. The Department of Public Works was responsible for R30.4 million in unauthorised expenditure from the budget less than its contractual obligations.

Unauthorised expenditure was approved and in cases where it was not approved an investigation followed and efforts were made to recover it. It was observed that the approved unauthorised expenditure is recorded against future years. It said that was difficult to link financial mismanagement of the department with unauthorised expenditure. The irregular payments made by departments were previously classified as unauthorised expenditure under the old Exchequer Act.

The State Tender Board has recommended that individuals responsible for unauthorised expenditure be brought to book. The Committee of the National Treasury has thus far approved R4.2 billion in unauthorised expenditure. The National Treasury proposes a special session dealing specifically with subject of unauthorised expenditure. It was indicated that over hundred cases were reported in financial year 2003/2004.

Listing of Public Entities
Section 47 of the PFMA provides for the listing of all public entities. The listing of these entities is an ongoing process between the Treasury and the Office of the Minister of Finance. The accounting of authority of an entity concerned must notify the National Treasury if not listed. The Registrar of Public Entities must identify unlisted public entities. An update of listed public entities must be published in government gazette as well as Treasury's website regularly. The Public Entity Review document is before Cabinet but not yet approved. The Review of Public Entities document proposes some legislative changes to the PFMA.

All stakeholders and various public entities were invited to comment on the proposed amendments to the PFMA. The Review also proposes reclassification of public entities hopefully improve financial management arena throughout the public entities.

Amendments to the PFMA
Treasury has identified a number areas which needed amendments in regard to PFMA. The envisaged amendments would include the alignment with the MFMA, incorporation of PFMA provisions within the Public Audit Act, strengthening performance accountability and governance review of public entities.

Training of Finance Staff
Treasury sought to address short-term training needs of finance staff in the public entities. Financial management requires specialised training and further academic training is envisaged. The proposed areas of study in government financial management and be evaluated by the Treasury's validation board. However it remains the responsibility of Accounting officer to train, recruit and retain competent staff.

Accounting Standards Board briefing
The Accounting Standards Board (ASB) gave a briefing regarding accounting standards which had be complied with by all public entities. Ms Erna Swart (CEO) told Members that the Board issued three accounting standards for accrual accounting applied in departments. She explained that these standards also had to comply with GAAP as internationally recognised best practice.

She noted that the Board has proposed accounting standards for various industries within the public sector and the proposals were before the Minister of Finance. The proposed standards of accounting in agriculture and capital investment as well in joint ventures within departments. The standards for consolidation of financial management information had also been proposed. The Board invited comments from the public as well as key role-players within the realm of public audit process.

Ms Swart reported that three boardmembers had resigned since the inception of the board. And the board has sent proposed names to the Minister of Finance for secondment. She stated that the board would like to see closer working relationship with the Committee. She also suggested that the Committee must nominate three Members to the board meetings. She submitted that Members would be able to evaluate the work of the board in improving accounting standards within the public sector.

Discussion
Mr Trent (DA) remarked that it seemed there was a gab between various departments in relation of consolidation given accrual accounting. Furthermore, the A-G had reportedly issued a disclaimer in regard to audit reports of some departments. He submitted that the issuing of the disclaimer was evidence of lack of internal controls within departments. He wanted to know if the Treasury was trying to implement legislation, namely PFMA that was impractical to apply. Mr Nomvalo replied that the Treasury was providing support to departments in order to help them comply with the PFMA. There had been substantial qualifications by the A-G on some audit reports of departments. A positive impact was being made on consolidations done by Treasury.

Mr Kganyago explained that the issue of ownership of reserves in the public purse was complex and required legal certainty. He stated that the Reserve Bank Act stated that any losses and profits of public accounts belonged to National Treasury. Hopefully an amendment to the Reserve Bank Act would bring legal certainty in respect of ownership of reserves.

Mr G Woods (IFP) commended the Treasury for successfully clearing of the backlog on consolidation. He commended the Treasury for successful clearing of the backlog on consolidation. By any accounting standards, it was a mammoth task to consolidate financial information of many ? He asked the Treasury to consider the question of goodwill as it affects the consolidated financial information in the public sector. He was concerned about the absence of figures in respect of fixed
assets in the consolidated financial information report.

Ms Mabe (ANC) wanted to know if the assets register is being finalised. She was particularly concerned of government overseas and whether such asset had been recorded in the public accounts. Mr Kganyago explained that consolidation of financial information of assets overseas was indeed a difficult example the Treasury was all along unaware that our government owned a piece of land in Germany until all embassies moved office. When the South African embassy had moved from Bonn to Berlin, the Treasury land in Bonn had belonged to the South African government. This scenario was illustrative complexity of consolidating properties overseas. All assets wherever they're must be registered in our books. He conceded that consolidation of South African assets overseas was a long and tedious process.

Mr Nomvalo said that a directive was issued in 2002 for all departments to start drafting their own assets. He noted that the A-G did not enforce serious compliance with such a directive and departments didn’t treat as serious. But during 2004 the Treasury circulated guidelines for departments to draw up their assets register. The guidelines are currently being printed and process will be rolled out soon. Final responsibility lay with respective departments

Ms Mabe expressed that if consolidation were to be achieved, departments would have to consolidate financial information themselves. Mr T Nombembe (Deputy A-G) told the Committee that a format was developed to help department consolidate financial information. In this regard the A-G was working Accounting Standards Board (ABS) to assist department in collation of financial information. He noted that consolidation might only be done at the end of the financial year in October.

Mr Beaukman wanted to know if the Treasury was proactively engaging departments to ensure effective management and internal audits within departments. He asked the Treasury to explain if there was monitoring of departments. Mr Kganyago explained that regular visits are paid to various public entities either in clusters or individually. The purpose of these visits was to discuss issues raised by the within departments. Section 6(2)(d) of the PFMA provides that the National Treasury must assist in building capacity for sound financial management.

The Treasury also provides training and documents on risk management and internal audit to officials of government departments. A conference on internal audit had been held for officials at national, provincial and local levels. CFO Forums had been formed by some departments. Although the Treasury did not participate in these forums, they are helpful tool to address various financial management

Mr Mofokeng (ANC) asked whether departments could not be compelled to conduct preliminary internal at least every six months. He submitted that such preliminary audits would serve as guide for early intervention by the Treasury. Mr Kganyago replied that in private sector some companies do preliminary three months. However such preliminary audits are not always a good indicator of financial related problems. He acknowledged that such audits could assist the Treasury and perhaps are worth pursuing by the Treasury.

Mr Woods wanted to know if the consolidation of financial management information on income personal tax was being effectively done. He also wanted explanation on issue of goodwill as applied in the public sector. ‘Goodwill’ was a commercial concept used mainly in private sector in relation to corporate taxation. He also probed on the issue of suspense account policy.

Ms Erna Swart (ASB) explained that purchase goodwill is difference between fair value and purchase price. Hence the purchasing of value is associated with the brand especially in the private sector. Where goods and branding are exchanged for value, the purchase goodwill becomes part of the annual financial statements. However this form of goodwill was excluded from the annual financial statements of most public entities.

Mr Kganyago replied that consolidation on personal income tax was marginally higher than corporate taxation. He conceded that on the corporate tax arena consolidation was slow but this was influenced by unforeseen trends in the economy. He said that Finance Ministry in Germany hired specialist firms to conduct audits and do corporate checks. The German Ministry discovered that profit margins of certain corporations were either significantly understated or overstated on their annual financial statements. The scenario in Germany was illustrative of the complexity of consolidation of financial statements of for tax purpose.

He assured Members that the Treasury is making significant headway in consolidation of public entities. And some public entities were operating financial management systems like corporations in private sector. In addition the Treasury has noticed emerging trends within our economy which would be helpful in forecasting financial management of public accounts.

Mr Nomvalo told the Committee that a specific department had lacked behind in submitting it's annual financial statements and the Treasury intervened. The intervention took the form of writing a letter to the D-G of the department and preparing templates for compiling annual financial statements. The department in question did recover and submitted their financial statements in February this year. This sort of intervention demonstrated a more proactive role by the Treasury. However in some cases, the intervention by the Treasury was too late. A meeting had been held with various departments to get feedback on implementation of recommendations by the Auditor-General

Mr N Du Plessis told Members that CFO Forums were formed for sector specific departments. He submitted that departments do comply with requirements of PFMA although financial statements were sometimes submitted late. He argued the lateness of financial information was an issue of quality control. The treasury was indeed proactively participating in audit committees of various departments to ensure quality control.

Mr R Ndou (ANC) wanted to know if there are punitive measures taken against either departments or officials involved in contravening the PFMA. He noted that PFMA provided for criminal offences in cases of non-compliance. He implored the Treasury to bring to book those who defaulted against requirements of PMFA.

Mr Gumede (ANC) observed that a disclaimer was issued by the Auditor-General against public entities such as UIF, Departments of Labour and Correctional Services. He wanted to know if Treasury had taken any disciplinary action against such entities. Mr Du Plessis explained that cases of breaches of PFMA were reported to the Public Service Commission. The Public Service Commission co-operated with investigators and office of the Auditor-General during the investigations. The findings of the Commission stated that there was financial mismanagement of public funds in some departments. The officials concerned were handed over to National Prosecuting Authority and due process of law was followed.

Ms A Dreyer (DA) also expressed concern over lack of enforcement of PFMA and lukewarm approach y the National Treasury towards the departments. She noted that a great majority of cases for unauthorised expenditure within department is caused by non-compliance with PFMA. She highlighted the figures for unauthorised expenditure that were relatively low for 2001/2002. However, this margin increased alarmingly in 2003/2004 thus creating worrisome situation. She argued that a tough approach by the Treasury on departments could result in the figures declining. She wanted to know if unauthorised expenditure was a direct consequence of lack of capacity and training.

Mr Vincent Smith (ANC) raised issue of under spending of the budget by provinces. He said that transfer of funds to provinces has been thorny issue since 1999. He cited underspending of monies allocated to provinces for social development. He stated that under spending in this regard has gone up by hundred percent. He challenged the National Treasury to crack the whip on defaulting departments. The PFMA clearly authorises the Treasury to withhold funds from provinces that were not spending their budgets. He lamented under spending by provinces as it led to poor service delivery. Under spending of budgets resulted from complacency by officials and not lack of capacity.

Ms Mabe (ANC) also raised the question of underspending of budgets by provinces. She expressed concern that North West province had failed to spend grants allocated for infrastructure development. She wanted to know if the National Treasury could initiate remedial steps to rectify the situation. Mr Kganyago remarked that a careful reading of Section 100 of the Constitution shows that the Treasury may intervene and withhold funds from provinces. He cautioned that Section 100 only authorised the withdrawal of funds in cases of persistent breaches. In practice, the National Treasury was requested to intervene by provinces. In the Free State province the Premier asked for the intervention of the Treasury. And in the Eastern Cape the Treasury was forced to intervene in order to prevent the province falling into financial collapse. He submitted that these scenarios bear testimony that Treasury is fulfilling its statutory mandate.

Mr Nomvalo replied that issue of transfer of funds must be raised in conjunction with equitable formula for provinces. He cited scenario where province A under spends its budget then monies must be directed to Province B. Therefore the Treasury is proposing that funds be channelled where they're utilised. Again this situation had created cases of fiscal dumping. Where funds were not used, grants had been withdrawn by Treasury. But this was possible mostly with conditional grants and invoking the provisions of section-100 to impose the necessary interventions.

Mr Nomvalo reiterated that departments were co-operating with the Treasury on issues of compliance with legislation. Treasury had received comments and submissions from the CFOs of departments. Some departments would send their financial officers to office of Treasury for feedback on implementation of recommendation. The National Treasury has held meetings with financial officials of both individually and in clusters. The meetings are meant to assist in capacity building and transfer of skills for officials within their respective departments.

He noted that the Treasury is compiling a summary of compliance report wherein improvements in financial management of departments is being highlighted. The compliance report is to be submitted to the Committee in due course. The same had been submitted to Cabinet earlier this year on audit qualifications and disclaimers by the Auditor-General. The report reveals evidence of both compliance and non-compliance of PFMA by various departments.

Ms T Tobias (ANC) observed that some departments are using financial statements on a modified cash basis while others are using accrual accounting. She submitted that this discrepancies renders consolidation information complex. In addition it also ran counter to generally accepted accounting practices’ lack of parity. Mr Kganyago explained that these discrepancies could be associated with change consistency in financial management. Discrepancies in applying accounting principles emanates MA and Companies Act. The latter required corporate entities to comply with Generally Accepted Practice (GAAP). The former required public entities to comply with the GAAP.

National Treasury would encourage compliance with GAAP as international best practice. A need ient of PFMA becomes a financial imperative. Therefore the provisions of PFMA must be aligned with accounting standards set by the Board. Mr Kganyago explained that where there's evidence of material breach PFMA prosecution would follow.

Mr Trent highlighted the provisions of Sections 36-38 of the PFMA that set out the criminal offences for defaulters. The officials who contravene statutory provisions are guilty of an offence and are compromising the security of their respective departments. He suggested that strong measure be taken against the culprits. Otherwise they should mandate National Treasury to police compliance and issue punitive measures in cases of contravention.

Mr D Plessis that cases of breaches of PFMA were reported to the Public Service Commission. The Commission co-operated with investigators and office of the Auditor-General during the investigations. The Commission found that financial mismanagement of public funds in some departments. The officials concerned had been handed over to the National Prosecuting Authority and due process of law had been followed.

The meeting was adjourned.