Department of Public Works & Entities audit Outcomes: AGSA briefing

Meeting report

The Chairperson welcomed everyone and noted that the Committee had thought that the Department of Public Works (DPW) will be presenting the same day. The Committee had however engaged with the DPW and it was agreed that it will present at a later date. He appreciated that the Minister had ensured that his office was represented in the meeting. He also noted that the Committee sends its wishes for a quick recovery to Dr Madlopha who was unwell.

The Committee Secretary confirmed that she had received apologies and read out the names of the Members.

Briefing by Office of the Auditor-General of South Africa (AGSA)

Mr Zaid Motala, Acting Senior Manager, AGSA, began by affirming that AGSA has a constitutional mandate and that the goal of the AGSA is to build public confidence through auditing of the public sector. The role of AGSA includes reflecting on the audit work performed and assisting the committee in its oversight role. He stated that the annual audit examines three areas:

• Fair presentation and reliability of financial statements
• Reliable and credible performance information for predetermined objectives
• Compliance with key legislation on financial and performance management

He reminded Members that the AGSA expresses the following audit outcomes:

• Unqualified opinion with no findings (clean audit)
• Financially unqualified opinion with findings, where the Auditee produced financial statements without material misstatements or could correct the material misstatements.
• Qualified opinions, where the Auditee had the same challenges as those with unqualified opinions with findings but, in addition, they could not produce credible and reliable financial statements.
• Adverse Opinions, where the Auditee had the same challenges as those with qualified opinions but in addition, they had so many material misstatements in their financial statements that AGSA disagreed with almost all the amounts and disclosures in the financial statements.
• Disclaimed opinion, where the Auditee had the same challenges as those with qualified opinions and could not provide AGSA with evidence for most of the amounts and disclosures reported in the financial statements.

The Auditees in the Public works Portfolio include the following 6 entities: DPW, PMTE, IDT, CIDB, CBE and ASA which was being included in the audit exercise for the first time.

For the year 2017/18 outcomes, the underlying theme is accountability. This comprises planning, doing and checking. Planning involves defining the targets. There is then the doing where the basics are implemented. Checking involves monitoring by all assurance providers. For accountability to be effective, the DPW needs to hold the people accountable. If plans are done correctly and there is action and monitoring, this results in better audit outcomes translating to better lives for citizens.  

Overall for the whole portfolio, only one entity received a clean audit: the CBE.  On quality of financial statements, 4 entities had unqualified audit outcomes compared to 3 in the last year, the additional unqualified outcome was from the new Auditee, ASA. There were no improvements on the quality of performance reports. On irregular expenditure, there was improvement, the figures for 2017/18 was R 210 million compared to 2016/17, where it was R 277 million. The CBE obtained a clean audit for the first time in the previous financial year and maintained the clean audit in the current year under review. The PMTE improved from an adverse audit outcome in 2016/17 to a qualified audit outcome in 2017/18. All the other entities have stagnated over the 4 year period. The 4 Qualification areas used for the PMTE in 2016/17 have been reduced to 2 in 2017/18. For property, plant and equipment, the incorrect use of source data in determining value of assets recurred in the current year. On accrued expenses, the PMTE did not recognise all amounts meeting the definition of a liability. On provisions for maintenance, he noted that material adjustments were made to the provision subsequent to the submission for audit which resulted in the matter being resolved.

On IDT, he reported that there is no change. The IDT’s audit outcome stagnated at a disclaimer of audit opinion in 2017/18.The two areas of concern that affect the whole business of the IDT are the following:

• the system is inadequate to provide assurance
• the matter which resulted in the prior year qualification remained unresolved.

On audit of financial statements, all the Auditees except the PMTE submitted their financial statements on time. 3 of the 4 audits that received unqualified audit outcomes did not require material adjustment to be made subsequent to submission, only the ASA required material adjustment to be made to avoid a qualification. Only the CBE got it right, it submitted financial statements with no material misstatements and complied with key legislation. On status of internal control with a focus on the area of governance, 5 of the 6 entities received a green outcome. The entities appeared to be effective in identifying weakness and presenting recommendations, it is the lack of implementation that was the problem. Only 1 entity, the CBE received green in terms of leadership. He cautioned that when there is constant change in leadership, implementation is slowed down. He noted that for PMTE and IDT the majority of functions are decentralized and that if disciplines are not implemented consistently risk is not minimised.

On Assurance provided, on the first level of senior management, the PMTE and IDT received the worst outcome at 33 % implying that the senior management provided limited or no assurance. At Accounting officer level, for the IDT there is minimal or no level of assurance provided. While there were some plans to provide assurance there was no implementation.

On management and delivery of key programs, the AGSA looked at three key programs:

-Expanded Public Works: It had a budget of R 2 bn. 99 % of budget was spent but the targets were not achieved. The focus for the audit was on training of EPWP beneficiaries. The AGSA focused on home- base care in two provinces and found that while no formal training is provided to beneficiaries due to budgetary constraints, on job training, mentoring and coaching are offered to home based care EPWP beneficiaries. This informal training is however not recorded and captured. The beneficiaries are thereafter unable to get jobs because of lack of documentation.
-Construction Project: The AGSA followed up on 3 infrastructure projects audited in the prior year. 2 were correction facilities one was a border post. It had previously identified fruitless expenditure and had asked the DPW to quantify. Only C-Max correctional facility investigation confirmed that there was fruitless and wasteful expenditure. Investigations have not been completed for the other 2 projects. The AGSA also looked at projects cross 6 provinces in specifically selected areas. Of the 7 key projects there were major issues in all areas. Only 1 was completed within the target period. In numerous instances there was possible fruitless expenditure, non-compliance with project management and variation orders. None of the projects met the targets set.
-Integrated service delivery, value of Programme spend (IDT)-The budget for 2017-18 was R5bn,88 % of the budget has been spent but the targets have not been achieved.

For all programmes, the material indicators were not found to be useful or reliable. On financial health, unfavourable conditions exist for 33 % of the auditees. For IDT, there are significant unfavourable conditions as the current liabilities exceed the current assets. For PMTE, management should enhance timely remedial action to improve the revenue management of the PMTE, focusing on the debt collection period particularly from other client departments who were contributing to the PMTE’s overdraft increasing every year for the last 4 years.

On unauthorised, irregular and fruitless and wasteful expenditure over the past 5 years, he reported that irregular expenditure had reduced to R 210 million from R 1.3 billion over the last 5 years. Fruitless and wasteful expenditure increased to R 42 million from R 16.6 million over the last 5 years. This was a result of expenditure incurred that could have been avoided if due procurement processes had been followed. No unauthorised expenditure was reported for the last 3 years. He noted that 69 % of irregular expenditure, If not investigated will continue to be irregular until condoned. 5 % (R 10 million) of irregular expenditure incurred in the current year represents non compliance in 2017/18.

Most common findings on supply chain management included the following:

-Competitive bids not being invited

-Contracts amended or extended without approval by a delegated authority

-Suppliers tax affairs not being in order

-Criteria applied in evaluation differing from originally specified

-Declaration of interest not declared

-Local content minimum threshold not adhered to

The root causes identified for all the entities except for CBE include:

-Inadequate response to improving key controls and addressing risk areas

-Inadequate consequences for poor performance and transgressions

-Instability or vacancies in key positions

He noted that the status of commitments are still relevant although majority are not yet implemented, only 2 are in progress. The two which are in progress are as follows:

-The Minister committed to ensure that adequate human resources are appointed at PMTE in terms of both numbers and skills

-Capacitate regions with suitable financial and technical skills by 21st December 2017 through the organisation development process that the IDT has embarked on.

On PMTE and shortcomings in leasing, he added that the amounts paid on leases are incorrect and that approximately R100 M was over paid in the current year. R30 million has been recovered relating to the previous years. He added that the status of records review assists in giving early warnings that may lead to negative outcomes. Key issues were discussed with senior management during the status of records review process and remained unresolved at year end.  He cautioned that in a Monopoly setting, where there is discretion without accountability, the likelihood of corruption increases.

Ms Ilze Slabbert, Senior Manager, AGSA, added that she was responsible for the audit of the IDT. She pointed out that the irregular expenditure figures provided does not include that on contracts and that there is an additional irregular expenditure of approximately R86 million on projects. She added that it was the fourth time the IDT was getting a disclaimed audit opinion and that something needs to be done. The leadership instability at the IDT is of concern as it created low staff morale

Ms Mabatho Sedikela, Corporate Executive, AGSA, noted that there are lapses in accountability cycle and that there has been a move from inadequate response to no response being given. The administration knows what needs to be done but are not doing. The required action is not being seen and the leadership instability is a cause for concern.

Discussion

Mr D Ryder (DA) noted that in the previous year, one of the qualification areas highlighted for the PMTE was that it was still using the excel sheets to manage the asset register. He wanted to know whether the migration to the new platform is complete. He asked the AGSA to expand on how the decentralised model negatively affects implementation and whether there are any recommendations on centralizing control. He also sought clarification on the outcome on assurance providers and if they will do their job or work on improvements. He sought more information on the improvements which only take place after an opinion is done. He noted that the root causes points to simple don’t care attitude by the entities. He asked for clarification on the PMTE incorrectly utilising the source data in determining the value of immovable assets with regards to extent.

Ms E Masehela (ANC) asked for clarification on the training of beneficiaries for EPWP. She also sought clarity on the budget versus spending and wanted to know whether it related to a particular project.

Mr Motala responded that for PMTE the excel spread sheet is still being used in some areas. According to management, certain functions can only be done under the excel spreadsheet. On decentralisation, he responded that for the PMTE this is required because officials should be closer to projects. The regional offices are however not adequately resourced in terms of skills and when inputs are kept incorrectly one never get the correct answers. On the outcomes on assurance providers, the focus was on how each level gives the AGSA assurance for example for the senior management, there are functions that are expected of them. The senior management was then measured against best practices and were found to offer limited or no assurance. For PMTE and the improvements happening after auditing had commenced, he reminded members that major changes happened within the year, the head of PMTE, Head of finance were replaced. This led to significant instability and led to actual plans not being implemented properly.

On EPWP, he stated that the issue was with respect to targets at provincial level. There is no consistency on what each province has as the target. Some provinces reported on all work opportunities created while others reported on work opportunities created by the Department. The AGSA has recommended a customised indicator. The AGSA also found there was under-reporting of achievement and where reporting was done, it was not supported. On the extent of immovable assert register, the AGSA requested for actual geographical information systems (GIS) maps and it was found that the GIS said one thing whereas the asset register showed a different extent.

In response to the question on budgetary constraints under the EPWP, he clarified that training was not included in the budget; however there was informal training which took place but was not documented. On the discrepancies between budget and spending, he gave an example of a correctional facility in Limpopo: the budget was initially R191 million, the budget was revised to R 229 million and the actual expenditure to date is R 225 million. This was attributed to the variation orders and inadequate planning. The project was started on 13 January 2010. It was supposed to take 3 years to complete, and 9 years later it is still not complete. As the time is extended the project becomes more expensive and there is possible fruitless and wasteful expenditure. He reported that in some projects there were overlaps in the money being paid out to contractors and the value of the assets ends up being overstated because of double payment. For other projects, variation orders do not get National Treasury approval. The management of projects is hampered by inadequate planning and poor oversight, where responsibility is passed on to third party consultants. These are issues that keep recurring every other year.

Ms Slabbert added that on IDT, centralisation will not do and entities need to recognise that decentralisation requires an effort from everybody. On assurance she added that it is a combined assessment of assurance provided or lack thereof. On the number of projects, at overall level there was no overspending, however it will have an impact on future developments.

Mr Ryder asked whether the AG seconds or considers seconding some officials to the entities.

Ms Sedikela responded that seconding AGSA officials would hamper the independence of the AGSA. A lot of senior management after finishing articles at the AGSA go and work in the public sector. The entities do not lack skills, the officials disregard what is required of them and there are no consequences.

Ms Masehela asked whether the doors of the AGSA are open to enable the entity officials to be briefed and whether AGSA is able to arrange a workshop for the department officials.

Mr F Adams (ANC) commented that if there is too much movement at the top, it affects the junior staff members.

The Committee should put its foot down on the executive authority. CBE has been the only entity performing well. The AGSA has done a wonderful job and the onus is on the Committee to clamp down on the DPW.

The Chairperson remarked that the job of the AGSA is to tell the Committee what it is seeing. Some of these shortcomings are repeated every year. He asked the AGSA to expound on the ASA adjustment which was done to avoid qualification. He also sought more information on how the client departments that are contributing to the overdraft facility that the PMTE is finding itself in.

Mr Motala responded that the AGSA opens its doors by engaging with the entities by giving them key recommendations a month after the audit exercise. This is what management uses to prepare its action plans. He noted that it would also help if the AGSA received information from the PMTE on time. It only received information at the end of June. The AGSA has had good feedback from the PMTE that it wants to start preparing the information early this year. When the audit is delayed it affects the whole cycle.

Ms Sedikela added that the AGSA received a letter from the chairperson of the audit which indicated that it had contracted out the internal audit and it wanted AGSA to advise it on how to go about it. The AGSA availed itself for a workshop to discuss the principles of combined assurance and it is still waiting to hear from the chairman of the audit committee. On status of records, she said the AGSA does that out of the audit cycle process, after all the insights are given the entities need to go back and do what the AGSA had advised them.

Mr Motala noted that most of items raised are repeat issues and none of the issues are new. On ASA, this was the first time it was reporting. Certain uncertainties were apparent and AGSA had to assist it. Some of the adjustments had to be done after the audit had started and it was a one off issue. On the overdraft of the PMTE, he stated that the operationalizing of PMTE is not finalised and it is up to the PMTE to fix its house.

The Chairperson commented that all the big projects are for benefit of South Africans and it is unfortunate when projects are delayed. He gave the example of the 3 year project which had ended up being a 10 year project. He attributed this to a lack of consequences. He agreed with Mr Adams that it is up to the Committee to be a focus scopa for the DPW, in particular for the PMTE. He added that South Africa is a developing nation and that the monopolies cannot be justified since they are all focused on enhancing the 20 % of the population at the expense of the 80 percent. Monopolies have a bad intention of fewer people enjoying, the more the number of participants, the better for the nation. He appreciated the AGSA’s input and informed Members that the adoption of the minutes will be postponed because of a lack of quorum. He confirmed that the Committee will hear from CBE and CIBE the following day. He thanked the Office of the Minister and stated that the Committee expects the senior members of the DPW to be present when the entities are presenting.

The meeting was adjourned.