DTI & EDD Audit outcomes: AGSA briefing; DTI & EDD 2019/20 Annual Reports

Meeting report

The Chairperson greeted the Committee Members and everyone who was connected on the online platform.

The Secretary confirmed that the meeting was quorate and representative. He presented the agenda, which was adopted.

The Chairperson welcomed Mr Lionel October, Director-General (DG), Department of Trade, Industry and Competition (dtic). He noted that the Office of the Auditor-General (AGSA) would present on the 2019/20 audit of the Department of Trade and Industry(dti) and the Department of Economic Development (EDD). It would be the last audits of those two Departments. That presentation would be followed by a presentation by the DG on what changes had been made to the 2019/20 Annual Statements as a result of the audits since the original presentation of the 2019/20 Annual Reports.

He invited the Office of the Auditor-General South Africa to begin with the presentation.

Opening Remarks
Briefing by Office of the Auditor-General on Audit outcomes
Ms Fikile Mashao, Senior Executive, AGSA, made the presentation. Overall, above 80% of the dti/EDD portfolio was clean and the remaining 20% was moving towards clean. The National Gambling Commission had not been audited.
 
No material findings were found, except in the audit of the South African Bureau of Standards (SABS), and the audit of the National Regulatory of Compulsory Specifications (NRCS) was not yet complete. Preventative controls were needed to improve those two entities. Ethical leadership and governance was critical to a clean audit and adequate risk management and policies needed to be regularly updated and communicated to staff. It was noted that the senior management audit committee was well-structured and functional.

Immaterial findings were made at CIPC, SABS and dti but the main concerns were with SABS.

The AGSA made several recommendations to the Department and its entities:
- the key vacancies in the Board of Directors and CEO at SABS should be filled.
- management should track action plans and ensure timely implementation to prevent a recurrence of findings, particularly at SABS.
- the investigation into grant allocations at the National Lottery Commission should be finalised and the report shared with the AGSA.
- oversight of the grant allocation process at NLC should be strengthened.

The AGSA advised the Portfolio Committee 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 SABS. The Committee should request feedback on the progress of appointing the Board of Directors and CEO at SABS and request the Department to share the results of the investigation report on grant allocations at NLC. The number of clean audits in the portfolio was an indication of effective leadership, which set the correct tone at the top, and provided sufficient oversight support. There was also an improvement in the quality of financial statements submitted for audit at SABS.

The AGSA requested the Portfolio Committee’s assistance in providing, when appropriate, the outcomes of the investigations into the NLC and the appointment of the Chairperson.

Presentation on Annual Report of dti and EDD
The Chairperson expressed his gratitude to DG October for ensuring that 15 senior officials from EDD and dti were in attendance on the digital platform. He noted that Deputy Minister Nomalungelo Gina was struggling to connect to the meeting.

DG October stated that the 2019/20 annual performance of the dti and EDD was presented to the Portfolio Committee on Trade and Industry on 6 October 2020 while on 5 November 2020, the Minister of Trade, Industry and Competition had tabled the Report and Financial Statements of Vote 34, Department of Trade and Industry for 2019-20, and the Report and Financial Statements of Vote 25, Economic Development Department for 2019-20. There had been no changes to the Annual Reports following the completion of the Audit Reports as the Departments had received clean audits with no material findings. The presentation by the Departments that day would be simply the highlights of the Departments’ Annual Reports.

The dti Financials
Mr Shabeer Kahn, CFO, dtic, presented the financial performance of dti. From an allocation of R10 billion, dti had spent R9.97 billion which equated to 98.86% of the budget. He presented a high level overview of the budget and expenditure. Of the R9.97 billion spent by the Department, R5.7 billion or 57.6% was disbursed to the beneficiaries across the various incentive programmes, i.e. R3.2 billion to, amongst others, beneficiaries in the Auto industry, Black industrialist programme, Agro processing and industrial loans for
manufacturers under the manufacturing development incentives, whilst about R1.5 billion was financial support for bulk infrastructure, top structures and critical infrastructure to improve industrialisation, regional development, exports and employment, as well as the attraction of foreign and domestic direct investment in the Special Economic Zones, Industrial Parks and in the economic areas of various municipalities. R1.32 billion or 13.3% was transferred to the public entities. Spending on operational costs was R1.7 billion or 17.2%.

The dti and 11 entities had achieved financially unqualified opinions with no findings, commonly known as a “clean audit” opinion. South African Bureau of Standards and the South African National Accreditation System (SANAS) obtained unqualified audit opinions with findings. One audit result was outstanding: NRCS.

2019/20 Annual Report Economic Development Department (EDD)
Dr Molefe Pule, Acting DDG: Competition Policy and Economic Planning, dtic, presented the EDD report.
Dr Pule concurred with DG October that the details of the Annual Report for EDD had been presented and he would present only the highlights as there were no changes to the actual report.

The EDD, the Competition Commission, the Competition Tribunal and the International Trade Administration Commission of South Africa (ITAC) had obtained clean audit outcomes. The audit opinion for the Industrial Development Corporation (IDC) was unqualified with findings due to corrected material misstatements on the financial statements.

In terms of highlights of EDD in 2019/20, the provisional Data Market Inquiry was released on the 24th April 2019. The final report was released during December 2019. The Grocery Retail Market provisional report, the purpose of which was to remove hindrances to SMEs and historically disadvantaged firms participation in the that market, was released on the 29th May 2019. The final report was released during November 2019.

Regarding mergers, Simba (Pty) Ltd (“Simba”), an indirect subsidiary of PepsiCo Inc. had acquired Pioneer Food Group Limited. The merger was approved subject to certain conditions, such as PepsiCo’s common stock to the value of R1.6 billion be issued to a South African, broad-based workers’ trust and stock in PepsiCo had to, after five years, be converted into a direct shareholding in Pioneer of up to 13%. There could be no merger-related retrenchments for a period of five years and the merged company had to remain a tax resident in South Africa. In addition, a Development Fund of R600 million was created for investment in education, SMMEs, enterprise and agricultural development.

Ms Irene Ramafola, Chief Director: Office of the CFO, dtic, (also former CFO of EDD), explained that the Department had spent 98% of the budget of just under R1 billion. 85% of the budget had been transferred to the Department’s entities.

DG October thanked the Chairperson and Committee and assured Members that the target of dtic was 100% clean audits. The Departments had made good progress in the 2019/20 audit but the process had a little way to go to ensure that every entity had a completely clean audit.

Discussion
The Chairperson explained that the Portfolio Committee had wanted to see if there were any changes to the Annual Report and that was why dtic had been called to present. The Committee remained concerned by the non-completion of the audit of the NRCS and the issues raised by the auditor.

Ms R Motaung (ANC) noted that the Annual Report was part of the Budget Review & Recommendations Report (BRRR). What did the DG wish the Portfolio Committee to note or to request for the Department in the BRRR?    

She added that the presentation given by the DG had showed that the dtic had kept all programmes going throughout the year but the Department had not presented the impact of Covid-19 on the Department. Could he please inform the Committee of what the impact of COVID had been on the Department? She applauded the Department on getting a clean audit.

Mr S Mbuyane (ANC) referred to the stability of the SABS. He understood that SABS was undergoing changes that would improve the situation but what assistance was being given by the Department now that it had a clean audit. He asked what the Portfolio Committee could do about the contract management that had caused the SABS not to get clean audit. When was the audit of the NRCS going to be finalised?

DG October appreciated the point about how the dtic had kept all programmes going in order to see the country industrialise.  

Regarding Covid-19, he reminded Members that the matter had been addressed in detail in the presentation on the Annual Report as the impact had begun in January 2020 when Covid had already impacted Asia.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               Asia had shown the first signs of the impact that Covid-19 had on a country and its economy and South Africa’s exports had been affected even in the first quarter of the year, 2020, as SA traded significantly in Asia. Targets relating to international trade and engagements had not been met in the final quarter of 2019/20. The dtic had focused on measures to repair the economic damage caused by COVID-19. The measures were intended to address structural problems hindering job creation.

The DG reminded the Committee that the Department had put Administrators in place in the NRCS and SABS. They had been supported throughout by the dtic and had done a magnificent job. The NRCS was close to finding its feet as the new CEO had settled in and the CFO was about to be appointed. The DG was sure that Committee Members would recall Rebecca who had been assisting the NRCS and was the new appointee.

SABS had made huge strides and was currently in the process of appointing a CEO. Thereafter a new board would be appointed.

In respect of the clean audit, the DG agreed that key to success was a day-to-day monitoring of the risk factors, especially in respect of corruption, but corruption could not be avoided as people were always trying to defraud, and were very clever about how they went about defrauding departments and institutions. The dtic was aware of failing in contract management and was dealing with it. He stressed that while fraud could not be avoided, on the first indication of fraud at dtic, the officials were suspended and, where applicable, payment to an outsider provider suspended until all investigations were complete. The Department moved very speedily when it came to fraud and that was why it was able to maintain a good record against fraud. However, he admitted that one case of fraud had been identified. It had been dealt with in the manner above, followed by appropriate disciplinary action.

Mr Khan said that COVID-19 had had an impact on finalising the audit of the NRCS but that the audit team could provide full details of the audit. He had heard that the audit was close to being finalised.

Regarding the current budget for the dtic, Mr Khan noted that the dtic had seen a significant adjustment to its budget and that was likely to have a significant impact on the goals of the dtic to build and support the economy. He added that the Portfolio Committee could assist in respect of the budget as the dtic needed funds to assist companies in distress and it was those funds that had been impacted extremely negatively as the dtic was focussing on its goals of industrialisation and localisation. The Department feared for those companies that would not get through the pandemic without assistance.

Ms Mashao stated that her colleagues who had actually audited the books would respond directly to the questions. She wished to say that the AGSA had worked very well with the Department and had received all the support necessary. It was encouraging to see senior management that welcomed audits because it helped the Department stay on track.

Ms Morongwa Mashigo, Auditor, AGSA, stated that the audit of the NRCS would be finalised by the end of the week. What remained to be done was to hold a meeting with the Audit and Risks Committee at the dtic and report back to that committee on risks that the committee should follow up on. Meetings would be held with the CEO and senior management to present the audit report.

Ms Mokgadi Masekela, Auditor, AGSA, stated that SABS had shown a significant improvement in the audit and the audit opinion was no longer qualified. There were some concerns about loans and investment and subsidiaries. The response had been slow but a whole lot of factors, especially regarding Covid-19, were responsible for the delays. There had been ongoing meetings with management during the audit, but following the submission of the documents, some misstatements were found and those statements had to be corrected. The corrections related mostly to disclosure, deferment and intercompany loans.

Ms Masekela stated that there had been a full implementation of audit recommendations and the senior management had been extremely supportive. The problems relating to the personal protective equipment (PPE’s) that had been cleared up with the assistance of senior management and the revenue had been cleared up.

She said that the previous year, SABS had been qualified on disclosure but that issue had been cleared by management and the audit committee. However, there were vacancies in the positions of CEO, CFO and the board, but that had been explained by the DG.

There had been problems the previous year in contract management but management had checked all contracts to determine which had been overextended. Correcting the contracts management issues had led to irregular expenditure. The irregular expenditure was caused was the clean-up but those expenses had to be brought into the books. SABS had a very good clean-up programme on irregular expenditure and that should resolve the issues of irregular expenses.

Regarding preventative controls, Ms Masekela stated that some preventive controls had been put in place and there were approval levels for expenditure which would manage and prevent irregular expenditure.
Support for other structures was there and the controls had been put in place but those controls had to be monitored and reviews had to take place regularly. Contract management had to be monitored.

Ms Mashao added that the leadership at the Department was exemplary and the entire senior management was committed to the audit process. That was what was required for good audit outcomes. She thanked the Department for the support shown to the auditors.

The Chairperson requested closing remarks from the DG and thanked him for bringing so many senior officials to the virtual meeting.

DG October thanked the Chairperson for guiding the Departments through the difficult time when the two former Departments had had to merge and the difficulties that had to be navigated in the face of the Covid-19 crisis. The final dti and EDD Reports had been tabled. The dtic would go forward and in future the Committee would receive a single report from Trade, Industry and Competition. Both the ex-government Departments had received clean audits and of the 16 entities under the dtic, 90% had received a clean audit and the Department would work towards a 100% clean audit for the Department and all its entities. It was not that the dtic loved having the auditors in their offices, but the dtic wanted to show that the funds given to the Department were prudently used to build the SA economy.

Ms Mashao thanked the Chairperson and the Committee for the opportunity to present the report. She thanked the DG and the Departments. She assured the Committee that the same audit team would be auditing the dtic and its entities in the future.

Concluding remarks
The Chairperson thanked the Department for the clean environment. The areas of focus showed relative stability and the Department would be able to grow. It was a really important audit statement following the merger and having dealt with the uncertainties of the year.

He thanked all Members, the dtic and all who had attended the meeting and noted that there would be no committee meeting the following day as there would be by-elections across the country. He would be holding a Committee management meeting the following day.

The meeting was adjourned.
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