Financial performance of provincial education departments: briefing by Auditor General South Africa

Meeting report

Auditor-General audit outcomes of the Basic Education Sector and related entities 2010/11
Ms Meisie Nkau, Business Executive, Office of the Auditor-General, reported on the outcomes of the provinces, together with the national Department of Basic Education (DBE), and on the sector report for the specific focus areas within the basic education sector. Those spoke to the predetermined objectives of the basic education sector. There were seven focus areas when the sector report was prepared. 
 
Ms Nkau highlighted that auditors in the provinces audited the provincial departments, so those reports were consolidated for presentation to Parliament. However, when going into the details of the findings it might not  be possible to give exact details, but rather a broad idea of what was happening in the provinces. 
 
The report would indicate any improvements but of greater challenge was that the Auditor-General of South Africa (AGSA) had travelled a journey in terms of auditing the predetermined objectives relating to service delivery; the 2010/11 results were the fifth year of auditing the predetermined objectives. The opinion on predetermined objectives was indicated in the Management Report and not in the Audit Report. The factual findings were in the Audit Report and the opinion was in the Management Report. This report indicated the percentage of provincial departments that received a certain opinion.
 
The greatest challenge was to get those entities where intervention was required to improve and to get clean audit outcomes, as the Government initiative was to achieve clean audit outcomes by 2014. Clear action plans and drives were needed to achieve that. Again the challenge was for those that recorded good outcomes for a number of years to sustain those good outcomes. There had been a number of regressions in the basic education portfolio and there was a need to ask why those regressions took place; there was a need to progress, and sustainability was critical. The entities at all levels had to engage in ensuring that the information they produced was credible and reliable. The Committee must hold entities accountable to confirm that the information presented to the Committee was credible and reliable. It was also a challenge to the internal audit to ensure information coming from the entities and the Department was reliable and credible. 
 
Mr Godfrey Diale, Senior Manager, AGSA,  presented the 2010/11 financial reports. The basic education sector received R146.7 billion from Government, of which R143.9 billion was spent (table, slide 4). 
The allocation to each province was indicated. 
 
Mr Diale turned to the audit outcomes of the basic education sector, nine provincial departments plus the national Department, a total of ten. There was 0% financially unqualified - no findings; 40% received financially unqualified with findings; 50% received qualified audit opinions; and 10% - one province, received a disclaimer. 
 
The report on audit outcomes per provincial department in the basic education sector, showed the audit outcomes for specific provincial departments. Eastern Cape received a disclaimer, while KwaZulu-Natal regressed from unqualified to qualified. Four received qualified opinions, and four received unqualified opinions but with matters reported. 
 
Mpumalanga, Limpopo and North West showed improvement even though the opinion status did not look good. Eastern Cape remained unchanged (disclaimer); KwaZulu-Natal regressed into a qualification; Free State and Northern Cape were unchanged (qualifications); and the national Department, Western Cape and Gauteng provincial departments remained unchanged (unqualified with other matters). 
 
In terms of three-year progress, there was a slight improvement from 2008/09 to 2009/10, but no improvement in the last financial year. 
 
Ms Nkau compared the basic education sector to the health sector in terms of audit opinions (bar-chart, slide 9)

Mr Diale said that in total six entities received qualified opinions; in the last audit it was also six. Capital assets remained unchanged at 67%; and unauthorised, irregular and fruitless and wasteful expenditure remained unchanged at 33%. 
 
Mr Diale explained corrections of material misstatements identified by auditors (bar-chart, slide 11).

In 2009/10 there was R2.2 billion unauthorised expenditure and R959 million in 2010/11 (table, slide 13). However, in 2009/10 irregular expenditure was R1.6 billion; in the current year it increased to R5.5 billion, of which R4.3 billion was adjustments that had to be made as a result of the audit (table, slide 14 and bar-chart, slide 12).

Fruitless and wasteful expenditure in the basic education sector increased from R106 million in 2009/10 to R172 million for 2010/11. R24 million was disclosed in the financial statements; R148 million was identified during audit (bar-chart, slide 15, and table, slide 16).

The root causes of defective financial statements were illustrated (diagram, slide 17).

In terms of predetermined objectives 30% of audit outcomes were unqualified in 2010/11, which was a good move against 40% the previous year; the percentage of qualified opinions remained unchanged at 20%; the percentage of adverse opinions was 10% in 2010/11 and 0% in 2009/10; and the percentage of disclaimers remained unchanged at 40% (bar-chart, slide 18).

Non-compliance challenges increased from 70% to 80%; information not useful increased from 20% to 40%; information reported as not reliable decreased from 60% last year to 50% in the current financial year; and there were no matters in terms of presentation (slide 19). 

The root causes of defective service delivery reports were illustrated (slide 20).
 
In terms of on-compliance with laws and regulations, the biggest challenge related to procurement and contract management, which explained the irregular expenditure that the auditors spoke to. Second was  expenditure management, which would also inform irregular expenditure and financial expenditure and could also affect unauthorised expenditure. The third highest related to annual financial statements and annual report (slide 21). 
 
Areas of findings on supply chain management were a big challenge. The biggest issue was uncompetitive or unfair procurement processes. The next critical issue was awards made to officials and their close family members, which was something that had to be looked at as well. The next biggest issue was limitation on planned scope of audit awards where documentation did not satisfy the audit process (slide 22). 

The root causes of non-compliance were illustrated (slide 23).
 
The audit also looked at the information technology (IT) control focus areas. The four biggest issues were IT service continuity, facility and environment controls, user account management and security management (slide 24).  
 
Ms Nkau concluded on the outcomes that Mr Diale had presented. The slides on drivers to improve audit outcomes (slides 25-27)  must be read together with the root causes (slides 17, 20 and 23). The audit reports concluded on internal control. There were three aspects of internal control: leadership, financial and performance management, and governance. Drivers to improve audit outcomes talking to the root causes summarised the three aspects of internal control.  
 
Leadership consisted of effective leadership culture, oversight responsibility, HR management, policies and procedures, action plans, and IT governance. In terms of effective leadership, 20% of the leadership required intervention, and 40% the leadership culture was effective. In terms of oversight responsibility, 80% oversight responsibility by leadership required intervention, which meant effective oversight responsibility was not in place within the Education Sector. 10% was making good progress and 10% was good. 
 
Under financial and performance management, the auditors looked at proper record keeping, processing and reconciling of controls, reporting, compliance, and IT systems controls.  
 
Governance issues included risk management, internal audit, and audit committee. There were audit committees that were not functioning effectively; internal audit was not functioning effectively; and together with risk management those issues clearly linked to the root causes. Risk management at 40% within the sector intervention was needed; internal audit at 30% of the entities required intervention; and audit committee at 20% of the departments in the sector were not functioning as they should. 
 
Mr Diale continued on the Education Sector focus areas for 2010/11. 
The seven focus areas were:  
 
HV/AIDS (Life Skills and Education) conditional grant to provinces (funded through the DORA allocation) 
National School Nutrition Programme conditional grant to provinces (funded through the DORA allocation) 
Learner Teacher Support Material 
Learner Transport Scheme 
Allocation of funds to schools 
Technical Secondary Schools re-capitalisation grant (funded through the DORA allocation), and 
Infrastructure (funded through the DORA allocation) (slide 29). 
 
The allocations totalled R2.6 billion for 2009/10 and R3.9 billion for the current financial year (slide 30). 
 
In terms of the HIV/AIDS life skills education grant, the most common findings were listed, as well as the findings per province where master trainers did not receive proper training, Educators did not receive proper training, the provincial departments of Basic Education did not fulfil their monitoring and reporting responsibilities in terms of the DORA framework, and the actual HIV and AIDS expenditure incurred was not in line with the conditions of the DORA framework with approved business plan, which were compliance issues. There were provinces that did fairly well, but it was still a challenge. 
 
The National Schools Nutrition Programme, where food was provided to those who were in need, was disappointing. Two provinces were exceptions, but overall in the sector school nutrition was not doing well and was a challenge that required intervention by leadership. 
 
Learner teacher support material required intervention by leadership.  Books were not received on time, which would affect outcomes at the end of the academic year. 
 
The learner transport scheme was an initiative to ensure that every student could access school, but was in need of leadership intervention. The various accidents where learners were subjected to unroadworthy transport were noted in the media in the past. Leadership needed to address those issue and  supposed to be assisting students but was exposing them to certain risks. 
 
Leadership also had to play a bigger role in terms of allocation of fund to schools. Oversight monitoring was needed to ensure that all the focus areas were a success, which contributed to quality basic education. 
 
There were very few findings on technical secondary schools recapitalisation. 
 
Infrastructure was a challenge. Government invested a lot of money in infrastructure and it was not yielding the expected results. Intervention was required to ensure that there were enough classrooms to accommodate learners and that the teachers and classrooms were not overloaded with excessive numbers of learners. Leadership needed to intervene and ensure that those issues were addressed 
 
The AG would be working closely with the Department in terms of management of the sector. 
 (Slides 29-39).

Entities related to the DBE were the South African Council for Educators (SACE);  the Education Labour Relations Council (ELRC); and the Council for Quality Assurance in General and Further Education and Training (Umalusi). They all had unqualified audit opinions, but only Umalusi had no other matters reported. The ELRC had findings of R2.5 million irregular expenditure, which was a sizeable amount for the size of the entity, and R116 000 fruitless and wasteful expenditure, which was significant for the size of that entity. If it were not for the audit effort the ELRC would not have received an unqualified audit opinion. Irregular expenditure was informed by non-compliance with the procurement and supply chain management regulations. The financial statements were not, in all material aspects, presented as required by section 55(1)(b) of the PFMA. The AG had to put in substantial effort to ensure that those financial statements were fairly stated. (Slides 40-42).
 
The Chairperson thanked the AG's Office for the very comprehensive report which really broadened the Committee's knowledge in terms of the reporting of the AG and would help the Committee when looking at the annual reports for the next financial year. 
 
Discussion 
Dr W James (DA) noted that one of the root causes of defective financial statements was the Portfolio Committee. The Committee had the responsibility to ensure accountability as part of the governance problem. He asked the AG's office to please elaborate. 
 
Ms Nkau responded that the Portfolio Committee as an oversight committee needed to hold the Department accountable. It had to be realised that this report came from the provinces so those root causes were the root causes that came from the provinces. That meant that the portfolio committee oversight was not happening at the level at which it should. As far as the national oversight was concerned there was great improvement.  In holding departments accountable, action must be taken to ensure that those that did not perform at the required level should have action taken against them. It could be that people needed training to be able to perform their functions and an oversight committee would need to ensure that such training was given. Discipline must be imposed and the departments had to be held accountable. 
 
Mr W Madisha (COPE) referred to the conclusion that the main objectives were not obtained mainly due to corruption and the inability of those who were supposed to lead to do that. What did the Committee have to do? There was sheer corruption and inability of those who were supposed to do their work; and officials gave contracts to their family members and friends. 
 
Ms Nkau responded that when a deficiency was identified or a finding was raised the finding would indicate the root cause and if the root cause was leadership then the AG would give a recommendation as to what action management needed to take. At the end of the audit process and the final management report was issued, the AG's office required management to draw up an action plan to address all the findings and specifically the root causes. The internal audit would check whether the actions plans were implemented and carried out and the AG's office would do a review and check the internal audit and verify that it was working the way it was said to be working. 
 
Mr Madisha asked for clarity on unauthorised and irregular expenditure, which was a huge challenge. 
 
Mr Diale responded that the AG's Office noted numerous non-compliance instances relating to human resources (HR) and also relating to compliance with rules and regulations relating to procurement and supply chain management. In some instances there could be reasons why the procurement process was not followed, and there were Treasury regulations and contract notes issued by Treasury indicating specific processes that needed to be followed in cases of emergency and cases where the correct processes of supply chain management could not be followed. If goods and services needed to be acquired and the climate did not allow to go for a tender Treasury was lenient in giving guidance as to what needed to happen.  There should not be irregular expenditure, there was a process to be followed in terms of procurement. 
 
Ms F Mushwana (ANC) said the core function of education was learning and teaching. She asked what was the rationale behind the finding of the unqualified audit. In the nine provinces, all but one, the Western Cape, did not have continuous unqualified audit reports. Despite that, during the past year Gauteng produced the best results. How did that relate to the unqualified reports? 
 
Ms Nkau responded that predetermined objectives talked to service delivery; hence the policy of predetermined objectives was phased in. It was necessary to allow the Portfolio Committee to give the Auditor General's office input into the sector focus area to bring out issues of concern. The Office was in the process of planning for next year's report so it was the ideal time.
 
Ms Mushwana was interested in the Learner Teacher Support Materials. Results would be better if materials were delivered in time; what could be put in place to ensure that there were no excuses. Today's children were born brilliant and just needed someone to unpack that brilliance. 
 
Ms Nkau responded that this went back to the recommendations given to the Department and the action plans that needed to be drawn up. One of the issues raised on Portfolio Committee oversight was that the action plans were not reviewed. The portfolio committees were aware of the areas of concern to them and if the departments developed an action plan and implemented it, they needed to account to the portfolio committee concerned. Credibility and reliability of information presented must be on the agenda. 
 
Mr Z Makhubele (ANC) asked whether the reports on leadership were shared at National level? He recommended that they be shared with the leadership, the Ministry and the Department so that they could understand the situation. 
 
Ms Nkau responded in the affirmative, the reports were discussed with the leadership in the national and provincial departments, but not yet with the Minister.
 
Mr Makhubele referred to the oversight that was not done by those who were responsible for it and asked whether that included Parliament, or was it the Ministry and the Department? 
 
Ms Nkau responded that the provincial portfolio committees in the provinces needed to hold departments accountable in terms of areas of concern raised. 
 
Mr Makhubele said there should be a way to link with relevant law enforcement agencies when there were criminal issues, such as drivers without licences ferrying children to school. There were a lot of accidents where innocent children were killed. Cases of corruption, after the AG's investigation, should also be passed to law enforcement agencies. 
 
Ms Nkau said that it was necessary to remember the audit history. Perhaps there was a need to think about investigations in those areas so that one could report accordingly and report to the law enforcement structures.
 
Ms N Gina (ANC) remarked that in some cases the reports were very good but in other cases were frightening, yet what was happening in the DBE was at least better than in other departments. The AG's office should be thanked for the picture of what was happening in the country, but it should not end there. An alarm had been raised and something had to be done. 
 
Ms Gina asked what was the office of the AG's relationship with Treasury when it was reported that provinces were not even able to account year after year.  Procurement management and expenditure management was falling apart. What could be put in place? 
 
Ms Nkau responded that the relationship with Treasury was interesting because it went hand in hand with the powers, roles and responsibilities of the Portfolio Committee She believed that the Portfolio Committee had powers and responsibilities and could make recommendations within those powers, and needed to explore those powers to put some disciplinary measures in place. 
 
The Chairperson was interested in predetermined objectives that were not in the AG's report.
 
Ms Nkau responded that the AG's Office did not audit the performance agreements of the Minister; it audited the strategic plan of the Department. 
 
The Chairperson said when the Department brought strategic plans to the Committee the researchers checked whether they were aligned to the performance agreements. The Committee now knew how important the quarterly reports were. When it came to end of year monitoring the Committee would see whether the Department had a trend of overspending or under spending. The Standing Committee on Public Accounts (SCOPA) had made recommendations and the Portfolio Committee could also. The Committee did ask for investigations by law enforcement agencies, but it was very expensive.  The Chairperson thanked the AG's Office; it was a privilege to have it report what was happening in the provinces, so the Committee was aware of what its duties and responsibilities ought to be. 
 
Dr James recommended that the Committee meet in closed session for ten minutes in the light of what was heard. 
 
The Chairperson agreed. She thanked Members for their work and oversight, and also the research team for its assistance. 
 
The meeting was closed.