DEL, Compensation Fund & Unemployment Insurance Fund on matters raised by AGSA; with Minister and Deputy Minister

Meeting report

Chairperson’s opening remarks

The Chairperson said that the meeting would focus on two entities; the Compensation Fund (CF) and the Unemployment Insurance Fund (UIF). A presentation was received from the Office of the Auditor General (AG), and the Committee had been made a bit uncomfortable by what it contained. The Committee had then requested that the Office of the House Chair grant it permission to sit [as it was the recess period]. The issues raised from the two entities were quite grave, and the matters could not be postponed till August.

The Office of the AG had also been invited, so that when questions were asked, they could be properly addressed and the AG’s office could listen to the responses and ensure it corroborated the responses they received. The leaders of both entities had also been invited because the Committee wanted to hear from the leadership, and not just the Commissioners.

Members would ask questions based on the presentations from the AG’s office, and the Minister and Deputy Minister would also respond when interrogations were conducted. The Chairperson hoped that honest responses would be given. She thanked the AGSA for making itself available for the extraordinary meeting.

Apologies were received from Mr M Bagraim (DA).

Discussion

Compensation Fund

Mr S Mdabe (ANC) commented that the AG had disclaimed the CF on the grounds of inadequate assessment of the accuracy of information submitted by the employers, inadequate processes in place to ensure all employers were registered and assessed, and the inadequate enforcement of the Act of employers not complying. These were the issues that had led to a disclaimer for ten years. He wanted to know how long the chairperson of the audit committee and the board had been with the CF, and what their role had been in ensuring that they complied.

Ms C Mkhonto (EFF) wanted to know what was happening to the management letters that the AG had been sending to the CF over all the years to assist with its books. She wondered if within ten years the CF had had a turnaround strategy to address this issue, and if it was implemented, what the result had been.

She asked if the answer given on human resources was based on the Department conducting a skills or qualification audit on all the concerned persons, or whether it was based only on the recruitment information.

Ms H Denner (FF+) enquired about the order made by the Standing Committee on Public Accounts (SCOPA) for the Minister to conduct a forensic investigation into the CF. She asked about the timeline for the investigation, and if it had been ordered by the Minister. She also wanted to know the parameters put in place, and every relevant detail concerning the forensic investigation.

She also noted that SCOPA had ordered a performance assessment of the Commissioner of the CF and the Director-General (DG) who oversaw the work of the CF. She wanted to know if the assessment had been done or scheduled.

Mr M Nontsele (ANC) asked if the Commissioner could mention the imperfections reported on the service level agreement (SLA) with the Public Investment Corporation (PIC). He commented that these imperfections had been pointed out by the AG 24 months ago, and asked which imperfections the CF had been able to eradicate.

She also wanted to know what had been achieved in relation to the associate investee companies.

The Chairperson asked the management of the CF if they had been informed that the Fund did not implement adequate and appropriate controls to address the completeness and accuracy of employer contributions, and that there was inadequate assessment of the accuracy of information submitted by the employers, inadequate processes in place to ensure all employers were registered and assessed, and inadequate enforcement of the Act of employers not complying. She wanted to know what the CF did with the reports when they were received. She expressed the concern of the Committee on the institution having eight years of disclaimers, and wanted clarity from the experts from CF.

CF's responses

Mr Thobile Lamati, DG, Department of Employment and Labour (DEL), said that in the meantime, management would respond to the different areas of the questions raised, while the questions on audit would be addressed by the head of corporate services.

Mr Julian Soupen, Chief Director: Compensation for Occupational Injuries and Diseases (COID) Services, DEL, said that a number of things had been put in place to verify revenue as well as employer information and monitor compliance. He explained that in the process of employers’ verification, payroll inspector rolls were created and employers’ earnings verified to ensure that the employers were in the correct sub-classes. Inspection was also done on the site of the employer. Occupational health and safety inspectors had also been appointed to do onsite employer workplace verification to verify that employers were in the right environment and ensure that the requirements of occupational health and safety were followed. Where there were deviations in terms of compliance from employers, judicial notices were issued to ensure adherence.

The CF had developed and implemented a new assessment model to verify employer revenue information, as well as to ensure compliance. The old assessment model had a lot of shortcomings and there were too many sub-clauses. A leaner sub-class had been introduced, and consequently the large number of sub-classes had reduced to 13, to enable effective monitoring of employers and monitoring of the sub-classes the employers were in, to ensure that they were compliant.

The CF had a relationship with SIPSI in terms of sharing employer data, which was then used to verify employers’ information and ensure that the employers were correctly placed in the correct sub-classes.

On the steps taken to ensure employers’ compliance, the CF had access to the UIF data base and similar checks were conducted to verify the accuracy of the earnings of the employers that were declared on the UIF. In assessing employers, the CF verified the number of the employer’s work force that were correctly declared, and the impact on the revenue declared.

Mr Lamati added that on the question of the findings of the disclaimer, the CF acknowledged that the AG’s finding was correct. The CF had had a problem with the areas raised by the AG, and action plans had been put in place to ensure that those gaps were closed. The DG confirmed that the AG’s finding had been correct.

The Chairperson said that she hoped that the clarification given would be an approach that would be taken by everyone.

Ms Milly Ruiters, Chief Director: Medical Benefits, DEL, said that the CF acknowledged that there had been duplicate payments in the previous systems due to control deficiencies. But in the COMPEASY system, which had been utilised for a full financial year that ended in March, duplicate checks had been included and incoming invoices from medical practitioners had been stopped. Checks were now made for duplicates, and this had made it compulsory for individual invoice numbers to be included.

A significant amount of controls had been put in in the area of benefit catalogues, so for instance, a general practitioner could not claim for a specialist or occupational therapist. Exception reports had been developed to enable checks for real duplicates. Senior members of staff had been added to the team that reviewed these exceptions and confirm that there were no duplicates.

A process called subrogation had been added in the COMPEASY system, which allowed the CF to do a sort off-setting of the claims from a medical service provider, where there was a duplicate or over-payment.

On the issue of claims paid with incorrect status, as raised in the AG’s report, Ms Ruiters explained that this was as a result of the introduction of COMPEASY. When COMPEASY was introduced, it had different types of status, and invoices and their liability were migrated into the system, which had caused a lot of challenges. Because some of the invoices had been previously accepted, teams in the provinces had proceeded to accept those claims. An example was a status on COMPEASY that would say, ‘waiting for information,’ which referred to cases where there was nothing wrong, but it was awaiting doctor’s reports. These would be in the claim status, and not the liability status.

Auto payment had been stopped in September 2019 when the CF stopped using the old system. However, they had shown that during the auto payment process there were officials working on invoices. When an invoice was at the stage of being authorised, the system would pick up the payment and send it to finance to ensure that the turnaround time was improved. After the challenges raised by the audit committee, an additional officer was assigned to review the invoices. However, the CF had stopped using the method when the systems were changed.

On the issue of changing the banking details, the banking details had been decentralised to the provincial level and there were assistant directors of finance who did the verification of the banking details. There was also an assistant director at the provincial level, and he/she was the only one who could change banking details. The CF was currently working with the information communication technology (ICT) unit on a process that was more rigorous for verification on COMPEASY.

There had been challenges with the segregation of duties in the previous years, but currently the system administrator received the raw data on a monthly basis every month and considered if the people were still in the same unit and occupying the same role. Reports on segregation showed that the CF now had staff at levels 6, 7, 8, 10, 12 and 13, that would work on an invoice, based on the delegation that they had.

The CF did not have a direct interface with the directors of health care funders, but these directors dropped files on a daily basis to enable the CF to conduct the validations and confirm whether the practitioners were registered with the Health Care Funders. A process was under review with the board of Health Care Funders, and they were currently working on the infrastructure.

Mr Vuyo Mafata, Compensation Fund Commissioner, said that the CF had implemented about two turnaround strategies at the Fund over a period of three years. In 2015, the CF had not been as functional, claims were not paid accordingly and there had been shortage of skills and a lack of basic finance functions working.

The first action plan in the turnaround strategy was stabilising the operations of the Fund, which enabled it to produce its monthly financial accounts, pay benefits regularly and conduct the skills audit that led to the new structure of the CF. The second action plan implemented included looking at all the critical areas and implementing the controls that had been highlighted in previous audits. A lot of interventions were carried out in the revenue unit such as:

• the new assessment classification models published in December for implementation in April;
• the appointment of funding of payroll auditors at the Departments’ inspection and enforcement services;
• the funding of occupation health and safety inspections to be able to deal with employer’s compliance with occupational health and safety (OHS); and
• preventing occupational injuries and diseases.

The application of COMPEASY was also a result of the turnaround strategy. Critical skills and basic processes were the outcome of the strategies implemented over the last three years.

Mr Vinay Ramnath, CFO, CF, said that the investments and associates were the social responsibility investments of CF, and were linked to the Departmental target for employment and growth in the country. While trying to achieving the target, reporting problems were encountered due to the quality of information received from associate companies, and the management assurance level on the information received. A lot of the associate companies’ financial year end was also 31 March, and this affected the CF’s receipt of the audited financial statements from these associate companies. He said that the challenge would still be evident in the 2021 year, but efforts were in place to address it in the 2021/2022 year.

The CF had started engaging with the Public Investment Corporation (PIC) to ensure assurance levels and auditing in terms of the financials received from the associate companies on an ongoing basis throughout the financial year. The CF hoped to validate the information received from associate companies on a quarterly basis so that at the end of the financial year, an assurance could be provided on their financial statements. While the CF was trying to achieve the target of employment and growth with the social responsibility investments, there was a challenge with the financial reporting.

For the associate companies, it was understandable that the economic environment had been difficult in the last financial years, especially due to Covid and the growth in the country, which had had a negative impact on these associate companies throughout the year. The PIC mandate had also been revised to include more stringent reporting on the part of associate companies, to ensure that the PIC was able to provide strategic turnaround plans for these companies. Reporting and performance controls had been added to the PIC mandate, and these would be shared with the Committee.

In the process of the 2021 year, the Fund had commenced reconstructing an irregular, fruitless and wasteful register, and the process was almost complete. An analysis had been carried out on the high value cases, and a number of the cases that were in the irregular, fruitless and wasteful register dated back from 2009 to 2013. The target for the 2021 year was to have the register complete and accurate, and a complete list could be provided to the AG for audit. High level value cases had been targeted for the 2021/2022 year, and included 19 cases of irregular and fruitless expenditure and five cases of fruitless and wasteful expenditure, which constituted about 97% of the rand value of those registers. The high value of those registers would significantly decrease throughout the financial year of 2022.

Ms Nhlanhla Qamata, Chief Director, Corporate Services, CF, responding to what informed the turnaround strategy in 2016 and the restructuring initiatives undertaken in 2017, said that an audit report was completed in 2016, and three critical skills were identified as lacking in the CF. First, were finance skills. The report showed that in terms of the provisions, the Fund was 225 places lower than the leading practice similar to the CF environment, second was information technology (IT) skills, and third was medical skills.

The audit report informed the provisions in the new structure proposed to the former Minister in 2017. In that structure, provision was made for these three critical areas. In respect of IT skills, an IT directorate was created and a director provided. IT project managers and business analysts were also recruited for the CF. The financial skills in the Fund were reviewed, and the CF had partnered with the Skills Education Training Authority (SETA) to augment the skills of CF. A training office was established in 2018 and a director to head that training office was recruited. The intention was to have trainees under her leadership so when they became qualified accountants, they could be absorbed into the structure of the CF.

However, the CF had challenges with remuneration, because the structure within the CF involved the public sector remuneration philosophy, which provided the Department of Public Service and Administration (DPSA) guidelines for the salary level of stipends for all trainees. This remuneration structure did not allow the CF attract the kind of skills it needed. The CF’s suggestion was that upon receipt of the Minister’s approval, the CF should be exempted from the DPSA's dispensation on the remuneration for trainees. The process for recruiting the trainees would then recommence while ensuring that they were adequately remunerated.

Provision had also been made in the Fund for medical skills, which had been absent, to assess claims. There were four medical doctors at the head office assisting with the technical clinical skills assessment of claims and assisting with assessing medical claims. There were more than 30 provisions in the structure, but not all provinces were headed by a medical doctor.

Steps were also being taken to align the national structure with the provincial structures. Provisions had been made for more medical skills in the provinces, and at labour centres. That process was in the final stage, and the structure was about to be approved. Provision had also been made for vocational rehabilitation and clinical skills in the CF which had not been there in the past, and these skills had been successfully recruited.

On the technical skills around finance, the CF had over the years received findings on its inability to undertake basic reconciliations. All officials responsible for finance functions had undertaken group training and were all trained on generally recognised accounting practice (GRAP), and financial management skills.

Provision was made in the 2017 structure for the creation of an anti-corruption integrity management structure headed by a director, and since 2018 ten dismissals had been carried out following fraud investigations. The CF had requested that the Minister conduct an organisational architectural review, because the structure was still not adequate and there was room for improvement. The review by the Minister would consider the organisational structures and the skills required, given the new mandate of employment, the leadership, the IT systems at the UIF and CF. It was ongoing work, and a service would be engaged to assist with diagnosing the organisational architecture.

Mr Luyanda Mangquku, Chairperson, Audit Committee, responded on how long he had been in the role. He explained that he recently commenced chairing the committee, and the committee had been trying to familiarise themselves with the pending work. It was evident that there was still a lot of work to be done, and the committee would keep tackling outstanding issues on an ongoing basis and ensure that the CF came out of the crisis.

The audit committee was positioning itself to receive clear audit positions, monitor management's response and ensure management could account as to how they intended to tackle issues such as qualifications. The systems were being developed, even though not at the speed expected. Necessary relations were being established, and the committee would undertake to speed up the process. The process would take time, but there would be regular review of progress made. Existing gaps would be closed, and consequences imposed where necessary. The systemic gaps that needed further investment would be monitored for progress.

Further discussion

Ms Denner asked for more clarity on why the material misstatements were not corrected, even though sufficient time was given for the corrections to be made. She also noted the response on the filing system not being in order, and wondered how a Fund with a capital base of billions of rands would have filing systems that were not in order, which would result in the inability to correct material mistakes in financial statements.

Secondly, there was insufficient evidence and listings to support the performance achievement. The listings did not align with the annual performance report for the percentage of medical invoices finalised within 14 days of receipt, and the percentage of the pre-authorisations responded to within ten working days on previously finalised cases. She expressed concern that the figures in the annual performance reports, which it uses for its oversight work, were submitted to the Portfolio Committee as well. She asked if the wrong figures were deliberately presented to deceive the Portfolio Committee, or if the figures were simply incorrect. If the figures were incorrect, she asked when the Portfolio Committee would receive the corrected figures.

Mr Mdabe thanked the newly elected audit committee chairperson for his responses. He referred to slide 17 on the AG’s report, which referred to internal control deficiencies, and the intervention required. There was a serious issue of capacity skills in the financial department of the CF. The annual financial statements, both consolidated and separated, did not comply with legislation, and one of the critical areas for an institution was its capacity to produce its financials. Where the organisation failed, then it was concluded that those responsible to perform these tasks lacked the capacity to do so.

There had been ten years disclaimers on provisions for claims, and for fruitless and wasteful expenditure, etc. If the fund had taken steps to employ management staff four or five years ago, some of the lingering issues would have been resolved. It was a serious concern, and the Committee would like to know when monthly and quarterly reports, with an action plan based on the AG’s report, would be submitted.

The Chairperson referred to the remarks of the chairperson of the audit committee, and said there were areas that should already have been addressed. She asked him to mention some of those areas that could have been addressed so that the Portfolio Committee could ensure that the CF was led by people who were very vigilant.

Ms Mkhonto said that in the AG’ s report, there were slides that referred to the CF receiving a disclaimer opinion in certain areas. While it was clear that the CF did not comply with the expectations of the AG, there had been response on the future plans of the CF. She noted that the responses had focused only on actions that had not yielded the desired results, and that the strategy of the CF had to change. She asked that the CF respond to how it would address each area raised by the AG in the 2020/2021 financial year.

The Chairperson observed that the recommendations of the audit committee on governance with respect to the key internal control deficiencies had not been adequately implemented. She asked the Commissioner to explain this to the Committee.

CF's response

Mr Mafata said that there were a lot of systemic issues in the Fund which needed to be enhanced in order to address some of the control areas. However, in other areas, there were cases of poor configuration of the systems at the time of deployment, and resort had been made to resolving those control issues in the new system that was developed. The issues were addressed in the CompEasy system.

On the question whether the listing did not support the financial system, the Commissioner explained that the system was adequately configured to support the Fund. The Fund could show evidence of how much payment it had made, but was unable to provide listings as requested by the AG that would support each claim or provide a link to a claim that was paid on the financial system. The CF was unable to do so because the system implemented had a financial management system that did not have a sub-model that had the listings of all the financial creditors in it. For a long time, the CF had struggled with listings that would adequately support what was in the operating system, and that was why the AG may not be able to rely on some of the figures in the financial statements. These issues were, however, addressed in the CompEasy. It was addressed on revenue side, because the revenue system was implemented with the right sub-modules, but it could not be addressed on the claims side.

One integrated system was used now for the production of reports, which would reduce issues of errors. A lot of enhancement had been done to the system, and reports could now be produced directly from the CompEasy system as opposed to having to rely on external sources which could be manipulated or prone to errors.

A number of enhancements were done to address the control witnesses, while a lot of policy issues were addressed on the revenue side.

There were issues on provisions and claims related to the systems, and there was still a lot of work to be done to clean up the reserves in the past. Some of the material misstatements that could not be corrected were related to these issues. Now that the controls had been implemented, a review would be conducted on how to deal with them.

Concrete steps and plans had been developed, and work was ongoing on a plan that would enable the system to be cleaned up. New systems had been implemented together with a number of policy changes which would assist in addressing some of the issues that were the causes of the disclaimers.

Minister's comments

Mr Thulas Nxesi, Minister of Employment and Labour, said that the issue of the forensic audit was contained in his input to the Standing Committee on Public Accounts (SCOPA), and SCOPA had adopted the recommendation. After the AG’s outcome, he had been the first to act on consequence management. However, consequent management was not an event but a process which involved a lot of people, and all the labour processes had to be followed. He confirmed that these processes were in progress.

He had started the process of reviewing the performance agreements. The DG’s performance agreement, which was based on the Minister's, was complete and had been signed by the President. He confirmed that the process was ongoing. Appraisals would also be done, based on the new performance agreements and on the new mandate.

Minister Nxesi said that he had instructed the DG and the Commissioner to commence the process of appointing the service provider for forensic investigations. He was monitoring the process to ensure that it did not violate the required processes and did not become an audit issue. He added that the process should be completed by the end of June.

On the terms of reference, the CF was consulting with the AG to ensure that the issues raised were dealt with.

Work was ongoing on the action plans for both the CF and the UIF, and a 32-day deadline had been given from the time of appearance before the SCOPA to finalise the action plan. A copy of the action plan must also be presented to the AG for confirmation that all the issues had been addressed. This was the short-term work. With respect to the long term, the organisations’ review would require that external experts were engaged, especially with respect to specialised expertise.

CF Chairperson's comments

Ms Thembi Nene-Shezi, Chairperson of the CF Board, apologised for joining the meeting late. She said that the area of concern that had been of concern was the issue of the audit. The CF had had a disclaimer for a long time, and efforts were ongoing to move from the original programme to CompEasy. A lot of work was being done to make it work. There hadbeen several discussions in board meetings on the issue of the disclaimers, and a new meeting had been scheduled to find out the reasons for the continued disclaimer, and how to turn the situation around. The process may not be as quick as expected, but the Commissioner and the DG had been asked to prepare clear action plans, with deadlines, on how the issues would be resolved, and the process for a review of the progress made.

The Board had invited the AG to present a brief overview of the issues and the possible solutions. It was agreed that though there might be areas where parties did not agree, there were also areas where a turnaround was required. The process had led to the decision to have an "Operation Clean Audit," which was driven by the AG. A lot of positive results had been seen in some of the areas and targets achieved, while there were other areas that still needed more work. She expressed her confidence in the ongoing work with SCOPA, and between the DG, the Commissioner and management.

The Chairperson said that the Committee was committed to ensure that things were turned around, and timeframes would be proposed by the Committee, which would also guide the monitoring the process. The Ministry would have to account, and the Committee would call the Department when necessary.

She asked Members for proposals for timeframes for monitoring.

Additional questions

Ms Denner noted that the Minister had said that both the UIF and the CF were instructed by SCOPA to deliver action plans within 21 days from the SCOPA meeting, and said that this Committee should also ask both entities to report to it on their action plans.

On the filing systems, she sought assurance that both entities had started with these action plans. She wanted to know what had already been identified in those plans so that the Committee could provide its opinion on them.

Ms Mkhonto asked the CF how it would improve on all the issues raised by the AG, and to provide timeframes to enable the Committee to conduct oversight.

She asked if the data was reliable and could be merged with the data which the AG had given to the Committee.

Mr Mdabe said he thought that the Minister had already alluded to the timeframes that were already in place between the CF and SCOPA, and there was no need for a duplication of dates. He asked if an agreement could be reached that on those dates, the CF would report to the Committee, while the Committee should consider engaging the CF when it resumed in August.

CF's responses

Mr Lamati said that the action plan for the CF had been finalised and would be presented to the Minister and Deputy Minister (DM) soon, as well as to the AG, to provide guidance on all the issues that were addressed. This action plan was very focused and the timeframes were very short. Very few of the action steps were long term -- most were short to medium.

He confirmed that some of areas mentioned by the audit chairperson could have been achieved more quickly -- for example, the area of enforcement, which needed only a letter from the compensation commissioner to the enforcement inspectorate to provide inspection reports.

The DG added that part of the work he was doing with the CF included identifying areas where systems needed to be put in place. A number of investigations had been conducted, especially in the area of revenue matters, and a number of practices by external parties colluding with staff members of the Fund had been identified.

Areas of concern included the variation in assessments. In terms of section 85 of the COID Act, the DG may vary an assessment of an employer. This may result in an increased assessment, often referred to as a loading, or a reduced assessment, often referred to as a discount. This section of the legislation was intended to encourage employers to maintain safe working places and reduce the number of workplace incidents. However, it had become a subject of abuse over the last few years, and in DEL's assessment of the practice it had found that employers enjoyed discounted rates in excess of policy limits. The quest for these discounts had led to a lot of problems, both for the Fund and for those whose interest the legislation was meant to safeguard, i.e. the workers.

A decision had been taken in 2016/2017 to stop the practice of varying the tariffs of assessment of employers and to begin the process of cleaning up of the existing data base. At the completion of the process, all employers’ loadings were cancelled in 2019, and in 2020 all employers' discount rates were restated to the original rates applicable to the industry in which they operated. The clean-up had led to a lot of criticism.

Historically, the fund had a complex employer classification model, which resulted in employees being classified under 23 industry classes, with each industry class comprising of sub-classes which added up to 102 classes with unique assessment rates. Consequently, employers were usually approached by unscrupulous third party consultants who promised them millions of rands in refunds from the CF. The consultants would then approach the Fund, stating that the employer had been incorrectly classified, and a refund would be processed to the employer. In an attempt to simplify the assessment process, the sub-classes were reduced to 13. The process took about three years due to objections, public comments, and the resistance received. The Minister had finally published a regulation in December 2019, effective for implementation from 1 March 2021. The new class regime had now been implemented, including a new class for domestic workers, and would be implemented within a period of five years.

Mr Lamati confirmed that he was aware that there were third parties colluding with internal staff. The staff would be promised favoured services, with differential treatment to third party consultants, and this had frustrated those employers who did not want to use the services of third party consultants. To address this matter, efforts were under way to automate the process, but there was a lot of resistance to this.

He referred to the fraudulent use of the name of the Department and the Funds, and said some companies had emerged who purported to be the Department and were registered with the Companies and Intellectual Property Commission (CIPC) as the Department of Labour (Pty) Ltd, or the Fund which was registered as a compensation house. This had the effect of misleading employers and receiving contributions from employers, and issuing them with fraudulent and invalid letters of good standing. Letters of good standing were now automated, and only employers who were fully compliant could generate letters of good standing from the Department’s website. Efforts were ongoing to improve the security and safety of the letters of good standing and overhaul the entire process of compliance.

While recognising the rights of every South African to exercise their trade, it could not be done in an unethical manner which compromised the rights of others. COIDA was an instrument which had been designed to ensure that every worker in South Africa had access to social security and by undermining the legislative process, the third-party consultants deprived the workers of social security.

While the role played by officials was being investigated, the role played by third parties in destabilising the Fund, based on the Fund's deficiencies, must also be addressed.

Further discussion

The Chairperson asked for the AG’s view on audit. Considering that the country was experiencing the Covid pandemic challenge, she asked if the clean-up and audit could be extended to the provinces.

An official of the Auditor General of South Africa (AGSA) said that it was working on extending the clean-up and audit to the provinces. However, the support of the national office in terms of logistics in order to engage with the people at the provincial level, would be required. If the national level could guarantee assigning someone to accompany the AG to the provinces, then the visits could be scheduled.

The Chairperson asked for confirmation from the AG that the CompEasy system had not been dealt with in detail in the 2019 audit.

The AG confirmed that CompEasy did not inform the 2019 reporting in the financial statement. The comprehensive reporting on the basis of CompEasy would be seen in the 2021 financial year, even though an assessment was conducted on the system.

The Minister said that there were number of short-term issues which had been identified and would be included in the action plan that would be submitted to the Committee on a monthly basis, if required.

He also requested the Deputy Minister to respond to UIF issues, as he had to attend to something urgent.

The Chairperson said that discussions on the CF were complete, and discussions would commence on UIF. She told the Minister, the DM and the DG that the reason why the leadership of the UIF was needed for the meeting was because the audit report was a warning signal, and the next administration should not be allowed to say that it had inherited an entity with audit challenges.

Unemployment Insurance Fund

Discussion

Ms Denner asked about the issues of material misstatements that could not be corrected within the time frame given. She also noted that there were problems with the filing system, and wanted to know why it was not up to standard, and if it was included in the action plan.

Secondly, the report said the financial statements submitted for auditing were not prepared in accordance with the prescribed financial reporting framework and supported by full and proper records, which had also been the case with the CF. She asked why the financial statements did not comply with the required framework.

It was stated that disciplinary hearings had not been held for confirmed cases of financial misconduct by officials, and she wanted to know how many confirmed cases there were, why the disciplinary hearings were not held, and what had been done to correct this since.

Dr M Cardo (DA) said that one of the recommendations made by the office of the AG was that consequence management should be implemented and monitored on UIF employees who had transgressed in the area of recurring irregular, fruitless and wasteful expenditure and other forms of financial misconduct. He wanted clarity on this.

He observed further that there was news in the papers that the suspended top management of the UIF were back at work, and this seemed to have happened discreetly, and there had been no report concerning the disciplinary hearings and allegations around improper financial conduct related to the Temporary Employer/Employee Relief Scheme (TERS). He asked if the Minister or DM could provide clarity on the suspensions that had been implemented last September, and who was back. He also asked if there were any outstanding disciplinary hearings, and what had happened to the disciplinary hearings that were supposed to have been held in February.

Ms Mkhonto observed that the Commissioner was back at the UIF, and the Committee had never been formally informed. She wanted to know what had happened to the charges that had been levelled against him.

The AG had talked about the investment in property as one of the areas that had led to their qualified audit report, as the investment property values were incorrect. Was this done deliberately, or was this information just taken directly from the investors' data?

Mr Mdabe asked about the annual financial statements that were not submitted for auditing within two months after the end of the financial year, and what the reasons were.

He also asked for clarification on the pre-payments that were made before services were received, which was against Treasury regulations.

With regard to internal controls, involving leadership, financial performance management and governance, the AG had raised concern in terms of the oversight responsibility of the leadership and the daily and monthly controls on reporting on financial performance and management. Why had the UIF regressed from the previous year's audit outcome?

The Chairperson asked why the financial statements submitted for auditing were not prepared in accordance with the prescribed framework and supported by full and proper record. She asked the DG, who was the head of the administration, to explain what was going on. This spoke volumes about the entire working of this Fund, and it was in that context that questions had previously been asked as to whether the required skills were present in the Fund. The AG’s response had been that the Fund had the required skills, and that people were employed accordingly, but that the people were just laissez faire and did as they wished. She commented that the actions of staff could not be at the expense of the ordinary people.

Mr Nontsele also asked for clarity on the presence of the Commissioner.

He wanted to know what interventions the UIF had made to deal with the challenges it currently faced regarding skills in both the managerial and technical areas. Apart from having to source support, how had they been able to attract properly suited staff internally to deal with these challenges?

Referring to the CompEasy system, he asked the CF what intervention they had put in place to deal with the reasons that had led to the suspensions.

The Chairperson asked why disciplinary hearings on non-compliance with legislation were not held.

Ms Boitumelo Moloi, Deputy Minister, DEL, said that during the investigation by the Special Investigating Unit (SIU), the suspension had been implemented because the UIF did not want officials to interfere with the investigation, and it had been decided that action would be taken after receiving a report. The SIU had since finalised their investigations, and they had made recommendations that were currently being implemented.

She confirmed that the Commissioner was back, but was not yet at the Fund, and was reporting to the office of the DG until the recommendations of the SIU had been implemented. Charges had been instituted against those who had something to answer, and the DEL was finalising other matters based on the recommendations of the SIU. The Committee would be taken in confidence about some of the issues in the next Portfolio Committee meeting.

UIF's response

Ms Fezeka Puzi, CFO, UIF, responded to the question on the issue of material misstatements in the financial statement and the quality of the financial statement submitted. The UIF had received two qualifications last year which were related to the investments in associates and joint ventures, and the issue of the technical reserves and how claims provided were received but not approved. The main reason for the material misstatements in this case and the non-compliance was due to the struggle in receiving financial information from the investment companies. The UIF had more than 20 investing companies, but because of its inability to get the required information from these investment companies via the Public Investment Corporation (PIC), it had indicated the impracticality to comply with the Generally Recognised Accounting Practice (GRAP) standard. When the AG saw the efforts made to receive the reports from the PIC and the associates, the UIF had been found wanting because it could not demonstrate that all avenues had been followed to ensure that the information that had not been submitted was escalated. There was a service level agreement (SLA) between the Fund and the PIC providing for follow-up on such matters, but all the UIF had done was to write to them without following the legal process. This was one area that the Fund had been struggling with, and had resulted in a qualification. This year, the UIF was working closely with PIC to get these audited and quality management accounts, and was conducting analysis on the financial statements.

The other qualification was around the technical reserve and the provision in terms of the claims. The Fund had received a technical opinion last year on how to account for these technical reserves, and it seemed it was just a matter of interpretation and understanding on both sides. A lot of escalation and disagreements had happened last year, but the AG’s recommendations were agreeable and would be implemented. The report contained the information that addressed the AG’s findings, and the 2021 financial statements would be able to be corrected.

On the question on poor document management and the poor filing system, the CFO confirmed that staff had been required to clean the filing room and ensure that documents were easily accessible. Work had been done to ensure that all documents, including those related to the supply chain, had been properly filed, which would enable the Fund to easily retrieve those documents for audit purposes.

Regarding the investment in property and the issue of evaluations, what the AG had referred to were the two properties that were currently under development. There were two properties -- one at Sunnyside, which was under construction, while the other was the UIF building which was under reconstruction. The AG had said that when the evaluation report was done, the evaluators had missed the work in progress, but for the current financial year the Fund had the evaluation report from them. The problem was actually due to COVID, which had made many financial companies close down and made it difficult to get information. In an effort to address the audit finding, and mainly because the majority of these investing companies had their financial year beginning in March, while others were June or September, the aim was to get quality information before submitting financial statements, so the material misstatements in the previous financial year could be addressed. However, it was a struggle to get the information and to apply for the impracticability when it concerned accounting on investment in associates and joint ventures.

The question on pre-payments was related to the labour activation programmes. In terms of the agreements, the UIF normally repaid for the start-ups and the stipends for learners, and did not pay for the subsequent employment. It was the fault of the Fund that the contracts were not implemented accordingly. They had addressed the issue and were dealing with the issue of pre-payments.

Referring to the disciplinary cases investigated, Ms Petro Roux, Director: Human Resources Management, UIF, said that ten cases involved irregular expenditure. The internal investigations on all the cases had been completed, but the outcomes were not clear on the action that should be undertaken by management. These cases had been re-opened for forensic investigation, which would be conducted to institute the consequence management.

There were seven cases of fruitless and wasteful expenditure. Internal investigations had been completed on six of those cases, and the outcome was not clear on the action which should be taken by management, and forensic investigation had been reopened for them. In one of the cases, the funder had recovered the money from the service provider, and further investigations would be conducted to institute consequence management.

Mr Teboho Thejane, Acting Commissioner, UIF, referred to the skills issue at the UIF, and said it had embarked on the process of job grading and evaluating the fit for purpose of staff for the work of the Fund. Through the office of the chief director, corporate services, a study had been conducted. A process had commenced of reviewing the structure of the UIF alongside the CF. A submission had been submitted in the value chain to augment the structure of the UIF to meet the requisite demand of clientele, and to consider the placement of relevant personnel with relevant skills in appropriate positions. There had been a purposeful drive to attract potential staff with the relevant skills.

Regarding the quality of the information submitted, the AG had stated that there was a change in the manner in which the previous and current financials had been submitted. This had been corrected to the previous mode of submission. The quality provided would be ensured, and there would be a process of verification of information along the value chain, so that everyone verified the information and it would get signed off quickly.

Insofar as pre-payment was concerned, the Fund had reviewed with the policy with its partners to ensure that the second and third tranches were paid on the basis of work that had been done.

Mr Xola Monakali, Director: ICT, UIF, said that after the AG's report, it had resolved the controls identified in the IT system which were preventing linkages with other stakeholders. For instance, there were people working for Department of Defence (DOD) who claimed that unfortunately a link could not be achieved. All efforts to liaise with the DOD had failed. A letter had been sent through the office of the Commissioner, but for security reasons, the data had not been shared. However, for other departments, such as the DPSA and Correctional Services, the controls which had been put in were working.

On the link between the UIF and the Department of Home Affairs (DHA), he said that by the time it was agreed, the memorandum of Understanding (MOU) was to integrate during working days --Monday to Friday -- because the DHA was operating during those hours. However, when they changed to operate also on weekends and public holidays, no data was sent, so that if a person had passed on from the UIF's system, that person would then be paid if he was captured on a Saturday or Sunday. This is the reason why the Fund had paid people at that time.

Another root cause of the problem that was sorted out, was that in the claim system of the UIF, initially when the COVID tests had started, if a person was not registered before March 2020, that person would not be paid. The management of the Fund had discovered that many people had been declined because of that, and the government as a whole had decided not to punish the employees because the employer did not do the right thing by declaring their employees, and had relaxed the rule. A directive was made to process the claims of people who were registered after 15 March. The bulk of the amount that was paid was in that category of the many people who were declared after 15 March, and that had opened the way for many fraudsters who posed as employers and got paid, and then closed their companies, based on Covid.

All the controls raised by AG had been dealt with, except for the one with the Department of Social Development, where an MOU had been signed by the DG but was awaiting signature from them to enable the UIF to integrate with them and share the data.

The issue of integration across government departments was one of the matters that needed to be addressed, because Covid had taught them that a "one-stop-government" was needed, where a person could visit one department and access data from other departments without going through the MOU’s. If that could be addressed going forward, it would be a good initiative.

Follow-up questions

Ms Denner said that if the UIF struggled to get financial and management accounts, how could it confidently say that the information it got from the investing companies through the PIC was sufficient enough to show that the UIF was invested properly and safely and used maximally for a return on its investments? This was in view of the report received on the R136 million which had been stolen when the UIF and CF had invested through the PIC. What was being done to hold the PIC accountable for the investment made by the Fund, considering it did not get proper accounts regularly?

Ms Mkhonto said that maybe in the near future when investigations were concluded, a report must be provided in respect of the employers who had deliberately defrauded the UIF through the TERS in order to give direction as to what should happen. It was not the government, but workers who had been defrauded.

UIF's responses

Mr Lamati said that the UIF had met with the PIC, and they had promised that they would provide the required information, but unfortunately they had provided only some information while some was still outstanding. The position of the UIF on social responsibility investment needed to be reviewed. Though there was a social benefit to be derived from this investment, the accounting responsibility was proving to be a nightmare, as some of these companies were not doing well at all -- some were at the point of liquidation -- and the PIC also did not seem to be ready to commit to set expectations. The required information would never be obtained, and even if the UIF received it, the quality was questionable and would not have a material impact on the financial statement. A business decision would be made on the future of the social responsibility investment because of the problems encountered at both the CF and UIF.

On the question on why financials were not prepared according to proper prescriptions, the DG said that it was not a deliberate attempt by the Fund not to comply. However, instead of applying the GRAP, the Fund opted for the impracticality related to the investees and associates. It had been unable to obtain information from the PIC, and had then tried impracticality, which had resulted in not complying with GRAP. Any decision taken this year may not have a major impact on the Fund till the 2021/22 financial year if UIF decides to disinvest in order not to be accused of wasting workers' and employers' money on companies that were not doing well and did not want to account.

Reports would be shared with the Committee after the investigations were completed.

Ms Puzi said that while sometimes entities submitted management accounts, they did not provide not credible information that could be used to account for those entities.

Dr Prittish Dala, Chairperson of the Audit Committee, said that from a governance perspective as an independent structure, especially in the 2019/20 financial year, the key concern related to the audit was related to the unlisted investments. It had been a bit disappointing that the UIF had further regressed in other areas, such as performance information, where it previously did not have issues, specifically with regard to the technical reserves and how it had disclosed them.

What had not been mentioned thus far was that as a result of the Covid TERS benefits, and the funding received in response to the presidential announcement to ensure that the benefits were paid out, was the responsibility to ensure that internal controls were in place within the Fund. It became evident, however, that there were no additional resources employed within the UIF to ensure that it delivered on the TERS benefit, to ensure that the UIF still delivered a credible set of financial statements and continued with its operation.

Further, the suspensions had taken place as a result of the Covid 19 TERS, and the executive team had then started lapsing. Other members from management had had to step in and there were fundamental mistakes made when it came to the preparation of the financial statements, and so forth. Also, the delays which should concern the Committee were that initially the UIF was supposed to submit these financials in July, but then it sought an extension because it wanted to understand if there would be changes in two months’ time. The UIF had been given assurances that the non-compliance would be accepted on the basis that it was trying to move away from the qualification.

As the DG had mentioned, over and above the interaction between the management and the PIC, there had also been board-to-board and committee-to-committee interactions, and the DG had been privileged to be part of the board meeting. The DG had said that he had requested the chief executive officer (CEO) of the PIC to attend and ensure that credible information was received. Commitments were made, but were not followed through and UIF was forced to apply GRAP 1.

From the AG’s perspective, they did not have a problem going the GRAP 1 route, but the UIF ultimately did not meet all the criteria, specifically in terms of the SLA, to ensure that it could be demonstrated that certain provisions of the SLA were enforced, and the reasons why it had been impracticable. That was why the GRIP 1 approach had not worked.

Dr Dala said that when the Fund first received the qualification, as the chairperson of the audit committee he was positive that things could be turned around. However, it was important for the recommendations of oversight structures to be implemented, and there needed to be much more commitment from the executive management perspective. In terms of the action plan, the root causes of the issues should be addressed so that the internal control deficiencies could also be addressed, which was within the IT space, misinformation, consequence management, and addressing the bottlenecks that occurred in that process as well.

Mr Zola Luswazi, Chairperson: UIF Board, said the board was just a month into the job and had since then had one special meeting after the induction and another meeting where the financial statements were discussed. It was correct that the board had made certain observations already as to where it believed the challenges were. At the last special meeting where the financial statements were considered, the statements were not recommended and that called for more action. The Minister had suggested that a workshop should be scheduled between the ministry management and the board, to dig deeply into the issues and come up with solutions.

His opinion as chairperson of the board was that there were several challenges that needed to be addressed. The first challenge was the issue of structural defects within the entity which did not allow it to function adequately. Linked to that was the issue of the skills levels, which were not up to where they should be. This was informed by the issue of the structure, which created a skills level problem, as it did not allow it attract the calibre of people it wanted.

The second issue was the skill level. For the technocrat skills, for example, there were minimum skills required. Also, in leadership one was required to do what one was supposed to do, and some of the things had to be dealt with vigorously. There was also a collapse of the system, and questions as to why these things were happening. From the board's observations, it was clear that the issues of consequence management was a problem which the DG would have to deal with quite vigorously. It was not sustainable and wrong to manage an organisation of this magnitude in the way it was being managed. There was also a big problem with the entity's work ethic.

Lastly, there was the PIC problem which had been discussed already. This would be tackled at a workshop next Friday, which would involve the ministry, the board and top line management. There would be a turnaround plan to address the core issues at the UIF.

The Chairperson referred to the issue of work ethic, and said she had visited the DEL office in Port Elizabeth and though the office was clean, when the provincial manager took her around, she had observed that in one of the offices, a member of staff had been addressing a member of the community with his mask below his chin. His response to this was a reflection of the leadership style in that entity.

Mr Lamati said that work had already started and it was dedicated to making sure that these entities went back to what they were two or three years ago. The DG would work with the chairperson and audit committee to ensure that the shortcomings were resolved.

Deputy Minister Moloi applauded the Ministry for the kind of leadership appointed to the board in the form of the chairperson. In a short space of time, they had started work and it was safe to say that they were on track as a Department. A meeting was held recently with the Minister and the entire management, and they had come up with strict timelines and agreed to get reports on a weekly basis so they could report on time to the SCOPA and all concerned parties. She was excited that the board chairperson was very enthusiastic on this matter. She acknowledged the experience of the Committee Chairperson at one of the labour centres, and also commented on the way staff presented themselves in jeans.

She said that the core issues of work ethics had been considered, and the Department would have to tighten up some of these loose ends. She herself, the DG and the Minister, would follow up on this and inculcate a new culture in the staff. She said that feedback on the status quo would be provided at every Committee meeting.

She thanked the Committee for the opportunity to present matters of clarification, and said that where additional clarifications were required, the Department would respond in writing in due course.

Chairperson's closing remarks

The Chairperson told the DG that all offices of the DEL should have a designated area for the staff to have lunch. She expressed pleasure that there was a chairperson of the board who would assist ordinary people of the country so that they were serviced in a manner that they should be serviced. Both UIF and the CF boards had a responsibility to show that they advised the Minister. There was a clear understanding that both institutions needed people with expertise. Many times, complaints were directed at the top management, while the middle management was overlooked. She said authority needed to be asserted to ensure that the Department delivered on its mandate.

The Chairperson thanked everyone that attending the meeting and said the Portfolio Committee would resume in August.

She added that deliberations were supposed to have been held tomorrow on the Employment Equity Bill, but unfortunately a letter had been received that the state law adviser who had been deployed to the Committee, had a serious family responsibility and would not be able to attend this week. She had consulted with the House Chair, because the Committee could not engage in deliberations when the member of the state law adviser’s office was not present. The meetings of tomorrow and Thursday would then be rescheduled, and they would apply officially for another date which would be communicated to Members. She asked them to prepare appropriately for the deliberations.

The Department would brief the Committee on the Violence and Harassment Convention 190 and their plans on gender-based violence (GBV) in the workplace as the Department of Employment and Labour.

The meeting was adjourned.