Audit Action Plans for Finance Portfolio; with Deputy Minister

Meeting report

Apologies were read out, which included an apology from the Minister of Finance, Mr Enoch Godongwana.

Introductory remarks

Dr David Masondo, Deputy Minister of Finance, thanked the Standing Committee on Finance (SCOF) for the opportunity to present progress on how National Treasury’s entities were dealing with the findings of the Auditor-General of South Africa (AGSA). It was important for all to make sure that the entities were properly governed. From time to time, the AGSA provided Treasury with a mirror through which it looked at itself on whether it was running its entities properly, including public finance. This was important in increasing the confidence of South Africa’s people in government. Not only that, but it would also increase the confidence of the investors, who were interested in making sure that good governance of government and its entities was in place. No one would want to put his or her money into a government or entities that were not properly governed, because they may lose their funds. In the Land Bank (LB) and other entities, investors played a key role in advancing their capital to help government do what it ought to do and for entities to generate better returns.  Treasury was committed to implementing all the interventions to restore better governance in its entities.

Treasury was working hard to ensure that it filled vacancies at a senior administrative level. It had conducted a number of interviews for the Office of the Chief Procurement Officer and the Office of the Accountant-General, but unfortunately it could not find suitable candidates. Treasury had not given up. The following day, it would be interviewing for the position of the Office of the Chief Procurement Officer and other positions, particularly the Chief Executive Officer (CEO) of the Government Pensions Administration Authority (GPAA). It was not giving up in trying to find suitable candidates for this position, because it was important for the Treasury to be stabilised at a senior level to make sure that there was no institutional uncertainty, and that there was always institutional stability in those entities.

Mr Dondo Mogajane, Director-General (DG), National Treasury (NT), introduced the order of the presentations. Treasury would present first, and then each entity would present. Treasury’s presentation would focus on what it was doing in addressing some of the findings outlined in the Auditor-General’s (AG) report.

The Chairperson of the Committee advised that all the presentations should be made first, and then the Members would ask questions.

External Audit Findings Action Plan as at 31 December 2021

Ms Laura Mseme, Chief Director (CD): Strategic Planning, Monitoring and Evaluation, NT, presented.

Ms Mseme said the presentation focused on Treasury’s quarterly audit action plans. It had agreed to provide those plans to the Committee on a quarterly basis. It had set up an audit findings committee. This committee was chaired by the Deputy Director-General (DDG) of Corporate Services and included the CD of Strategic Planning, Monitoring and Evaluation, the Chief Financial Officer (CFO), the Chief Revenue Officer (CRO), and the Internal Audit. Internal Audit acted as the secretariat of the committee, and also verified all of the submissions that were made by all of the audits finding owners on their progress. The committee was meeting regularly and ensured that the Treasury addressed the audit findings.

Progress on 2020/21 External Audit Findings: Plan of Action as at 31/12/2021

Treasury had resolved 59% of the findings from the previous financial year. It was in progress with 33% of the findings, and 8% were unresolved. Of the 33% that were in progress, six of the findings were currently in the internal audit verification process, which meant that the audit finding owner had reported to Internal Audit and provided evidence that they had addressed the finding, the controls had been implemented, and Internal Audit was now in the process of verifying that that was correct.

Progress by Business Unit on External Audit Findings 2020/21

The table on page two summarised the progress on action plans to resolve the AG's findings. The business units were: Corporate Services – Internal Audit; Corporate Services – Enterprise Risk Management (ERM); Corporate Services – Financial; Corporate Services – Human Resource Management; Corporate Services – Information Technology (IT); Corporate Services –  Supply Chain Management (SCM); Office of the Chief Procurement Officer (OCPO); Office of the Accountant-General; and Strategic Planning, Monitoring and Evaluation  (SPM&E).

Ms Mseme said that some of the unresolved findings were still being implemented. There were a number of items in the IT area where the cost of resolving the finding may be prohibitive, and the Treasury was therefore looking at mitigating controls that would reduce the risk. In other areas, the risk control could not be implemented at that time, because it referred to systems that needed to be opened for departments to use. If the Treasury implemented the control, departments would not be able to access its systems. Hence, updates and upgrades needed to take place in the departments that accessed the Treasury’s systems, and then it would be able to implement those controls. Treasury recognised that that delayed its resolution of those findings. It was imperative that departments got access to the Treasury’s systems.

Additionally, of the 39 findings, 23 were resolved, 13 were in progress (six of which were indicated to be resolved by the process owner, with Internal Audit doing the verification), and three remained unresolved.

Ms Mseme added that the Treasury had provided the Committee with a full action plan, with the status of each of those findings.

Land Bank Presentation

FY2021 Audit Outcome & Corrective Action

Mr Ayanda Kanana, CEO: Land Bank (LB), said that the audit that the LB was dealing with for the year 2021 needed to be contextualised: That audit covered three financial years. That was because the 2020 year audit had received a disclaimer from the AGSA, which meant that the LB had to undergo a “huge” programme of restoring the internal controls that were required by the entity in order to make sure that it restored the integrity of the financial statements that it had put out. The LB was audited for the 2021 financial year. The AG had also audited the 2020 financial year again, as well as the 2019 financial year. The LB had stated a number of accounts to make sure that the financial statements fairly presented the state of affairs.

The LB had had an improvement from that disclaimer to a qualification. The qualification that it had was not a representation of where it needed to be -- it should be sitting at an unqualified audit opinion with findings. One of its intermediary partners with whom it worked to advance funds to farmers with loans as an agent of the LB, had not been cooperative in giving it the necessary bank statements in order for the AG to perform its audit. As a result, there had been a scope limitation. That scope limitation meant that for a book as big as that partner managed had resulted in a qualification. Except for that, the LB had been able to restore the necessary financial controls in order to get an unqualified opinion. All that partner had needed to do was to give the LB the bank statements to validate where the payments were going. That inability had resulted in a qualification. The LB was working to remedy that situation. The reason for that difficulty was that the bank had decided to in-source the books that were managed by those intermediaries. It had been left with two out of the six that it had, and that was done largely to be able to regain control of the LB loan book and be able to account for it internally, as opposed to having a dependency system. The previously mentioned reason was amongst other reasons that had motivated the in-sourcing that was done.

The remedial plan undertaken by the Land Bank after the 2020 financial year's disclaimed audit opinion had yielded significant results, as it had received a qualified audit outcome with findings for the 2021 Audit.  The reason for the qualification was as a result of Unigro, which was Land Bank’s intermediary partner, refusing to provide information required to verify disbursements and repayments on the loan book. Per the audit report, the AGSA outlined the basis for the qualification as follows:

“I was unable to obtain sufficient appropriate audit evidence that management had properly accounted for disbursements and repayments for loans and advances that were managed by a Service Level Partner (SLA) which was the Bank's external service provider. This was due to the status of the accounting records and non-submission of information to support these transactions. I was unable to confirm these transactions by alternative means. Consequently, I was unable to determine whether any adjustments were necessary to loans and advances stated at R31 billion in note 11 to the consolidated and separate financial statements.”

The loan book previously managed by Unigro was in-sourced from 1 October 2021 and was now managed in-house.

The AGSA, in its audit report, also raised a material uncertainty on the ability of the bank to continue as a going concern, as outlined below:

“I draw attention to the matter below. My opinion was not modified in respect of this matter. I draw attention to note 3.3 to the consolidated and separate financial statements, which indicates that towards the end of April 2020, the bank experienced a liquidity shortfall, which resulted in the bank defaulting on some of its obligations. This triggered a cross default and resulted in a de-facto standstill on capital and interest payments to its funders. At the date of this report, the liability solution to cure the default was still in progress and was dependent on the signing of the commitment agreements with lenders. The planned date for the signing of the commitment agreements was at the end of January 2022. These events or conditions, as set forth in note 3.3, indicate that a material uncertainty exists that may cast significant doubt on the entity's ability to continue as a going concern.”

Mr Kanana added that some of the issues relating to internal controls were that the models the LB had used to rate its risk to manage the loan book had not been calibrated for a number of years, dating back to 2015. It had caught up on the fact that internal controls work, its models were up to date, and it was able to account and manage the loan book as it wanted to. Going forward, he believed that that improvement would bode well for a bank that had started to see a lot cleaner audits than had been seen in the recent past.

FY2021 Audit Outcome & Corrective Action

All audit findings raised during the FY2020 audit and led to the disclaimed audit opinion had been successfully addressed by the LB through the remedial processes undertaken by the bank. The FY2021 audit findings had also been successfully addressed as part of the audit process.

In order to address residual internal control deficiencies in the management of the loan book, the bank had again initiated the remedial programme to address audit findings coming out of the FY2022 audit. In order to prevent a recurrence in the FY2022 audit, the Land Bank was engaging Unigro through its lawyers to ensure all information regarding the loan book was handed over to the bank.

Mr Kanana added that the risk that the LB currently had was that the 2022 audit was upon it. The reason it was reported late, and why the Committee was not seeing clear progress, was that the audit was completed only in December. The LB had started with the implementation of the remedial action plan, which had a shorter period of time to fix any of the problems. Its engagement with its partners “was a little bit more intense” around ensuring that it got the necessary information in order to account for that book. It was important that the bank was able to get all the content and bank statements, despite the fact that the agreement had terminated. It was expected that it would be put in a position to account for that book, otherwise those agreements had really done an injustice to the LB itself.

The remedial action plan was also trying to ensure that where controls had been identified as weak, the LB was able to boost them so that the AG could rely on them and use a less substantive audit process to deal with the bank. To that effect, the LB had activated its legal team to engage with the agent or service level agreement (SLA) partner to make sure that all information, and all bank accounts where LB money was used, was made available so that it could account to the Committee and to the auditors with a bit more certainty this time around.

FY2020: Remediation Plan - background and context 

A remediation plan had been developed and implemented in order to address the AG’s audit findings. The implementation was completed within the time period for the FY2020/21 audit. (See the presentation for the full details.).

Regarding the annual financial statements and resolving the going concern risk, a revised liability solution intended to restructure the repayment of debt going forward was being negotiated with lenders. Its conclusion would cure the event of the default that the Land Bank was currently in. In the area of loans and advances, net impairment charges, claims and recoveries and credit risk disclosure, the implemented corrective interventions were aimed at the overall enhancement of internal controls and were focused on enhanced management of the loan book. These included model recalibration and integrity of inputs, such as collateral management, staging and modifications, and a review of relevant policies (collateral management and impairments, and write-off policies). Another intervention was the termination of some SLA agreements and in-sourcing of the management thereof, as well as finalisation of the implementation of the SLA improvement plan for the remaining SLAs.

The remediation work affected the three previous financial years from 2019 to 2021.

Mr Kanana gave feedback on the LB’s position in terms of its restructuring. It had not been able to close on the default and was working tirelessly with lenders to make sure that they assisted in making sure that the bank was out of default. It was working on a revised liability solution. The latest proposal on the table was a third solution to try and get the lenders to get the bank out of default. This was important because it also addressed the going concern. The AG knew that the country at large supported the LB. That had been mentioned a number of times. Appropriations had been made to ensure that the bank commenced with its developmental mandate and to make sure that it got out of its event of default. That was a particularly important aspect of ensuring that future payments did come through, and getting out of default was what the LB was working with lenders to achieve. That prospect threatened its existence in the market and its support for small to medium-size farmers in particular, who had not been accessing the LB for the past two years. That aspect was critical for its going concern risk, and it was being attended to with the lenders.

Conclusion

Mr Kakana summed up the situation as follows:

• The Land Bank had received a qualified audit outcome from the AGSA for the year ended 31 March 2021.

• This was a significant improvement from the disclaimed audit outcome received by the Bank for the FY2020 audit.

• The Bank was taking steps to address internal control deficiencies that had led to the audit outcome and had re-instituted the remedial programme to address them, as well as an overall enhancement of the internal control environment as regards management of the loan book.

• The majority of the loan book previously managed by intermediaries had now been in-sourced and managed internally. This further allowed the Bank to implement the required controls on this portion of the book as well.

• The Bank was committed to addressing the challenges experienced regarding the internal control deficiencies, as well as to finding a solution to deal with the event of default.

Public Investment Corporation: audit outcomes

Mr Sibusiso Nsuntsha, Acting General Manager: Finance, Public Investment Corporation (PIC), said the PIC had received an unqualified audit opinion with findings for the financial year ended 31 March 2021.

The AGSA had identified significant control deficiencies, which were highlighted in the audit report.

The PIC was responding to the controls identified to ensure that all the deficiencies were mitigated and did not recur when the audit commenced for the year ending 31 March 2022.

Financial systems and internal controls

AGSA's finding had been that management did not implement effective financial systems of internal controls to ensure accurate disclosure notes to the financial statements. The preparation and review of the disclosure notes were not adequately reviewed.

The action plan to deal with this finding, and progress to date:

Annual financial statements were previously presented once a year, and disclosure notes were prepared and reviewed at the end of the financial year.  Management had implemented controls to prepare and review disclosure notes more frequently. The disclosure schedules were now prepared and reviewed for December and would also be prepared and reviewed in February and March 2022. Regarding the timeline, the PIC’s plan was in progress, and the completion date was the end of March 2022.

Annual refresher training on changes relating to the International Financial Reporting Framework (IFRS) had been completed.  This would ensure that staff was up to date with all changes and that those changes were implemented in the AFS for 2022. IFRS training took place in September 2021. This part of the action plan had been completed.

A detailed assessment of the impact that the new accounting standard would have on the PIC's AFS had been performed and implemented for the 2022 AFS. The PIC was currently using the latest IFRS checklist to ensure the AFS complied with the IFRS. This part of the action plan had been completed.

Another finding had been that management did not ensure that enhanced due diligence (EDD) was performed on the identified politically exposed persons (PEPs), as required by the applicable PEP policy. This was due to a misalignment between the PEP policy and the Finance Intelligence Centre Act (FICA) risk management and compliance programme guideline. The PEP policy required EDD to be performed for all PEPs identified whereas the guideline required EDD to be performed when PEPs were identified as high risk.

The finding was based on the 2019 PEP policy, and an updated policy that addressed the shortfalls would be approved by the Board before the end of the financial year. This action plan was in progress, and a new policy addressing the risk identified by AGSA had been updated and was due for approval by the Board in March.

A third finding had been that effective and appropriate steps were not taken to prevent irregular expenditure disclosed in note 38 to the annual financial statements, as required by section 51(1)(b)(ii) of the Public Finance Management Act (PFMA). To address this, preventative controls were in place to prevent irregular expenditure from occurring. The controls in place had been found to be working effectively by the AGSA, and additional training would need to be provided to staff. Training on the PFMA and the procurement policy was scheduled for February 2022. The action plan was in progress.

Mr Nsuntsha recalled that some of the irregular expenditure disclosed by the PIC was related to the old contract before the condonement. Although the PIC had disclosed this, the AG had still emphasised that the PIC needed to make sure that it put more preventative controls in place. This would make sure that it prevented any new irregular expenditure. It had worked with the procurement team to make sure that it closed any gaps when it came to training for the current financial year. It would apply to the Treasury for the opening balances that were not condoned, to make sure that it communicated with the shareholder to supply evidence so that Treasury could approve those condonements.

The PIC’s target this year was working to make sure that those three significant deficiencies that had been identified by the AG’s office were addressed.

Independent Regulatory Board for Auditors briefing

Mr Imre Nagy, Acting CEO, Independent Regulatory Board for Auditors (IRBA), said the presentation contained details of the annual report for 2021, the key audit outcomes, irregular expenditure and governance. Other strategic highlights were the role of auditors and audit regulators, and the IRBA's refocused five-year strategy (2021-2025).

Annual Report 2021 – key audit outcomes

• Unqualified audit report for 11 consecutive years.

• Unmodified audit report on the 2020/2021 financial statements.

• No material findings on predetermined objectives.

• Findings on compliance with laws and regulations involving irregular expenditure and expense management.

Annual Report 2021 – irregular expenditure

The presentation showed an extract from the IRBA’s financial statements, specifically disclosure note 25 from the 2021 financial statements.

The 2021 opening balance had been R335 570. This was “way below” the materiality threshold for the IRBA. The AG had highlighted current irregular expenditure of R1 962 869, and irregular expenditure from prior periods of R8 468 502. Mr Nagy said that the IRBA had gone back to 2014 to look at all single source expenditure for specialist investigators, which were mainly specialist investigators of auditors with misconduct around audits and auditors.

AGSA raised a non-compliance with a supply chain process in 2020 involving R335 570 but had not modified its opinion as it was considered immaterial. However, the IRBA had retrospectively reviewed previous financials from 2014 onwards and self-declared an amount of just below R11 million arising from a similar procurement practice and disclosed this in the 2021 financial statements. To place this in context, the Irregular expenditure related mostly to procurement of specialist investigators for high-profile matters, in which it had historically proven difficult to obtain three quotations due to the scarcity of independent experts, as the skill-set was highly specialised. An example was if the IRBA inspected the audit failure of a bank. When the IRBA investigated a big bank that failed, it investigated the auditor’s role in that. What was important for the IRBA was to get a specialist auditor that had banking expertise.

The IRBA had procured specialist investigator services through single-source motivation for several years, with no findings from the AGSA until the 2019/20 audit. This was directly related to the interpretation and implementation of National Treasury Instruction Note 3 of 2016/2017. Mr Nagy added that Note 3 required that a single source above a certain amount needed to follow a due procurement process, otherwise the Treasury should be approached for prior approval of a deviation.

The IRBA Board and Acting CEO had subsequently investigated the matter in early 2021. Given there was no fraud, corruption or criminal conduct and no material loss to the IRBA identified, the Board had approved the removal of the irregular expenditure in the 2021/22 financial statements in terms of paragraph 44 (c) of the irregular expenditure framework. Going forward, the IRBA would not use single-source procurement, but would instead appoint a panel of various experts on which to draw for specialised investigations. Where a high-profile investigation matter required a specific expert investigator skill-set, the IRBA would apply to NT in advance for any such deviation. One such deviation had already been granted in a high-profile investigation matter.

The IRBA had been prudent in declaring and disclosing possible irregular expenditure and had implemented the necessary controls to mitigate possible future irregular expenditure. The former CEOs and former Director: Operations (CFO) had since left the employ of the IRBA and new/additional staff had been appointed to strengthen the supply chain management (SCM) unit.

Annual Report 2021 – governance

Former Minister Mboweni had dissolved the IRBA Board of Directors in January 2021 and appointed a caretaker board for three months. The new CEO had left the IRBA after seven months.

The caretaker board had appointed an Acting CEO in February 2021, and the Minister had appointed a new board in June. The board had approved the refocused five-year strategy.

The President signed into law the Auditing Profession Amendment Act in April 2021, strengthening the governance, independence and enforcement powers of the IRBA, such as the upper limit of fines with which firms could be sanctioned had now been removed by the new Act, and the upper limit could now be set by the Minister.

The International Forum of Independent Audit Regulators (IFIAR), comprising independent regulators from 54 countries, had appointed the IRBA as a board member and the chairperson of its Audit and Finance Committee.

The board was actively recruiting a new CEO.

The role of auditors

Mr Nagy said that by promoting integrity in financial reporting and building a basis for providing confidence, auditors reduce financing costs and contribute to the efficiency of capital markets, thereby promoting economic growth.

In essence, the IRBA fully understood the role that auditors play. When auditors issued an opinion on financial statements, both local and foreign investors had to rely on that financial information in order to make investment decisions. The more trust that could be placed in the financial reporting ecosystem, and the reports that were issued by directors and those charged with governance and then audited by the auditors, the more trust was built in that ecosystem. In turn, investors would be more inclined to invest their money, because investors could trust the figures that could be produced to them for investment purposes.

The role of the audit regulator

As a regulator, the IRBA understood its updated mandate in terms of the new Auditing Profession Amendment Act in creating an ethical, value-driven financial sector that encourages investment, confidence and protects the financial interests of the public. The public included the investing public, and those with pension funds that were invested in, for example, listed companies.

Overview of refocused five-year strategy

The redefined strategic focus areas included sustainability and relevance; audit quality; and comprehensive stakeholder engagement.

(See the presentation for the full details).

Mr Nagy added that the IRBA’s mandate covered only auditors and not accountants.

He said key projects for restoring confidence included Financial Reporting and Governance Eco-System Gaps (outside mandate); Auditing Profession Gaps (within mandate); and IRBA Gaps (internal).

He said the IRBA was constantly putting out new ideas, new reforms and new rules that would prevent and hopefully curb auditors misconducting themselves in the execution of an audit. The IRBA had recognised that it needed to remain capacitated and that it needed to maintain its professional capacity and experience through its staff, which was its greatest asset. The IRBA also needed to invest in its platforms and people, as well as technology, to make sure that it was a future-fit regulator that effectively and efficiently regulated the auditing profession in the country. The IRBA had identified three workstreams under the leadership of the executive management, and it reported to the Board on a quarterly basis on that project. It had already made a lot of progress on a number of those projects to strengthen, for example, the transparency and content of the auditor’s report for the benefit of investors and those that were interested in the audit outcomes of companies’ financial statements.

Government Pensions Administration Authority 2020/2021 audit report

Mr Shahid Khan, Acting CEO, Government Pensions Administration Authority (GPAA), said that the GPAA had read the Announcements, Tablings and Committee's (ATC) report that had been shared with the GPAA by the Secretariat of the Treasury. Its presentation would focus on the highlights contained in the AG’s report on the GPAA.

2020/21 audit outcomes

The overall audit outcomes of the GPAA remained unchanged from the unqualified audit findings that were achieved in the prior year. It had prepared an annual performance report (APR) that was useful and reliable, as no material findings were identified relating to the APR. This was due to the government component implementing the prior year's recommendations and action plan.

Mr Khan added that the AG had commended the GPAA on implementing the recommendations and the action plans on performance.

Compliance with laws and regulations at the GPAA still remained an area of concern, as material non-compliance had been identified. These contraventions related to procurement management, contract management, expenditure management and consequence management. This had been internally identified by the GPAA when the tender was immediately cancelled and irregular expenditure of R2.4 million was raised and reported to the AG.

Sufficient appropriate audit evidence could not be obtained that one contract had been awarded to a bidder based on points given for criteria that were stipulated in the original invitation for bidding. This was as a result of the advertised evaluation criteria that were not clear and specific. In some instances, the AG was unable to verify the outcomes that were reached at the due diligence phase of the bid evaluation. Though this was not classified as irregular expenditure per the AG's recommendations, the GPAA was busy with an investigation to ascertain whether there were any irregularities in awarding this contract.

An independent legal team had been approached through its procurement section to do that investigation. The GPAA had shared the terms of reference of the investigation with the AG, and had asked the legal firm to interview the AG in order to appreciate her concerns. He had been told that that report would be made available at the end of February, in line with the agreement with the AG.

Consequence management

The AG had been unable to obtain sufficient appropriate audit evidence that disciplinary steps were taken against officials who had incurred irregular expenditure. This was as a result of recommendations included in investigation reports.

Actions had been taken by the GPAA since the audit. A loss committee was established in terms of the framework of the PFMA that dealt with irregular expenditure, and it had looked at all investigation reports that were done. All irregular expenditure that was presented to the loss committee had revealed no criminality or loss of funds. There was value for money spent in respect of the expenditures incurred. It was a matter of certain prescripts that had not been followed in full that had resulted into these irregularities.

Controls had been put in place to avoid a recurrence of the irregularities in order to ensure that they could either be removed or condoned. Staff members who were found in the wrong by the investigation reports were given appropriate sanctions, including written warnings.

Expenditure management

Effective and appropriate steps had been taken, and progress to date, and the closing balance of irregular expenditure, showed that R16.07 million had been removed from irregular expenditure in line with PFMA regulations. R12. 343 million had been sent for investigation and the reports were expected to be finalised by end February. R7.604 million had been sent to the NT's Chief Procurement Office for condonation. R37.855 million in investigations and consequence management was in progress.

During the audit, the AG had identified and reported instances where payments were not made within the stipulated 30 days. Management was thus urged to implement corrective measures. Business units were engaged every month for invoices that could be pending on their units. The invoice payment delays had been placed in the cost centre manager’s performance contracts.

Key management positions vacant

A number of key management positions were vacant. The instability in key management positions was reflected by the number of executives and senior managers acting in positions for a period exceeding 12 months. This adversely impacted the government component`s strategic direction.

The executive positions of Chief Executive Officer, Chief Operations Officer, Chief Financial Officer, and the Head of Corporate Services, had been advertised in the 2021 calendar year, and all the short-lists and necessary information had been prepared and candidates were awaiting interviews.

Key vacancies of Chief Risk Officer and General Manager Support Services at chief director level had been filled during the financial year, together with the Chief Audit Executive. The Chief Audit Executive had prioritised the filling of key vacancies within the Internal Audit Unit in 2022. 

Government Technical Advisory Centre 2020/21 audit outcomes

Ms Ronette Engela, Acting Head: Government Technical Advisory Centre (GTAC), said the overall audit outcome of GTAC for the 2020/21 financial year was an ‘unqualified audit with findings.’ This remained unchanged from the unqualified audit with findings that were achieved in the prior year.

GTAC had been able to achieve most of its strategic objectives, a marked improvement from the prior year’s audit.

There were no material misstatements in the submitted annual financial statements, and note should be taken that there was about an 83% reduction in irregular expenditure compared to the prior year -- R1.4 million versus R8.2 million.

The findings were in the following areas:

- Usefulness and reliability of reported performance information, where one key performance indicator was not well defined to adhere to the “specific, measurable, achievable, relevant and time-bound” (SMART) criteria.

- Non-compliance with SCM legislation, which had resulted in irregular expenditure.

The key root causes were the lack of strict monitoring of useful and reliable performance information.

Ms Engela added that it was also a matter of the timing of the publication, as GTAC could not change it in the annual performance plan (APP). It had changed it in the business processes, but that was not deemed adequate. There were also insufficient preventative controls to ensure compliance with SCM legislation.

The Accounting Officer position was vacant and was currently appointed in an acting capacity.

Management actions implemented

• Audit action plans were reviewed by internal audit and the audit committee to ensure that they address the root causes, with specific focus on compliance with SCM legislation. The internal audit unit independently monitors the action plans and the audit committee exercises oversight. Preventative controls on SCM compliance had been strengthened and the SCM training improved.

• A policy and standard operating procedures had been put in place to ensure that performance indicators were well defined and adhered to the SMART criteria. Consultations were also made with the Department of Performance Management and Evaluation (DPME) and internal audit before the APP was finalised to ensure adequate performance indicators. The audit committee also exercises monitoring and oversight.

• Investigations of all reported irregular expenditure were finalised by the internal audit unit, and the process of determining the breakdown in internal control to initiate disciplinary actions was underway. Submission to request OCPO to condone the irregular expenditure would be instituted thereafter. Consequence management processes had been prioritised by management, and the audit committee would track consequence management on a quarterly basis.

Cooperative Banks Development Agency

Ms Lorna Padayachee, Deputy Director: Financial Management, Co-operative Banks Development Agency (CBDA), said that the CBDA was currently without an acting managing director.

Audit Outcome

The overall audit outcome over the last three years was inconsistent -- from being unqualified to being qualified in 2019/20. The qualification related to fruitless, wasteful and irregular expenditure; the preventative controls that had been implemented by management had not been adequate to prevent non-compliance.

In the 2020/21 year, the improvement of an unqualified audit opinion was achieved, with a reduction in findings.

Management was addressing audit findings in terms of expenditure, supply chain and consequence management and material misstatements, to eradicate the deficiencies in the control environment through the implementation of action plans which were monitored by the governance structures.

Ms Padayachee said the CBDA had to do prior year corrections related to the 2019/20 year. This had resulted in the two investigations it had on fruitless, wasteful and irregular expenditure. The AG had found that the CBDA could not identify the split between the amounts relating to fruitless and wasteful expenditure. Even though the investigation took place, it could not concretely determine which amounts were which. It engaged with the Office of the Auditor-General (OAG), and it had resolved that matter.

In terms of the fruitless, wasteful and irregular expenditure, the entire amount in its financial statements was R5.447 million. There was R9.891 million in irregular expenditure.

In performance information, the CBDA had one finding related to the usefulness and reliability of its performance information.

Action plan implemented

The Agency had:

• Reviewed the processes, procedures and systems within the units to strengthen controls and monitor the effectiveness of the controls.

• Built close relationships with the National Treasury supply chain management (SCM) unit and the Office of the Chief of Procurement (OCOP), since the CBDA did not have the necessary capacity.

• Employed skilled and competent staff in the finance and SCM fields. Ms Padayachee noted that looking at the process that would unfold with the CBDA merging with other entities, this process had been put on hold.

• Through the internal audit plan, it had included a review of interim financials and internal controls in SCM and finance.

• Prepared an external review of the annual financial statement.

Identifying the cause of deficiencies

Ms Padayachee referred to human resource capacity constraints and added that due to governance compliance issues, which took up a lot of resources, Corporate Services was made up of only five personnel. The CBDA’s main aim was to make sure that its core area, which was capacity building for the co-operative financial institution (CFI) sector, had enough resources to make sure that it could contribute to CBDA meeting its mandate.

Another factor was the segregation of duties, such as where one person prepared the statements, while another handled other duties, with inadequate review of the financial statements. There was also a lack of consistent leadership -- over two years of having an acting managing director. There had been delays in the appointment of board members, which had impacted the CBDA, and ineffective monitoring of controls. Consequence management in terms of the prior year's fruitless, wasteful and irregular expenditure had still not been continued.

Ms Padayachee added that without an acting Managing Director, a lot of those matters were currently being put on hold. Although the preliminary steps had not been taken yet, the process was still continuing, even though it was still a bit slow. It was crucial for the CBDA to make sure that it had a leader so that it could take those matters forward.

Deputy Minister Masondo said that the presentations were the Treasury’s account of how it was implementing some of the recommendations or action plans, as guided by the findings of the AG.

Discussion

Ms D Mabiletsa (ANC) commented on the Land Bank. Even though it was saying that with the negative outcome it got, it was only one matter, a qualified audit opinion was a qualified audit opinion. That was how the AG was going to describe the LB. Her concern was that the LB also had a unit that was just there to chase after those bank statements. How long had that unit been chasing after these bank statements? Her other concern was that if the LB could not submit the bank statements or the report, had it done the necessary work? Had it achieved its mandate? She thought that the LB must just continue and look into the other matter.

Referring to all the other entities, she said that sometimes these entities might make sure that their books looked good, because they had received an unqualified audit outcome, but forgot their mandate. Even though entities had all of those books that were looking good, what was the mandate? Were people there doing the work they were supposed to be doing? She asked that entities continue to fill all of the positions that were supposed to be filled, because that would affect their mandates, otherwise they would not achieve what they were supposed to achieve.

Dr D George (DA) said that he had spent time in the Standing Committee on Public Accounts (SCOPA), and one of the things that struck him very much there was that the Committee saw the same thing happening over and over again. The same issues came up, and they never seemed to get resolved. The people responsible just moved around the government services. That had been a concern of his from a systemic perspective for a very long time. That was something, from a macro perspective, that needed to be looked at. He believed that that lay very firmly in the domain of the National Treasury, which was responsible for the proper management of the people's money. From a macro perspective, his expectation -- and he was sure it was the expectation of every other hard-working South African -- was that Treasury’s eye would be very firmly on all of the entities that were spending the people's money, to make sure that they spent it well and did not waste it. That was his appeal to Treasury, because he did not believe that it had been as effective in this regard as it could have been. He knew it was a very difficult task to achieve, but he believed that was where “the buck had to stop”.

On the Land Bank, he thought that the Committee had heard it all before and that the key issue with the bank was that it did not manage the loan book properly. There were “dodgy” loans. The LB never got paid back, or problematic loans never got paid back. There was a lack of management, a lack of controls, etc. However, it did help to dwell on the past, and “we must look forward.” In the case of the LB, he did not think Treasury had been “on the button.” The Committee had heard over and over again things that were wrong, things that “we turned around -- and then we never got there.” He wanted to hear from the Treasury how that cycle would be broken. He was not so sure that the cycle had been broken, and this could not continue to go on and on.

Dr George said there was “a bit of noise” about the PIC, but he would not go into that. The PIC had said that one of the items, in particular, was that management did not implement effective financial systems for internal controls to ensure accurate disclosure notes to the financial statements. That was a very serious problem. If one was going to do a set of financials, one would have to explain certain things. One would have notes on them. If there were no records or insufficient reports to be able to put a coherent statement together, that spoke “very huge volumes” to the PIC’s ability to actually manage the organisation. Given that it invested other people's money -- in particular, government employees and government’s money, and the people's money -- one would expect a very high standard. He asked the PIC that if it was said that management did not implement effective controls, what would happen to that management? Was there, in fact, consequence management in the form of disciplinary action or dismissal, etc, because if that did not happen, then one would not get anywhere?

The Committee had heard previously about some issues that had arisen at the IRBA. Given that the IRBA was there to set the standard, and was supposed to be leading the charge, with the difficulties that it had experienced and indicated, did that impact negatively on IRBA’s credibility, and therefore its ability to hold others to account? If one was saying to somebody that one was setting the standard, and one expected another person to behave in a certain way, but one’s own house was not in order, then what was people's view? People would look at the IRBA and think, “Well, who were you to tell me what to do?” He was concerned that that sort of culture started to break down systems. He asked the IRBA to comment on whether that was a problem.

On the GPAA, he said the DG would recall that he had raised a number of problems over the past few weeks because the “noise” coming out of the GPAA was “enormous.” Given the number of people complaining about service failure, long-outstanding issues, and not being able to get hold of the call centre, the service appeared to be deteriorating quite badly. He had raised that issue before. He did not go looking for people to come to him with issues for the GPAA to sort out. No Members of Parliament (MPs) did that, as they had a lot to do, with their duties to Parliament and to the community. When people searched for an MP so she or he could help them with a problem of their pension, that told one something -- that there was a very serious problem when it was “bubbling upwards.” He gave the example of a pension where the person’s spouse had died, and now they were starving because they were not getting their money, and pieces of paper were moving from pillar to post. To the credit of the DG, some of the issues he had raised had been taken on to be resolved, so the Treasury was getting somewhere. However, it left him with a very troubling feeling. On the surface, the service appeared to be deteriorating rapidly – what did it mean for financial management? Problems in service showed up in the finances because it told one that there was something wrong with the management. How did the Committee know that these issues were getting sorted out because would show up in the financials before long? That was a serious matter in his view.

Dr George was pleased to hear that disciplinary steps would be taken at the GTAC. The Committee would never completely know what the details were, but that had been the biggest problem – that there had not been proper consequence management for anybody. What he had seen in SCOPA was that people would do something egregiously bad somewhere, and then pop up in another entity. He did not want to know what the detail of the disciplinary action was, but he wanted to appeal to all of the entities that where there were these problems arose, disciplinary action needed to be taken. In the House, he had asked the Minister how many people had been jailed for stealing the people’s money or having done egregious things to their money, and the answer had been probably none. That was a serious problem in terms of consequence management. He was pleased to hear that the GTAC was taking disciplinary action, and he would expect the other entities to do so too.

Mr I Morolong (ANC) said that the Treasury was expected to manage fiscal resources efficiently. The Committee expected entities that fell under the Treasury to set the tone when it came to sound financial governance practices. He was encouraged by the action plans shown in the meeting, which were aimed at remedying internal control deficiencies and responding to all other findings.

He shared Ms Mabiletsa’s sentiments on the LB. He therefore wanted to ask a number of questions, not necessarily on the LB, but generally about the entities under the Treasury. Had it been ensured that within the entities there were fit and proper persons who had been properly assessed and vetted, who were part of the boards of directors and executive? Had the Treasury signed shareholder compacts with each of those entities? Had it ensured that the performance of the shareholder compact was assessed on a quarterly basis? Had the Treasury considered appointing shareholder representatives to the board of directors in the entities? He commented that there should be clear consequence management for non-performance, as well as for non-compliance with laws and regulations.

Mr G Skosana (ANC) said that the action plans of the Treasury and the PIC were quite encouraging. The Committee hoped and believed that the plans would assist in turning the situation around, and producing improved audit opinions moving forward. As a Committee, it would keep monitoring so that an action plan did not become an action plan only on paper, but also a real action plan where there were actions that were taken in order to remedy the situation.

He said the Committee welcomed the improvement on the LB’s audit opinion from a disclaimer to a qualified audit opinion. However, that was not enough – the Committee needed a clean audit, or at least an unqualified opinion with findings, especially from entities of the Treasury. The Treasury was known to be the Department that dealt with issues related to good governance, financial management, etc. The Committee was therefore expecting a clean audit or at least an unqualified opinion with findings. He had heard the justifications -- that the reason the LB did not get an unqualified opinion was that there was a certain individual who had not submitted the documents, etc. There should be mechanisms to deal with such situations. If the LB did not have a mechanism to deal with such a situation, it meant that in future, it may again receive an unfavourable audit opinion because of certain individuals who were not cooperating. It was the LB’s responsibility to have mechanisms in place to deal with stakeholders or individuals who were not cooperating with submitting documents, especially during the time of audit. The LB really needed to deal with that, because it would be unacceptable for the Committee to be given a justification stating that the LB was supposed to get an unqualified audit opinion, but the reason it had not received an unqualified opinion was because of this individual or stakeholder.

Mr Skosana said the IRBA had been getting an unqualified audit opinion for 11 consecutive years. It had not indicated how many of those unqualified audit opinions were without findings. The report on issues of governance indicated that the Minister had dissolved the IRBA Board in January 2021, and subsequently appointed a caretaker Board for three months. The new CEO had been in office for only seven months and had then left. What was the reason for this?  If the IRBA knew the reason, could it please share it? It had been during an important period of stabilising the institution, with putting in a caretaker Board, and the Board approving a five-year refocused strategy. In the middle of that particular process, the CEO had left the entity. He was interested to know what could have been the reason, or if the IRBA knew the reason.

Ms P Abraham (ANC) said that it was pleasing to pick up from Treasury, as well as the entities, that they had been upbeat and positive about the findings from the AGSA. That was a very good start because it gave Treasury mileage in correcting what it was doing wrong, rather than being in denial and being defensive. In the report that the Committee received, it had heard a lot of improvements regarding what was being done to turn the situation around in areas where it had not been so good. For example, most of the findings were around the weaknesses in internal controls in most of the entities. She wanted to know why that had been the situation. She saw that that was being addressed, but the first presenter had said a particular percentage had not been addressed in remedial exercises -- why was it not at 100% in addressing the issues? The DG had addressed issues of employment -- was there still a high vacancy rate in the Treasury and the entities? It would also be beneficial for the Committee if anyone from the AG’s office was represented in the meeting, so the Committee could confirm progress on the implementation of plans. She knew the Committee could trust the Treasury that the plans were there, but was there anyone from the AGSA who could confirm if the implementation was in place?

On the IRBA, it would be interesting for the Committee to know the names of the companies who were being made single source suppliers for its investigations. She thought that the Members would all agree that the area of forensic investigation was not a scarce skill in SA. That kind of openness would be appreciated.

The Financial and Fiscal Commission (FFC) was not part of the entities that were there to make presentations. If the DG could share the reasons thereof, that would be appreciated. It could be that the FFC was performing very well, and therefore there was no need for it to come before the Committee.

Dr George asked about the solution to the liability challenge of the LB. It had been mentioned in the presentation that there was a solution, and he wanted more detail on it, as it was not clear to him what that actually was.

Responses

Mr Mogajane, Treasury DG, said that the FFC was a separate entity, and it accounted directly to Parliament. It had had a relationship with parliamentary institutions, but not necessarily through the Treasury.

The Committee may have been aware that recently a new Land Bank board had been established, with a new chairperson and “new energies.”

Dr Duncan Pieterse, Deputy Director-General: Asset and Liability Management, National Treasury, said there had been an improvement in the audit status of the Land Bank. Along with the board and executive team, the Treasury wanted to see further improvements. What the Treasury found comfort in was that a new board, which was overseeing the remedial plan of the LB, had taken an active interest in making sure these audit issues were dealt with. It helped that the new board had prioritised this. In addition, the Treasury, as the shareholder, had made sure that the issues around the audit findings for the LB were an area of focus for the board and the board committees. It had communicated that and held the LB accountable through its weekly meetings that it had with the entity, and through the quarterly reports that it received from the bank. It was also making sure that the LB continued to report on those matters to Parliament. From that perspective, the Treasury found comfort in the emphasis that the new board, including the new chairperson, placed on this issue. The liability solution was being negotiated between the LB and its lenders to cure it of its current default position. There were various local and international lenders that were invested in the entity. The entity found itself in a position of default, and the liability solution was what was being negotiated in order to cure the entity of its default position and to chart the way forward for a new and sustainable LB.

Mr Mogajane said that on the issue of vacancies, Dr George was right. The two of them had been exchanging emails around the complaints and issues that remained unresolved. It could not be that somebody knew Dr George or Mr Mogajane, and that then their issue could be dealt with quickly. The system needed to be such that it did not need any intervention from their offices. The point was well taken. It was perhaps something that the GPAA CEO could address as well.

In reply to Mr Morolong, Mr Mogajane said that the Ministry of Finance and entities had to demonstrate leadership in all the areas that had been mentioned in the meeting. He had been consistent on that matter since the Committee had been engaging on this issue. Treasury agreed and accepted Mr Morolong’s guidance. As far as board membership was concerned, where the law or regulations allowed, Treasury ensured that it had board membership in all of the entities that it should be part of.

Ms Mseme answered questions on the vacancy rate at Treasury: This was a priority for Treasury. It had taken an active cautionary stance, in that it needed to find a balance between filling its vacancies and ensuring the integrity of its budget for the compensation of employees (COE) was maintained. Treasury had identified the critical skills in Treasury and the critical vacancies, and it had mounted a significant campaign to have them filled. She recalled the recent announcement by Treasury that it had permanently filled the Deputy Director-General (DDG) Budget Office position, which was a critical position for it. It was doing the third round of interviews the following day (Wednesday) for OCPO. After several failed attempts, it had had to go through a headhunting process. Those interviews would be held the following day. Shortly thereafter, the Treasury would be having interviews for the Office of the Auditor-General (OAG).

With regard to filling positions below the DDG level, Treasury advertised 67 positions in December, with the closing dates in January. It had extended the closing date on those positions to allow people sufficient time to submit applications, given that it was over the holiday period. It was going through the thousands of applications it had received. Short-listing and interviews would be held over the next month for all those positions. Once they were filled, Treasury would start a second round, where it had identified additional positions that would then be the support roles to those critical posts. Once it had completed that, it would have filled all of the critical positions. 

Treasury was going through an organisational review process. It had been a while since it had done this, and it was important that it did it regularly, especially given that it had done some shifting of priorities in its strategic plan. It was imperative that its structure was best able to support its strategic plan. It was expecting the organisational review to be completed this year. Whilst it would not result in any decrease in the Treasury’s staff complement, it would certainly mean that it would be able to ensure that all positions effectively supported its strategic purpose.

Mr Khan responded to Dr George’s remark that the “noise had become huge” in terms of claims coming through and queries being addressed. He wanted to draw attention to what the GPAA had done with regard to that. The GPAA understood the noise, which was due in part to the economic pain out there, where people were desperate. As the GPAA, it needed to show empathy, and try to provide the required services. He wanted to assure the Committee that the GPAA took those matters very seriously. The GPAA had a national footprint. It had 16 offices throughout the country, excluding the head office, in order to serve people through walk-in centres, in addition to telephone lines. It had developed a self-service application (app), where people could go on to the app and download the required information on where their pension processes were, download their members' statements, and download personal income tax certificates (IRP5s) regarding their pensions. A platform had been created in order for the GPAA to do that. It also had an enquiry line, where it had set up a dedicated unit under its legal services, in order to work through emails to ensure that it provided the required services.

Rather than assuming that the noise was predominantly due to inefficiencies in the organisation, it was a dual process involving the economic pain on the one hand, and the challenges that the GPAA faced as an institution. Mr Khan wished to assure Dr George that he and the DG had had face-to-face discussions on the challenges facing the GPAA. Part of that was institutional, related to resources and capacity, while part of it was about dealing with exit management within government as a whole.

He had shared with the DG the information on how the GPAA dealt with information, and what it shared. The GPAA was reliant on the receipt of completed documents from government departments. It needed to ensure that those documents were completed correctly to allow the GPAA to pay. It disbursed on average R113 billion annually, so it needed to be absolutely sure that that money was allocated correctly to the annuitant (pensioner, member or spouse, etc.). It had set up a working team between itself and the Department of Public Service and Administration (DPSA) to ensure that exit management was prioritised, in order for it to be able to pay pensions more expeditiously. The current figures from the GPAA showed that there was an improvement with the quarter to quarter processing of pension claims. He had seen a 5.8% quarter to quarter increase. It was not good enough, because there were people who were in financial dire straits.

He assured Dr George that the GPAA had quarterly meetings with the Deputy Minister (DM), where he insisted that the GPAA take service delivery as an institution seriously. The GPAA was rising to the call from the DM to be accountable. The GPAA’s accountability lines ran not only to the DM and the DG, but it was also accountable to an independent board that monitored its performance on a quarterly basis. That independent board read the GPAA the “riot act” when it did not deliver. Every pensioner, member or annuitant should and would receive the required attention that they deserved.

Mr Kanana said that in discussing the Land Bank, Ms Mabiletsa, Dr George, Mr Morolong and Mr Skosana had all touched on the same thread, so he would summarise their questions.

The first question was around the LB “celebrating” a negative outcome. This matter was a “reducing negative.” What the board had found when it came into office in 2020 was an undesirable state of affairs. It had talked about the issue of bank statements – what gave it a disclaimer had been loans and advances that were not properly accounted for, and a poor control environment in terms of the loan book, particularly the one that was managed by the intermediary partners. For the past two years, the LB had been battling a “five-year pandemic” with respect to the loan book. It had come to reduce that negative to almost an unqualified opinion. He was saying that in a way that was not celebrating a qualification, but to show the Committee the commitment that had been put in to try and deal with that negative outcome, which had been a “much stronger negative” when the LB took it on. When it put out the remedial plan, it realised quite a lot of things that the bank had not been aware of. As it in-sourced or cleaned up, the book, it realised that the situation was worse than the LB thought. Some of the decisions that were taken to do some of that in-sourcing had been quite critical. The issue of the bank statement was probably a “small iceberg” which had managed to trip the LB, but it was not celebrating the qualification. In fact, it was very aggrieved by the fact that it had advanced money to partners, but when relationships were terminated, it was being held at ransom. The issue went far deeper than a bank statement.

On the mechanisms that the LB was putting in place, the termination of those contracts was one of the issues that it was dealing with. There was a belief that after the termination, the partner did not have to work on behalf of the LB. When those contracts were conceptualised, it was anticipated that should they end, the SLA partner must put the bank in a position where it could account for the book. Over and above partners advancing the LB money into the sector, it had paid management fees to them. Those fees had secured its rights and entitlement to those statements. The LB “should not be apologetic” about that, and had to “go and fetch” them. To that extent, it had asked its legal team, even if the team had to go to court, to get the outcome that it wanted. It needed to do that, or else it would have to come back to the Committee and say that 2022 resulted in another qualification, because it had spent time negotiating with people who were not interested in what the LB was doing. In order to protect its interests, the LB had had to go the legal route, and the strength of that route had to ensure it was able to secure how its monies had been used elsewhere.

Dr George was correct about his experience, and how he had heard it all before. For a long time, the loan book had not been well-managed. The lack of management and controls had been highlighted before, when Dr George had asked the Treasury a question, and it had responded to that. The Treasury had also indicated what the liability solution was. For the past two years, the LB had been working with lenders on three solutions. The latest solution was what was on the table, but lenders had also given the LB some reservations about accepting it. The bank was back at the table engaging with lenders for the right solution for everybody in the room -- one that must get it out of default, and one that had to enable it to focus on its mandate. Everybody had to align their interests to make sure that the bank got out of its event of default. The liability solution catered for that in particular.

There had been a comment on the improvement from a disclaimer, and possibly getting to a clean audit and unqualified opinion: The LB had started with its task team efforts. It had a group of individuals in the bank who had formed themselves into a group that tackled not only the audit problems but also the loan book problems. It had taken the book and looked at it from all angles to make sure that nothing tripped it up, including the related policies that must protect that particular book. The LB had again initiated the remedial process that had helped it with the disclaimer. All of the models that were not calibrated or which were not working properly had been improved, and the policies that had not been in place had been put in place. The AG had indicated that it would like to rely more on the LB’s control environment, and that was what it had been working on fixing. Unfortunately, it was tripped up by a small issue that it had not anticipated, but it had also put mechanisms in there so that it could get to that clean audit. The LB was not celebrating the qualification -- it was celebrating the drive with which people had worked long hours trying to fix a long-standing problem. It was the LB’s responsibility to make sure that those mechanisms were in place. It was not acceptable for such reasons to be advanced in future, so it needed to do what it could to correct them, and “must leave no stone unturned.”

Ms Abraham had noted that there was an upbeat view about working with the AG. The AG could share the manner in which it and the LB worked with each other, such as engaging openly and dealing with issues on a speedy basis where they could. The LB’s relationship with the AG had been much stronger, and Mr Kanana wanted to thank the AG for its partnership in making sure that the entity got out of a disclaimer of opinion.

Mr Brian Mavuka, Acting CFO, PIC, said that Dr George had correctly highlighted one of the findings from the AG as it related to the disclosure note. There had been a disclosure note around commitment, as well as one on financial assets, and whether any consequence management had been applied. It was the first time the PIC had received a finding on the financials. The reason for that particular finding had led to a need to look at the nature of that finding. It had to look internally to see if it had the right skills. It looked at whether the finding was due to any negligence, or staff not applying themselves, and that had not been the case. When the PIC looked back and did a post mortem with the AG, it had highlighted that the nature of the finding itself or root cause was around its dependence on key personnel, as it had key members of staff affected by COVID-19 during May. That put quite a bit of weight on internal controls. Hence, the PIC went the route of addressing the problem the way it had, because it tried to address two things. One was not to have key personnel dependencies so that the system continued to run even though it did not have key personnel there. The other was that by increasing the frequency of the documentation and the review of those disclosure notes which one typically saw only at the end of the financial year, one was also using one’s assurance providers to assist one in ensuring that those risks were correctly captured. The root cause was not because of negligence or lack of capacity, so no consequence management had been taken in relation to that.

In instances where the PIC had found that there was negligence, and the policy was not being followed around irregular expenditure that had been incurred, the first part of the irregular expenditure had been from a prior disclosure period that the PIC had disclosed, based on the recommendation of the commission and the investigations that followed. That had been disclosed, and consequence management had been taken against the implicated individuals. In the one instance that was identified during the year under review, where it did find a contravention of policy, consequence management was applied. It was something that the accounting authority supported and was very serious about.

Mr Polani Sokombela, Business Executive, AGSA, said he was encouraged that there was a specific meeting to look into how Treasury and its entities were implementing the audit action plans to improve the audit outcomes. That was something that was close to the AG’s heart. It had a very good working relationship with Treasury and its entities. When the AG came to table the audit outcomes the previous week through the Budgetary Review and Recommendations Report (BRRR) session, it had highlighted some key findings that were key issues. It had also made recommendations to the Committee on the areas that were very critical, and which needed to be followed up with the entities, especially the development of effective action plans to address the audit findings. The AG was working with the entities to ensure that all the commitments that were made in those action plans were also implemented, and to provide more recommendations to ensure that the audit outcomes improved.

One of the key issues was consequence management. Based on the feedback he was getting in the meeting, consequence management was taking place. The AG would also be doing its own follow-ups because it was also busy with the 2022 audits. It would be doing follow-ups on consequence management as well as the progress that was being made by the entities.

Compliance with legislation, specifically irregular expenditure, was one of the challenges that the portfolio was also having, which was something where preventative controls needed to be put in place to ensure that there was compliance with procurement legislation. He had heard from the DM and the DG on the filling of the key vacancies, specifically the position of the Accountant-General, the Chief Procurement Officer, and some DDG positions at Treasury. These positions were critical to ensuring that there was service delivery at Treasury level. He had heard that there were efforts being made to ensure that those positions were being filled. The AG had also been highlighting those particular roles because it believed that they were critical for the Treasury. That progress was appreciated, and the AG would be engaging with the DG on the filling of those particular vacancies.

Referring to the Land Bank, Mr Sokombela recalled that when the AG came to brief the Committee in November last year, it had still not finalised the position of the bank. It had been a very difficult task to do, because the LB had to remediate the disclaimer in the previous years, and the AG had made significant findings on the management of the loan book. It was very encouraged by the board of the LB, as well as the executive management under the leadership of the CEO in terms of the audit action plan that they had developed. As an audit office, the AG had looked into that plan as well, reviewed it and provided inputs. The LB had taken the AG’s inputs very seriously and had been working until such time as the majority of the significant findings had been addressed.

Last year, the AG had managed to sign the audit report of the LB in December. However, the issue of the documentation that it could not find on the loan book that was managed by the third parties was the one that was very disappointing, because if the parties had managed to find those bank statements, the AG would perhaps have been talking about an unqualified audit opinion for the LB. That was something that was very encouraging for the bank and needed to be celebrated, in as much as it was a qualification, but for him, it was the effort and the determination that the AG had seen from the LB, which was something that was very good. However, one of the things that was a risk at the bank, and which needed to be looked at, was the liability solution. When the AG signed the audit report in December, one of the things that it signed, especially on the basis of the going concern, was that the liability solution would be finalised by 31 January 2022, and this had come and gone. One could therefore understand the difficulties in agreeing with the lenders regarding that particular matter. That remained a critical risk for the LB, because if the liability solution was not finalised, it would be very difficult for it to do business, or to execute its mandate.

The FFC was not represented in the meeting. It was one of the entities that also had some findings, but the AG was seeing consequence management as well. The GPAA also had made improvements that the AG had noted. The issue of consequence management was an issue that the AG had highlighted at the GPAA, and it was working with management to ensure that it was making a follow-up on the implementation of consequence management, and the preventative controls that needed to be put in place. There had also been feedback about the GTAC and consequence management. The AG was continuing to work with the entities to ensure that the audit outcomes were improved.

One of the key issues that the AG was also putting a spotlight on was service delivery. All of the entities were there to ensure that their services were delivered to the citizens of the country. One of the things was to ensure that the focus shifted to mastering the skills of preparing credible financial statements, and preparing credible annual reports, so that going forward, it could focus on whether there was service delivery in those entities. The IRBA had regressed because it had been obtaining clean audits for 11 years, but because of the governance challenges, the AG had seen the IRBA tripping on compliance with legislation and irregular expenditure. He was hopeful that the IRBA would bounce back to getting clean audits.

Ms Madidimalo Singo, Senior Manager, AGSA said that Mr Sokombela had largely covered the AG’s observations. When it came to the issue of audit outcomes, it was a combined effort from both management and the audit committee, internal audit, and the AG. Management played a critical role in ensuring that the audit action plans that had been discussed were fit for purpose, specifically talking to the issue of properly analysing the root causes that led to findings. Management also played a critical role in ensuring that whatever actions were being discussed in the meeting were being tailor-made specifically to address those challenges. One could not underplay the role that the internal audit function would play in ensuring that action plans were implemented on the ground and that they were effective. One could also not underplay the role that the audit committee was going to play in that oversight, where the plans would be tabled on a quarterly basis depending on the need to ensure that the AG saw sustainable improvement in outcomes.

From the AG’s perspective, what it would want to emphasise was that it was important to prevent internal control deficiencies from happening in the first place. It urged management to really concentrate on the preventative controls that needed to be in place in order to ensure that these outcomes could be improved in a sustainable way going forward. When Mr Sokombela was dealing with the AG’s assessment of the plans as part of its interim audits, it would be looking into those plans. It also had an initiative within the AG, which it termed the State of Records Review. As part of that, it would be looking at the progress in terms of implementing those plans, and it would be in a better position to provide more feedback on that at a later stage.

Mr Nagy said that there had been questions from Dr George, Mr Skosana and Ms Abraham on the impact of the audit on the credibility of the IRBA. It was aware that there was a possible impact on its reputation as a regulator, especially if it was considered in the absence of the context. It was for that reason that when Mr Nagy was appointed in February, together with the new board, the IRBA had immediately acted to investigate the matter. It was important that the context and the nature of how the irregular expenditure came about, be considered in the IRBA’s instance. The IRBA had acted proactively by being prudent and transparent, in that it had self-declared the irregular expenditure, and had fully disclosed it in the financial statements prior to submitting the financial statements to the AG. It had been something that needed to be dealt with decisively and promptly. The IRBA would strengthen several aspects of its supply chain management process, and the monitoring and controls around that process, going forward. It would still appoint expert investigators to meet the IRBA’s mandate to successfully investigate high-profile public interest matters involving its auditors.

The IRBA had received unqualified financial outcomes for the last 11 years. For the last ten years, before the 2020/2021 financial year, it had clean audits, so there had been no issues reported. The IRBA was hopeful that the measures that it had put in place would not yield another note on non-compliance, and that it could again achieve its clean audit status. That was something that was very important for the IRBA.

On the reasons why the previous CEO had left after seven months, Mr Nagy said he was not involved in that particular process. That process was dealt with by the former caretaker board at that stage. He became involved only when he was approached to act after the CEO had left. All he knew was that the departure of the CEO was announced publicly as a resignation. He unfortunately did not have more information on that.

Ms Abraham had commented that forensic skills were not a scarce skill. Mr Nagy explained why the IRBA believed that external investigators were a scarce skill for the IRBA in particular. The board and Parliament had previously requested the IRBA to prioritise high-profile public interest investigations, based on the negative impression it brought to the auditing profession and the IRBA resulting from audit failures and significant losses suffered by investors. The nature of those investigations was such that only one appropriately qualified and experienced person could conduct an investigation. This was because the role of an investigator required direct knowledge of the issues identified, and he or she would be the factual witness to testify should the matter proceed to a disciplinary hearing, which was a court set-up. These investigators were experienced chartered accountants who had excellent technical knowledge on the international auditing and accounting standards in a particular industry such as a bank, for example. What contributed to the IRBA’s limitation of tapping into auditors and chartered accountants with that extensive experience to stand up in court as an expert witness, was the IRBA could not use investigators that were currently practicing auditors, because of the independence issues that were involved. That factor narrowed down the pool to a very limited number of experts in the country that had the wealth of experience and knowledge to testify on those high-profile matters. The IRBA could unfortunately not afford to carry a specialist external investigator. It had investigators internally who were the IRBA’s general investigators. Those investigators were qualified as registered auditors and chartered accountants, and the majority of them were also qualified as forensic investigators. It was about the specialist knowledge of the investigator that would enable that person to stand up and deliver evidence in a court setup.

What contributed to the single-sourcing that had been followed to date was basically what Mr Nagy had mentioned. Additionally, at the beginning of the investigation, one did not know if the matter would be dismissed after a month or two, or whether new evidence would come to light during the investigation which would perpetuate the investigation. An investigation could sometimes go on longer than a year. For that reason, it was very difficult to budget upfront to say that this investigation would be three quotes, or it had to go out on tender, etc. At the time of commencing an investigation, the complexity of the investigation was generally unknown for procurement purposes.

It was important to note that the IRBA currently had two external specialist investigators on high-profile public interest matters. He used the example of the African Bank, which was successfully prosecuted last year, using the IRBA’s specialist expert auditor on banks. The IRBA had motivated in detail to Treasury for a deviation approval on one of those two specialist investigators. He believed that the IRBA had received that deviation letter from the Treasury last year. That investigation was currently continuing, and the IRBA had been in the process of putting the panel of those expert investigators together for a period of time so that when an investigation came along, the IRBA could also tap into the experts that were on the panel after following that panel procurement approach, which was allowed in terms of the procurement processes and the framework. The IRBA wanted to thank the AG. It was working closely with the AG and cooperating with its teams.

Further discussion

Dr George thanked the LB for the feedback on the liability solution. He wanted to know if there was a particular timeframe in mind, because it had been going on for quite a while, and it needed to be brought to a conclusion. If there a specific timeframe that the LB had in mind, what was it? Was folding the bank one of the possible solutions?

Mr Skosana said that his question had been on the IRBA, so he was now covered.

Mr Mogajane replied that folding the LB was not on the Treasury’s radar now. The Treasury was doing as much as it could to save the LB, and let it continue with the important function that it performed. It was a critical player in ensuring food security in the country, so the Treasury continued to support it as far as that was concerned.

Treasury was “working flat-out” on the liability solution, and had been meeting with the relevant lenders. The following day, he was meeting with others, including the World Bank (WB), because it also had a guaranteed exposure there. Treasury was trying as much as possible to engage the LB in finding a solution that was viable. The bank and the board were engaged. The support that the Treasury was offering the LB was also about the resources that it had provided. There was a budget of both R5 billion and R1.5 billion in 2021/22 and R1 billion in each of the outer years. Those amounts on their own were to address the liquidity challenges of the bank. The Treasury had to do that in the fairest way. That was why it was spending a lot of time in ensuring that the two parties “found each other,” so that the LB was able to move on its own and was able to be strengthened as time went on. The bank would then be able to fulfil its mandate, including supporting emerging farmers on development farms.

Deputy Minister Masondo said that it was very valuable for the “finance family” to be called to come and account on the implementation of the audit action plans, as this helped Treasury and its entities to be held accountable during the year. His experience was that annual audit outcomes were a function of what one did during the year. That exercise added a lot of value to the audit outcomes and financial health of the Treasury’s entities, including Treasury itself. He had highlighted the importance of financial accounting, which was how financial health enabled Treasury to account to the taxpayers on how it was managing public finance. It also enabled Treasury to account to investors, who needed to make informed decisions on whether they would lend their money to properly-managed entities.

The AGSA was an important institution in SA’s democracy. It was a creature of SA’s Constitution and enabled Treasury to account to South Africans. The Constitution required the AG to audit and report on the financial statements and financial management of the state, including entities. The AGSA was the only institution that, by law, had to audit and report on how the government was spending taxpayers’ money. Treasury took such accounting very seriously, and it took the AG very seriously.

He was concerned about the growing tendency of some of government’s entities where the AG was increasingly being taken to court because of its audit findings. In his view, that was very counterproductive. He was not saying that the AG could not be taken head-on where entities and departments felt that the AG had erred, but in some of the instances, one got a sense that people just wanted political accounting and not financial accounting. Instead of working on the findings, he was worried that some entities and departments had a tendency of rushing to court. He felt that the Committee needed to have a view on that, otherwise departments and entities would waste a lot of money on legal fees instead of improving on their financials. He was not saying that people were perfect, including the AG, but he thought that if that trend was not arrested, “we may find ourselves accounting more in courts than accounting to our people based on what we need to correct in our financials.”

Committee Members, as public representatives, were also very important as instruments to ensure that SA’s democracy worked. One of the components of democracy was to hold everyone accountable. Therefore, Treasury appreciated the role that the Committee played as public representatives who were calling it and its entities to come and account and be held accountable on how far it was in implementing the remedial actions to deal with the weaknesses identified by the AG. The Treasury would take forward the Committee’s suggestions and critical feedback. The critical feedback would also form part of how Treasury worked going forward in dealing with some of the concerns that Members had raised.

Chairperson's summation

The Chairperson said that it was important for the action plans that had been put in place to be monitored from time to time so that it would not be just a matter of compliance that entities had action plans, but instead, they should be adhered to. He thanked the DM for raising the issue of the AGSA. The decisions of the Standing Committee on Finance and the audits from the AGSA were mandatory for departments and entities to implement. People might think it was optional, but it was not. Three or so years ago, Parliament had tightened the legislation regarding the powers of the AG. The AG derived its mandate from the Constitution and the legislation, whereby chapter nine of the Constitution established the AGSA as one of the state institutions supporting Constitutional democracy. The Constitution recognised the importance and guaranteed the independence of the AGSA, stating that the AGSA must be impartial, and must exercise its powers and perform its functions without fear, favour or prejudice.

The DM had mentioned the AGSA being taken to court. There were mechanisms that had been put in place by the Constitution and legislation enacted to deal with issues where there were differences with regard to an audit outcome. The Constitution guaranteed that the AG should exercise its functions without being intimidated by any other entity, and it should not be seen to be in favour of any entity or any other department. The functions of the AG were described in section 188 of the Constitution and regulated in the Public Audit Act, which mandated the AG to perform constitutional and other functions. The constitutional functions were those which the AG performed to comply with the broader mandate described in the Constitution. Section 4 of the old Public Audit Act, which had since been amended, made a further distinction between mandatory and discretionary audits. It was unfortunate if there were entities or departments that thought that they should take the AG to court. He was not saying that there were institutions that were above the law because SA was a constitutional democracy, but if there were issues, then a way of handling those issues properly needed to be found.

The issue of vacant posts should be attended to. The Committee was talking about posts that were budgeted. There were many vacant posts, and now with the tight fiscal framework that SA had, not all posts were budgeted, but with those that were budgeted for and critical, such as the Accountant-General at Treasury, should be filled. Those that were also budgeted for in the entities also needed to be filled as soon as possible.

Now that the courts had made judgments that Treasury could directly intervene in the running of a municipality that was having challenges with administration, it called upon Treasury to have more competent personnel to perform such a function. As much as it was a treasury, it was also the Department of Finance with a clear role that it was supposed to play, both as a department and as the Treasury. Now it had an added responsibility, working together with the Department of Cooperative Governance and Traditional Affairs (CoGTA), to monitor and even run a collapsed municipality. The sooner the Treasury filled some of those critical posts, the better. The Committee would continue to use audit outcomes and findings as tools to conduct oversight on the Department and its entities.

This year, the Committee would spend more time out in the field. In the past two years, there had been challenges related to the COVID-19 regulations. Now that those regulations were being relaxed, the Committee had put in place a schedule to visit the Treasury and entities. On 29 March, the Committee would go to the Treasury in Pretoria. On 30 March, it would visit the Land Bank. The Chairperson asked the CEO or Chairperson of the LB to make sure that when the Committee came, it showed the service level agreement that it had signed with UNIGRO. He did not understand the story that UNIGRO was an intermediary, and that there were issues with it, such as its refusal to provide information required to verify disbursements and repayments. Why should that be so? The Committee wanted to see the LB’s SLA and other arrangements that it had with UNIGRO.

Of course, there were other issues that had been identified in the last meeting that the Committee had with the AG that it wanted the LB to respond to. The LB was too important to be folded. There were many small and emerging farmers who could not gain access to commercial banks, who relied in the main on the LB. In the past, SA used to have agricultural co-operatives in different provinces. Now that those were no longer there, small-scale farmers had to rely mainly on the LB. This was a very important bank for SA, and it should not be allowed to collapse. The Treasury would also be there when the Committee visited the bank. The Committee would be glad if it could meet some of the investors so that it understood the view of the investors with regard to how the LB’s challenges could be dealt with.

On 31 March, the Committee would be visiting the FFC, which was a very important constitutional structure, and the Committee would appreciate it if the Treasury was there. During those days when Prof Daniel Plaatjies was still alive, he always raised issues that the FFC was there, but government did not give it the status that befitted it, as defined in the Constitution.

In the second quarter, the Committee was going to identify other entities that it would be visiting. It would be doing those visits until the end of the year so that it did not engage only with the entities in meetings like today’s. Instead, it would come to where the entities operated, and it would have a feel of where the Treasury was, and the challenges it was facing.

Mr Allan Wicomb, the Committee Secretary, said that there would be a meeting the following day with the Treasury, the Financial Sector Conduct Authority (FSCA), the South African Reserve Bank (SARB), and the Prudential Authority (PA) on bills recently referred to the Committee. These were the Financial Sector and Deposit Insurance Levies Bill, and the Financial Sector and Deposit Insurance Levies (Administration) and Deposit Insurance Premiums Bill. The two bills were a Money Bill and a Section 76 Bill.

The Chairperson said he had seen correspondence from the Chairperson of Chairpersons, saying that the Committee had not prioritised those bills in its programme this year. Were those bills in the Committee’s programme, and what was it supposed to do with those bills?

Mr Wicomb replied that the bills were not in the programme for the current term. He had contacted Mr A Lees (DA), who was the initiator of the Bill. It was two bills with the same title. The bills had been introduced in different years, so Mr Wicomb was waiting on Mr Lees for clarity. The other Member who introduced the Bill was not a Member of Parliament -- his term had expired with the previous Committee. He was not sure if the bills would be merged into one. He would also send an email to Adv Frank Jenkins, Senior Parliamentary Legal Advisor, to clarify how the Committee should approach this, and would brief the Chairperson on the matter.

The meeting was adjourned.