Credit Rating Services Bill [B8-2012]: adoption; National Treasury and Stats SA audit outcomes 2011/12

Meeting report

Introduction
The Chairperson welcomed Mr Roy Havemann, National Treasury Chief Director: Financial Markets and Stability, Ms Retha Stander, FSB Senior Legal Adviser, and Ms Jeannine Bednar-Giyose, National Treasury Director: Fiscal and Intergovernmental Legislation.

Credit Rating Services Bill [B8-2012]: Consideration and adoption
The Chairperson said that the Committee had had sufficient time to deliberate on this Bill. He had been very flexible in making sure that the Committee had tried to reach some consensus on the Bill. The Committee had done a great deal of work on this very important Bill and had raised all kind of issues.

He asked Members if there was any other thing that the Committee needed to consider before adoption.

Mr Harris proposed a technical correction to the latest draft that the National Treasury drafting team had given to Members. He referred to Clause 3(1)(b). The Committee had removed the concept of publication, but there should be a consequential change to Clause 3(1)(c) and to Clause 3(2). The concept of publication should also be removed from those two Clauses. This was his only technical change to the new draft that the Members had been given.

The Chairperson read the latest draft of Clause 3(1)(b):

'Credit ratings that are issued by credit rating agencies that are registered in the Republic.'

Mr Harris read the previous version:

'Credit ratings that are published in the Republic.'

There had been an extensive discussion about publication and how it should not be a requirement. The Committee had agreed to remove it, but it had forgotten to remove it in Clause 3(1)(c) and Clause 3(2).

The Chairperson read:

'A person that performs credit rating services or issues credit ratings that are published in the Republic.'

Mr Harris said that the Committee had agreed that it did not want publication to be a requirement, but it had not made all of the changes required to remove it.

The Chairperson asked Members if there was any fundamental objection to Mr Harris' proposal.

The Chairperson asked Ms Bednar-Giyose if she had any comment.

Ms Bednar-Giyose replied that there was no problem with Mr Harris' proposal. However, she wanted to be clear how Clause 3(1)(c) and Clause 3(2) should read, so that the drafting team could make sure that that these were correctly reflected in the 'A list' and the 'B Bill'.

The Chairperson asked if Members agreed. It was just a matter of ensuring consistency.

Members agreed.

Mr Harris, however, pointed out that National Treasury had asked for the Committee's confirmation of the new wording in the Clauses to which he had referred. It would be relatively simple to give that confirmation. The problem was that if the Committee finished the Bill now that the Committee had agreed to change it but without giving National Treasury the formulation, 'I think it is still up in the air'.

The Chairperson thought that National Treasury was comfortable with what Mr Harris had proposed.

Ms Bednar-Giyose said that she and her colleagues were comfortable but just wanted to confirm exactly how the amended provisions should read. She asked if she could read the amended Clauses according to her understanding of Mr Harris' proposal.

Clause 3(1)(c)
'Any person that performs credit rating services or issues credit ratings in the Republic.'

Clause 3(2)
'With effect from a date determined by the Minister by notice in the Gazette a person may not perform credit rating services or issue a credit rating in the Republic unless that person is a registered credit rating agency.'

She asked if the above redrafting was a correct understanding of Mr Harris' proposal.

The Chairperson affirmed that it was consistent.

The Chairperson looked intently at Members and read the Committee's Report.

'Report of the Standing Committee on Finance on the Credit Rating Services Bill [B8-2012] (National Assembly, Section 75, dated 17 October 2012: The Standing Committee on Finance, having considered and examined the Credit Rating Services Bill [B8-2012], referred to it, and classified by the Joint Tagging Mechanism (JTM) as a Section 75 Bill, reports the Bill with amendments.'

The Chairperson asked if any Member would move to adopt the Committee's Report.

Mr Harris requested permission to raise specific objection to specific Clauses.

Mr E Mthethwa (ANC) said that the Chairperson should continue with the Committee's process. The DA should register its objection. The DA could deal with its objections to specific Clauses separately, but the Committee could not go back to discussing specific objections on each and every Clause.

The Chairperson asked if a Member could move. Thereafter the DA would register its objection to specific points.

Mr Mthethwa moved.

Ms Z Dlamini-Dubazana seconded.

Mr Harris said that, as recorded in the minutes of the Committee's meetings on this Bill, the DA had detailed and specific objections to some of the formulations relating to Clause 10, Clause 16, Clause 18, and Clause 25.
 
The Chairperson noted the DA's objection to these Clauses.

The Chairperson said that the Committee had finally come to the end of its deliberations. He thanked Members for their participation and constant attention.

National Treasury audit outcomes 2011/12: Auditor-General of South Africa (AGSA) briefing
The Chairperson welcomed the Office of the Auditor-General and wished that the Committee could have considered the AGSA's report first, before meeting with National Treasury and Statistics South Africa (Stats SA) on their Annual Reports and financial statements 2011/12. The most important thing was that the AGSA findings on any department should be treated very seriously, as they assisted in identifying weaknesses and assisting in improving the systems and performance of any department or entity.

Audit opinion history
Mr Eugene Zungu, AGSA Corporate Executive, summarised briefly the audit outcomes for the National Treasury. He highlighted the key issues and trends that had emerged over the last few reporting cycles. In paragraph 2.1 there was a summary of the audit outcomes for the past four years, beginning from 2008/09. He briefly explained AGSA's colour coding.

- Green signified a clean audit report (an unqualified audit report with no other findings).
- Yellow signified an unqualified audit report, but with findings in the areas of compliance, as well as in the areas of reporting on predetermined objectives (PDOs).
- Purple signified a qualified audit opinion, with or without findings.
- Red signified a disclaimer or adverse audit opinion

In 2008/09 National Treasury had achieved an unqualified audit report with no other findings. National Treasury achieved an unqualified audit report, but with findings in the areas of compliance, as well as in the areas of reporting on predetermined objectives (PDOs), in the past three years, 2009/10, 2010/11, and 2011/12.

There was a synopsis of the emphasis of matters over the past four years. Such emphasis of matters did not negatively impact the AGSA's audit opinion, but it was something that that the AGSA highlighted in the audit report as requiring remedying.

Over the years, the AGSA had highlighted basis of accounting (2009/10), restatement of corresponding figures (2009/10), and issues around irregular expenditure (2009/10 and 2010/11). It was important to note that this issue of irregular expenditure was effectively addressed in 2011/12. The next issue reported under emphasis of matters was material losses (2010/11). In 2011/12 there were issues around material impairments, which related to debtors who were written off by the National Treasury to the extent of about R17 million. There was also an issue of material under spending of the Vote. He spoke about this in more detail later.

In paragraph 2.1, there was reference to compliance with laws and regulations. This was one of the areas, where, if there were material findings, a department would not achieve a clean report. Here was the history of how National Treasury had performed over the years:

- The first area talked to the lack of a human resources (HR) plan (2009/10 and 2011/12).
- The next issue was National Treasury's Strategic Plan and performance (2011/12), where there were issues with the inclusion of targets, outputs and objectives for the Jobs Fund. He spoke about this in more detail later.
- The annual performance report was not submitted on time (2010/11). It did not recur this year (2011/12).
- A problem for the past two reporting cycles was the quality of the financial statements which were submitted, which the AGSA gauged on the basis of the material misstatements, that had to be corrected, as was indicated in the AGSA's audit report (2010/11 and 2011/12).
- The next two issues were expenditure and management, as well as the issues around the Special Pensions Fund (2010/11). These issues were dealt with effectively in 2011/12.
- Procurement and contract management were highlighted (2011/12). There was a lack of audit evidence around specific tender processes. Employees had performed remunerative work outside their employment without permission.
- There was one issue which was newly highlighted this year (2011/12). Here the AGSA found that 42% of the National Treasury's targets were not time-bound.
- Last year the area in which the National Treasury had findings was in the submission of quarterly reports (2010/11). Here the National Treasury had not submitted the quarterly reports for all the quarters of the year. This issue did not recur in 2011/12.

Key focus areas
He gave detail of the issues highlighted and reported for the year under review (2011/12).

In paragraph 2.2, the key focus areas that AGSA was tracking across all the departments were described. These focus areas were supply chain management, predetermined objectives, human resources (HR) management, information technology (IT) controls, material errors in financial statements, and financial health.

Supply chain management
In supply chain management there had generally been no improvement, although findings had been highlighted in the audit report. He gave further details. (See paragraph 2.2.1)

These included officials who had interests in suppliers to other institutions but who did not obtain prior approval to engage remunerative work outside the department. There were five such instances. The root cause was that the requirements to comply with these applicable laws and regulations had not been emphasised enough for all employees to understand exactly how they had to comply. The AGSA recommended that:

The Executive Authority needed to make an assessment of the impact of this remunerative work performed by these officials on their ability to perform their duties in the National Treasury. This assessment needed to be done before there was a formal approval to approve the work. In respect of the officials who had not obtained prior approval, disciplinary action should be considered.

The second area highlighted was at the bottom of page 3. It related to awards that were of the value of R234 000 that were procured without inviting at least three written price quotations, and to the deviations that National Treasury had approved but which the AGSA found did not meet the criteria for deviations.

The root cause was lack of planning, preference for a specific supplier, and disregard of procurement processes.

The AGSA recommended that National Treasury must plan better and much more adequately so that it avoided these kinds of deviations from the prescribed legislation.

There was a deviation for an amount of R2.2 million, which was approved on the basis of an emergency, even though proper planning would have prevented such an emergency.

The root cause here was similar to the above issue. The deviations were entered into or concluded not in compliance with the supply chain management legislation.

The AGSA had recommended that the National Treasury needed to put controls in place to ensure that procurement through deviations complied with the legislation.

The last area which the AGSA had highlighted in the National Treasury around supply chain management was the three suppliers who were paid in the absence of a finalised legal contract. The total value of the payments was just under R600 000.

The root cause was that management did not develop measures to track and monitor all the contracting processes to make sure that payments were made only once the contract had been signed.

The AGSA had recommended that these controls needed to be implemented, so that the National Treasury did not incur any expenditure before the conclusion of a contract.

Predetermined objectives
In paragraph 2.2.2,the first area around predetermined objectives was Treasury Regulation 5.2.2. This required that the Strategic Plan needed to be consistent with the department's published medium term expenditure estimates, as well as that the Strategic Plan must include measurable objectives, expected outcomes, problem outputs, indicators, and targets. The area of concern highlighted was with respect to Programme 8, where an allocation of R2 billion was made out of its total budget of R4.2 billion. This R2 billion was for the employment creation facilitation fund. The National Treasury's Strategic Plan had not included any relevant targets for this fund to ensure that the National Treasury was measured on the service delivery aspect for which this fund was created. Another issue that related to the fund was that the National Treasury materially underspent its budget by R2.4 billion. This was also attributable to under expenditure on the employment creation facilitation fund.

The AGSA's assessment of the root cause was that the National Treasury had not Incorporated all the inputs that were submitted by the respective programmes into the Strategic Plan.

The AGSA recommended that in future the National Treasury's management should perform reviews to ensure that all budget estimates were aligned to the measures and targets as outlined in the Strategic Plan.

The AGSA also recommended that when the Standing Committee on Finance approved the Strategic Plan, it paid particular attention to ensure that they met the Specific, Measurable, Attainable, Relevant and Time-based (SMART) goal setting criteria principles and all the key requirements of National Treasury's Regulations, such as Regulation 5.2.2.

The second area of concern under predetermined objectives was the framework for managing programme performance information. This framework required that the time period or deadline for delivery be specified. The AGSA had found that a total of 42% of the targets relevant to Programmes 2 to 8 were not time-bound in specifying a time period or deadline for delivery. The Strategic Plan was approved by Parliament which had an oversight responsibility. This note would become clear when talking about the AGSA's recommendations on how to deal with this issue going forward.

The AGSA outlined the root cause as management's failure to apply fully the requirements contained in the framework when it set some of its predetermined objectives.

The AGSA recommended that management needed to ensure that the Strategic Plan was set in line with the framework in that it management needed to set specific dates for achieving output or deliverables.

The AGSA recommended secondly that the Standing Committee on Finance should be alert to these issues when it considered the Strategic Plan for approval.

Human resources
Paragraph 2.2.3 dealt with human resources, which was the AGSA's next focus area. This also had been marked as yellow. Here the findings for the current year (2011/12) were similar to those for the previous year (2010/11). The area of concern was around the human resource plan, which, contrary to the Public Service Regulations, was not established.

The root cause was inadequate follow-up with the Minister of Finance's office to ensure that the required approval was obtained.

The AGSA recommended that National Treasury's management needed to make sure that strict deadlines were imposed on those responsible for drawing up the HR plan and where delays were encountered, these needed to be monitored and documented, and appropriate action taken.

There were quite a number of issues around vacancies at the National Treasury. He summarised them briefly. There had been a slight increase in the senior management vacancy rate from 13% to 15% (2011/12). There were a number of positions which remained vacant for more than 12 months. These included a position within the finance section. There were also positions in senior management. There was also an internal audit position that had remained vacant for more than 12 months. The other area highlighted in managing vacancies was that a number of positions were not advertised within six months as required by the regulations.

The AGSA had assessed the root causes as failure by National Treasury to comply with a specific regulation. It had not compiled and implemented any action plan to address all these issues of late-filing or late-advertising of vacant positions.

The AGSA recommended monthly update reports to be discussed at management level, after which a plan of action should be compiled. This action plan should include due dates for interviews and appointments.

The next area of concern in HR management was around the appointment processes, where the AGSA had found that the verification processes for some appointments did not always cover criminal record checks, citizenship verifications, and financial record checks.

The root causes were that management did not comply with the regulations, and did not ensure that employees involved in recruitment were aware of the requirements and complied with them.

The AGSA had recommended that the National Treasury should compile a check list that included all the public service regulation requirements and use that check list as a control mechanism for all appointments. If there were instances where there were deviations against this check list these instances would need to be motivated properly by the appropriate delegated employee, and this motivation should be put on file as proof.

The other area of concern was with regard to positions held in an acting capacity. This was linked to the issue of the management of vacancies. There were instances of employees holding acting positions for more than 12 months. There were senior managers who had held their positions in an acting capacity for more than six months. These acting positions should be limited to six months for senior managers, as required by the regulations of the Department of Public Service and Administration (DPSA).

The AGSA assessed the root cause as the failure of the National Treasury's payroll system to provide for processing of an acting allowance for a period of more than six consecutive months.

The AGSA recommended that acting appointments should be limited to a period of not more than six months in order to comply with the DPSA regulations. If vacancies could not be filled, the extension of the acting period should be approved by the Executive Authority, and that acting allowance should not be in excess of six months, and should not be paid unless prior approval of the Executive Authority had been obtained.

The AGSA also recommended that since the payroll was not capable of automatically tracking the instances where payment had been made beyond six months or 12 months, the National Treasury must institute manual controls to ensure that employees holding acting appointments for six months should be terminated from the system, and that they must then commence with a process of reappointment. This was to ensure alignment with the DPSA regulations.

The last area highlighted under HR management was in the area of performance management, in which the AGSA had found that senior managers did not sign performance agreements for the current performance period. There were no measures in place to prevent senior managers from exceeding the 31 May deadline. Nor was there any evidence of any action being taken against those who failed to comply.

The AGSA recommended that the National Treasury could incorporate weekly reminders to be sent to all employees closer to the deadline. Also the National Treasury could consider making the signing of the performance agreement one of the performance criteria for all the affected senior managers.

Information technology controls
Information technology (IT) controls (paragraph 2.2.5) was an area rated yellow in this key focus area. The issues highlighted here had been highlighted previously.

Areas of concern were the IT security management, where the AGSA found that the violation reports were not reviewed.

The root cause was that the specific information technology security policies were in the process of being developed. These policies needed to be finalised and approved, and there needed to be a roll-out across the whole department to ensure that unauthorised access was prevented.

The other area highlighted was under IT user access controls. The National Treasury did not have a process in place to ensure that the system administrator's activities were reviewed on the network. There was also no dedicated firewall implemented on the external network perimeter. Management had not designed and implemented adequate controls to protect the National Treasury's network environment against potential security breaches.

The AGSA recommended that these system logs be reviewed as soon as the security policy was developed. As to the lack of dedicated firewalls, since the rooter on the external perimeter was being controlled by the State Information Technology Agency (SITA), a dedicated firewall should be installed on the external network perimeter as a matter of urgency.

Material errors or omissions in the Annual Financial Statements (AFS) submitted for audit
One of the focus areas rated as red was material errors or omissions in the financial statements submitted for audit (paragraph 2.2.7). The main reason was that National Treasury had had issues in this area for two consecutive periods. The finding here talked to the quality of the financial statements that were submitted for audit purposes where, as a result of the audit process, the AGSA identified a number of material misstatements which the National Treasury eventually corrected to avoid an audit qualification.

The root cause was a lack of adequate review of financial statements by all concerned in management before submission for audit.

The AGSA had made two recommendations. The first was regular preparation of financial statements. This needed to be done and reviewed monthly to enhance the quality of the statements. For the final set of financial statements, there needed to be a thorough review by management, internal audit, and by the audit committee, prior to submission to the auditors.

Financial health status
In the last area of focus, which was the financial health status (paragraph 2.2.8), there was concern at the material underspend on the budget of R2.4 billion.

The AGSA had identified that, according to the National Treasury, it was an entity that controlled and facilitated spending in relation to the employment creation facilitation fund. However, there was miscommunication between the National Treasury and the Executive Authority.

The AGSA recommended that there needed to be consultation between the National Treasury and the DPSA so as to set realistic targets for the fund or to reflect the National Treasury's facilitation role accordingly in their predetermined objectives. This would address many of the issues that the AGSA had identified in the area of predetermined objectives.

Other matters of interest
The AGSA had highlighted some of the key issues in the National Treasury's report (paragraph 3). The AGSA was pleased to report no unauthorised expenditure in the National Treasury in 2011/12. There was one item of fruitless and wasteful expenditure to the extent of R3.9 million. This related to a building leased and partially utilised but was never refurbished so as to be fully utilised. After the National Treasury had done a cost benefit analysis and considered further refurbishment, it realised that the cost would be excessive and the lease contract was terminated and settled in the amount of R3.9 million.

There was no irregular expenditure incurred by National Treasury in the course of the year (2011/12).

Other AGSA reports
There were two investigations highlighted in paragraph 4.1. The first was a forensic investigation that was conducted by the internal audit based on allegations received from the Public Service Commission (PSC) on the basis of procurement irregularities and use of public resources for private purposes, and leave irregularities. The official concerned was suspended and disciplinary processes were followed. At the conclusion of the disciplinary processes, the official and one other person were dismissed with effect from 20 February 2012. A criminal case had been opened with the police.

The second investigation was also being conducted by the PSC. This was based on an allegation received by the Office of the PSC in terms of irregular appointment of service providers by the National Treasury. The National Treasury had supported the investigation which was still with the PSC. The investigation was ongoing at the date of reporting.

The AGSA was conducting a performance audit on the readiness of Government to report on its performance. This performance audit was at a very advanced stage and the AGSA would table a report in the next month or two.
 
Statistics South Africa (Stats SA) audit outcomes 2011/12: (AGSA) briefing
Audit opinion history
The outcomes for Stats SA were that it had two years of unqualified audits but with findings (2008/09 and 2010/11) and it had one year of a clean audit report (2009/10). In terms of its latest audit report, it had received a qualified audit report (paragraph 2).

Stats SA was qualified on one issue – accruals. These were found to be incomplete and inaccurate. He gave more details later.

[Significant accruals in the current year - all voted funds approved for the next year will not be available for use; i.e. current year expenditure need to be paid from next year’s voted funds. An accrual-adjusted surplus for the year was not achieved.

The root cause was that accruals increased as a result of an increase in the total number of transactions due to Census 2011 (Stats SA only managed to pay about 70% of invoices within 30 days as required due to the increased number of transactions).

The AGSA recommended that the department should monitor the internal processes that contribute to the delays in settling invoices within 30 days.]

As to compliance with regulations, the biggest concern was with material misstatements on disclosure items. Stats SA had had these issues for three of the four years. For 2008/09 and 2010/11, Stats SA managed to make the necessary adjustments, but in 2011/12 Stats SA ran out of time to make the adjustments. Hence Stats SA was qualified.

The second point on the compliance issue reported this year was the organisational structure that was not in place as required by the Public Service Regulations. Employees were appointed without following a proper application process. He spoke more about this later.

The next issue of non-compliance was Stats SA's failure to pay its creditors within 30 days. This issue was prevalent in 2008/09 as well as 2011/12.

The Accounting Officer did not take appropriate and effective steps to prevent and detect irregular expenditure. This issue was reported in 2010/11 and 2011/12.

There was a failure to take appropriate and effective steps to prevent and detect fruitless and wasteful expenditure. This was reported in 2010/11.

Stats SA had no findings in the area of predetermined objectives in the past four years.

Key focus areas
It was a similar assessment in the key focus areas (paragraph 3). The predetermined objectives were indicated as green.

Material errors and financial health were indicated as red. The AGSA made it clear in subsequent paragraphs.

All the other areas were rated as yellow, mainly because there had been similar findings in previous years.

Supply chain management
In paragraph 3.1, the findings on supply chain management, the first issue referred to awards to persons in the service of Stats SA that were made to suppliers owned by employees of the Department.

The root causes were that the requirements of the applicable laws and regulations had not been emphasised enough. Also Stats SA lacked adequate internal controls, processes and systems to identify employees with interests in contracts.

The AGSA recommended that Stats SA management must investigate and take corrective action.

The next finding under supply chain management was that there 58 officials with an interest in suppliers to other state institutions who did not obtain approval to perform or engage in remunerative work outside their employment.

The root cause was that Stats SA had not emphasised to all members of staff that they must comply with the applicable laws and regulations.

The AGSA recommended that Stats SA management must investigate and take corrective action.

The last issue under supply chain management related to a contract to the value of just under R4 million which was signed only after the services had been rendered.

The contract management section had not ensured that all contracts were signed.

The AGSA recommended much tighter and proper controls to ensure no expenditure prior to the conclusion of the contract.

Pre-determined objectives
The Stats SA had adequate monitoring and controls in place in the reporting of predetermined objectives (paragraph 3.2). However, there were instances identified where performance results were not valid, accurate and complete; but these findings were not material and did not impact on the audit report.

Stats SA management was taking corrective action.

Human resources
As to human resources (paragraph 3.3) there were a few issues in human resource management. The organisational structure had not been approved by the Minister.

A memorandum was submitted to the Minister in 2011 to approve the recommended changes. However, at the time of concluding the audit report, such approval was not obtained.

AGSA recommended that Stats SA management should make adequate follow-up to ensure that the organisational structure was approved by the Minister as required by the Public Service Regulations.

There was concern as to verifications and checks on criminal records and references (page 5). These were not performed before the appointment of employees.

The root cause was that management did not review and monitor compliance with the Public Service Regulations. Also Stats SA struggled with timely responses from the institutions that were dealing with the verifications.

Management should review internal controls around appointments and ensure that all required verification procedures were conducted before signing the employment contracts.

The next item concerned the payrolls that were not returned to the CFO as required by the National Treasury Regulations.

The root cause was a lack of a monitoring process.

The AGSA recommended that all these payroll reports should be certified before payroll payment dates and returned to the CFO within 10 days. Management should take corrective action against those in charge of pay points who did not comply.

Some payroll payments were made after termination date. This might be related to the finding that these payroll reports were not reviewed on a timely basis and appropriate action taken.

The root cause was lack of review processes.

Management should send a list of terminations on a regular basis to the finance section before the salary run dates. There should be controls to identify and monitor the recovery of invalid payments made to employees after the date of termination of their employment.

The other concern was the capturing of leave. This was not captured on PERSAL on a timely basis. Stats SA did not monitor the implementation of action plans, as this issue had been identified in the past.

Stats SA should implement proper controls and ensure proper capturing of leave on PERSAL in a timely manner. All backlogs of capturing must be completed by 31 March each year. This was to avoid misstatement.

There was no policy on the suspension of employees.

Management had not established and communicated policies and procedures.

Stats SA should implement a policy for the management of suspensions. For prolonged suspensions, management should strive to reach a settlement where necessary and to limit the salary payments to an individual who was not providing a service to his employer.

Information Technology controls
Paragraph 3.4 dealt with IT controls. The first issue was with IT governance. An IT strategic plan and IT governance framework or charter had not been approved.

Stats SA had developed an IT strategic plan, but in developing this document it did not make a provision for somebody to authorise it.

The IT strategic plan and the framework should be submitted to the Statistician-General for approval as soon as possible.

There was an issue regarding violation reports, as these were not reviewed.

The root cause was non-adherence to the information security policy due to a lack of management o oversight.

The system logs should be reviewed in accordance with the established information security policy.

Stats SA did not have a control to ensure that the system administrator's activities were reviewed on the network.

This was the result of insufficient management oversight and failure to ensure correct documentation and review.

Stats SA needed to ensure that the system administrator's activities were reviewed.

Disaster recovery plans (DRPs) were not approved.

This was because these plans had not been submitted to the Statistician-General for approval.

The AGSA recommended that these be submitted as a matter of urgency.

Material errors or omissions and in the financial statements
Material errors or omissions and in the financial statements (paragraph 3.5) were the main reason for the qualification. The accounting officer submitted financial statements for auditing that were not prepared in all material aspects in accordance with the modified cash basis as required by Section 40(1)(a) and (b) of the Public Finance Management Act (No. 1 of 1999) (PFMA). The material misstatements identified by AGSA with regard to the disclosure items were subsequently corrected.

The root cause was a lack of adequate review of AFS by those charged with governance (incl. Audit Committee).

The AGSA recommended that management should prepare and review the AFS on a monthly basis.
The AFS should be reviewed by the governance structures i.e. management, internal audit and audit committee prior to submission to the auditors.

Financial health status
There was underspending of the approved capital budget by R24.55 million (paragraph 3.6).

The root cause was that the savings related to capital assets were due to the economies of scale realised during the mass procurement of assets for the Census activities. Furthermore, the department leased printers, projectors and laptops for Census training in the 2 200 venues instead of making outright purchases.

Stats SA had significant accruals in the current year - all voted funds approved for the next year will not be available for use; i.e. current year expenditure need to be paid from next year’s voted funds. An accrual-adjusted surplus for the year was not achieved.

The root cause was that accruals increased as a result of an increase in the total number of transactions due to Census 2011 (Stats only managed to pay about 70% of invoices within 30 days as required due to the increased number of transactions).

The AGSA recommended that Stats SA should monitor the internal processes that contributed to the delays in settling invoices within 30 days.

Material losses were incurred.

Irrecoverable damages and losses to government and hired vehicles amounting to R34.396 million were written off by the department. A further R33. 449 million of damages and losses to government and hired vehicles are under investigation.

Other matters of interest
There was no unauthorised expenditure incurred during the current financial year.

The opening balance for fruitless and wasteful expenditure was R480 000. New cases for the financial year amounted to R788 000 and mainly related to “no shows” for travel and subsistence (hotels and plane tickets). (Paragraph 4.2)

The opening balance of irregular expenditure was R6.223 million. Irregular expenditure recorded during the year amounts to R2.768 million, of which R576 000 relates to non-compliance with SCM procedures, R1 million of a transfer payment to a university without the prescribed approval from National Treasury and the remaining R1.190 million to staff appointments that were not according to prescripts. Irregular expenditure to the value of R144 000 was condoned during the year. The balance for irregular expenditure under investigation at the close of the financial year was R8.847 million. (Paragraph 4.3)

Other AG reports
Prepayments and advances, disclosed in the 2010/11 and 2011/12 financial statements, included an amount of R7.762 million in respect of services procured and paid by Government Communication and Information System (GCIS) on behalf of Stats SA during 2010/11 but the services were never rendered. This matter was still not resolved and the department had asked the Accountant General to investigate the matter. (Paragraph 5.1.1)

Goods and services disclosed in the 2011/12 financial statements, include an amount of R35.770 million paid to a supplier for services rendered in 2011/12 financial year. The evaluation criteria used to award the contract could not be determined by the audit team to form a conclusion whether the award was fair, equitable, transparent and cost effective. The Department requested the office of the Accountant General to investigate the matter in     order to determine whether the award was fair, equitable transparent and cost effective. (Paragraph 5.1.2)

No performance audits were conducted during the year under review.

Discussion
The Chairperson asked Ms Z Dlamini-Dubazana to act temporarily as Chairperson.

The Acting Chairperson commended the AGSA on the quality of its briefing, which was an excellent example in terms of its content and for the presenter's keeping to time.

She emphasised that if the Committee had heard this briefing before, it would have had a highly effective engagement with the National Treasury together with the Stats SA. Next time the Committee would do so.

Ms P Adams (ANC) congratulated the AGSA for a most enlightening presentation. She agreed that it would have been highly advantageous to have had this briefing before the annual report briefings.

She asked when the results of the two ongoing investigations at Stats SA would be available.

Mr Zungu replied that the first investigation, on the services procured from GCIS, had been in progress for about a year and a half. He was not in a position to say when the investigation would be finalised, but it was something that needed to be concluded as it had already straddled two financial years.

The second issue came to the AGSA's attention when concluding this audit around July 2012. The AGSA recommended that it be dealt with in the manner that it needed to be investigated further. When the AGSA highlighted this matter, National Treasury was consulted and gave assistance to the AGSA in reaching this conclusion that there was a need for further investigation. The investigation had just started a month or two ago. He hoped that the Committee would assist the AGSA in tracking the progress on these issues.

Mr Vusi Msibi, AGSA Business Executive, added that these were separate investigations on issues that happened in two different years.

Mr Harris thanked the Office of the AGSA for a good presentation, which added a great amount of detail to what Members had read in the audit reports contained in the Annual Reports. Yesterday he had said that there was 'a litany of errors' identified by the AGSA at the National Treasury, about which National Treasury had 'got a bit sniffy'. However, today's briefing demonstrated that this was an accurate assessment. The AGSA had tracked the alarming deterioration in National Treasury's performance. Four years ago it had had a totally clean audit with no findings. The next year it had four findings. The next year six. The year after that, eight. He asked if the AGSA would agree that this was a deterioration. Moreover, coming from a department such as the National Treasury which should be beyond reproach, it really rang warning bells. Would the AGSA agree that National Treasury should be held to an especially high standard? What was the AGSA's view of National Treasury's attitude to the recommendations that AGSA made?

Mr Harris said that the material errors in this year's financial statements were, from his perspective, the most serious, because these prevented the AGSA from working out exactly what went wrong.
Secondly, the fact that seven tenders were issued without the appropriate quotes cut right to the heart of issues of corruption and good financial management in Government.

Mr Msibi replied that these were mainly compliance activities where the AGSA highlighted weaknesses around controls in supply chain management. Therefore the AGSA's judgement did not go so far as to say whether there was corruption or not. However, where there was non-compliance, the AGSA would say that the particular contract had to be re-examined in detail. Such was the case with two contracts in Stats SA. In the case of the above seven tenders at National Treasury, management had not sourced three quotations as required by the legislation. It did not necessarily mean that there was corruption or mismanagement.

Mr Harris said that when he had raised the issue of the five employees who had performed work outside without permission, one of the National Treasury officials had replied that the framework had a weakness. The AGSA had not specified that in its report. Was National Treasury's explanation adequate in the AGSA's opinion?

Mr Msibi replied that the AGSA was highlighting from the audit perspective that there was a gap in control. If officials did not declare the nature of their interests in other entities, it was quite opportune for the executive authority or for management to know what the nature of those interests were. There was a risk that those officials would perform outside work at the expense of the department's work. Thus the AGSA was reporting from the perspective of control to say that if permission was given, there would be a document stating that the official concerned had an interest in a particular company, but that he or she basically applied his time to it during the weekends. This documentation was to protect the delivery mandate of the department concerned. This issue was an example of non-compliance with Treasury's own Regulations.

Mr Harris said that the major figure identified was the under-expenditure of R1.7 billion on the Jobs Fund. That spoke to the capacity of Government to do what it said it would do. If National Treasury could not get the figures right, to the extent of almost R2 billion, this spoke to a serious capacity problem in Government.

Mr Msibi replied that it would be opportune to ask the National Treasury itself. The AGSA examined the objectives in terms of the Strategic Plan and how the department concerned reported on those objectives. The AGSA had highlighted that there was an amount allocated, but there was no explanation. The AGSA was not in a position to respond on the capacity issues.

Mr Harris said that the Chairperson yesterday had summed up the views of the Committee when he had said that there was a stagnation in the National Treasury's performance as reflected in its audit reports. Mr Harris would go further and say that it was a decline. He supported the Chairperson's assessment that an improvement was required.

Mr Zungu fully agreed that National Treasury should lead by example, especially in the quality of the financial statements and compliance with the financial framework that this department itself designed. In terms of the attitude and response to the AGSA's recommendations, it was important to note (paragraph 2.1 of the AGSA's document on the National Treasury) that the AGSA had highlighted certain issues in the past, like reporting on time on performance information, and expenditure management. Last year there had been a major issue around the Special Pensions Fund. With all honesty he could say that the National Treasury had invested a great deal of effort in addressing these issues, particularly that of the Special Pensions Fund, an area of concern in 2010/11. This matter had not really reared its head again. He could not say that National Treasury's attitude was dismissive. It had worked on the ones that were critical. National Treasury still needed to strengthen its efforts to correct its material misstatements in financial statements. It needed to look carefully at the AGSA's recommendations in terms of regular reviews of its information before submitting it for audit.

Mr Harris asked if the problem with the 58 Stats SA officials was that they had an interest in other suppliers. Or was the problem that they did not receive approval to work externally? Were there two separate breaches of the law?

Mr Zungu replied that these 58 officials had shares in entities that traded with other state institutions. They did not trade with Stats SA itself. They were either directors or they were owners. In terms of the regulations, any employee, prior to his or her acquiring these interests, where he or she earned some form of income, needed permission from his or her department. In this instance, the 58 officials did not seek prior approval.

Mr Harris understood that the main reason for the qualified audit was the accruals. Was that because Stats SA did not settle invoices within 30 days? Effectively one third of those invoices were settled outside the requirements of the PFMA. This was relatively alarming.

Mr Zungu replied that the short answer was that there was a link between the qualification and the accruals. The main reason for the qualification was that there was a significant increase in the volume of invoices that it had to process as a direct result of the Census 2011. The increase was about three-fold. There was difficulty in processing those invoices on time and in quantifying the amount to be disclosed in the financial statements as accruals. Linked to this was the failure to pay suppliers on time – within 30 days, which was the issue highlighted later.

Mr Harris battled to understand how a department could do R70 million worth of damage to vehicles. How did this compare with other departments?

Mr D Ross (DA) said that the material losses amounting to R34.4 million were simply unacceptable. It was a huge amount. One suspected fraud and maladministration to a very serious extent. Therefore one should call those officials to account.

Mr Mthethwa asked for more information on the further R33.4 million. Was it above the R34.4 million that had already been audited?

Mr Zungu replied that Stats SA had always reported damages to vehicles. In 2009/10 and 2010/11 the figure was around R33 million. The figure was linked to the number vehicles that Stats SA used. The increase in the number in 2011/12 could be directly associated with the Census 2011.

Mr Tami Dibasic, AGSA Senior Manager, added that for the Census 2011 Stats SA hired just above 7 000 vehicles. In addition to that 7 000, there were also bakkies (pick-up trucks) and Kombi vehicles that were hired. This resulted in a total of close to 8 000 vehicles. The value of the damages of R34.4 million was what Stats SA had confirmed as had been caused by the temporary employees for the Census and some members of the department. That R33.4 million was in addition, and the total was around R67 million in total.

Mr Zungu thought that the figure for damages was reasonable, which was why the AGSA had merely referred to it as a matter of fact. He suggested that the question might usefully be posed to the department concerned itself.

Mr Mthethwa welcomed this briefing but his focus was on two points. He asked how the AGSA would want the Committee to do more effective oversight. Would the AGSA provide the Committee with special training to empower it?

Mr Zungu replied that AGSA would be happy to provide such support, including assistance to the Committee in its review of Strategic Plans. The AGSA could provide this support in a number of forms, including a specific presentation on what the AGSA meant by the SMART principles which were in the framework for reporting on performance. The AGSA could run a workshop. The AGSA had done similarly for some departments that had issues on predetermined objectives. It could also give a preliminary review of whether the Strategic Plans would pass the test. For example, were the Strategic Plan targets in line with the SMART principles? So that when the Committee would apply its mind to the Strategic Plan it would already have an idea of what it might expect the AGSA to have to say when reporting on the audit opinion 18 months into the future. The AGSA was a telephone call away.

Mr Mthethwa acknowledged the AGSA's colour coding, but was puzzled by the use of black in paragraph 3 of the Stats SA document. What did the yellow-black colour mean with reference to supply chain management? If it was together with green it would obviously denote his party.

Mr Zungu replied that his copy had yellow coding on supply chain management. Perhaps Mr Mthethwa's copy was printed in black and white? He would have to follow-up that question later. The correct colour was yellow. It must have been an error that found itself introduced during editing. For pre-determined objectives the coding was green for Stats SA.

Mr Ross was at first encouraged to see an unqualified report for the National Treasury, but was now quite despondent having scrutinised it and heard the AGSA's detailed briefing. There were quite serious problems. Neither of these reports could be dealt with in a single meeting with just a few questions. Would it not be appropriate to call Stats SA and National Treasury, and especially their officials in the financial branches to make full presentations to this Committee, in order to discuss these reports bullet by bullet, and determine the root causes of all these problems. The AGSA's opinion on Stats SA made it quite clear that there was no organisational structure in place. This also brought the Census results that were expected in a few days into doubt as to whether they were properly counted. One could not afford a situation in which aspersions were cast on the results of a census that was so important for the country. The qualified report for Stats SA was a huge setback for building credibility for Stats SA. It was a stark contrast with the previous five years. Then the organisational structure had been in place, but now Stats SA performed dismally.

Mr Zungu fully agreed that the organisational structure needed to be prioritised to enable the Stats SA to deliver on its mandate and to address issues identified as weaknesses.
Mr Ross asked if this situation be remedied by bringing these people before the Committee in order to question them point-by-point. Would the AGSA support his recommendation to call National Treasury and Stats SA to explain themselves?

One could believe that Stats SA was still battling to implement coordination of an integrated financial management system. There were leases for IT systems, instead of purchasing of IT systems. Why was such a decision made?

Mr Zungu replied that a question on the choice of leasing rather than outright purchase should be referred to the department itself, as it was a management decision.

Mr Ross asked if appropriate and sufficient corrective action being taken against the maladministration that was apparent from these reports?

Ms J Tshabalala (ANC) commended the AGSA's briefings. There were many similarities – the HR issues, vacancies, supply chain management, framework charter, non-approval of contracts but work done, fruitless and wasteful expenditure, money transferred without approvals, and employees with interests in suppliers, for example. These were disturbing. She agreed with Mr Ross' suggestion to call National Treasury and Stats SA to explain themselves, although she felt that such a meeting might not necessarily yield any results. It would have been preferable to engage with the AGSA before the present meeting. However, she especially appreciated the AGSA's recommendations. They were substantial and would take the two departments forward, but only if management and staff had the will to implement them. She agreed with the Chairperson on the issue of oversight, but time was a constraint. There should be a focus on financial management, the budgetary process, the allocation of money, the management of money, and the issue of bail-outs. There certainly needed to be heightened oversight of the National Treasury itself, which was a big worry, because it was this department above all others that was supposed to have a very high standard of management. When Members received such reports, it was very perturbing.

Mr Zungu replied that the AGSA would really support the idea that the AGSA and the two departments worked together on each of these issues. The AGSA was very willing to brief the Committee in even greater detail and then have the departments respond. The departments would be expected to say exactly what they were doing to respond to the issues raised. The AGSA would be very happy to play that role.

She asked when the results of the performance audit conducted on the readiness of government to report on its performance be available (paragraph 4.2 of the AGSA's document on the National Treasury). She asked if Members of the Finance Standing Committee could be the first people to receive this report.

Mr Zungu replied that this report was on the verge of being finalised. It was hoped to table it at the end of October of mid-November 2012. He noted Ms Tshabalala's request that the AGSA brief the Committee on the report.

Ms Tshabalala asked what recourse the AGSA had when its recommendations were not implemented, especially when there was a recurrent failure to implement.

Mr Zengu replied that the AGSA did interact with the departments on a quarterly basis. It made an assessment of where their key controls were. The AGSA could also give the Committee 'a heads up' on its assessment of how things were progressing in the departments so as to enable the Committee to perform its oversight even better. It was a role that the AGSA was most willing to play.

Conclusion
The Chairperson appreciated the AGSA's work. This audit outcome and recommendations reflected the ability of the Committee to perform its oversight role. The Committee over the years had never entertained audit outcomes for the National Treasury. It had been more concerned with the fiscal and macro-economic issues, but it had not focused on the deliverables. This was why the kind of issues raised today would have escaped the Committee. The Committee needed to reflect on the AGSA's recommendations, particularly with regard to what the Committee itself should do in attending to these very serious matters. As he had said the previous day, it would have been much better to receive the AGSA's report before the National Treasury annual report. It would have to follow correct this sequence in future. It was difficult at this stage to say whether there had been progress or not, as the Committee had not given itself time to look into the audit outcomes of earlier years and compare whether there had been any improvements on issues raised. The AGSA had highlighted issues around internal controls, compliance matters in particular. There were also issues of capacity, and issues of conflict of interest. The Committee should not simply leave these matters to the Standing Committee on Public Accounts (SCOPA) although SCOPA had a specific role, but should dedicate time, together with National Treasury, to study these matters. He would not expect the AGSA to respond on behalf of National Treasury and Stats SA on these findings. Space should be found in the Committee's programme very soon to call National Treasury and Stats SA and interrogate them point-by-point on these findings and on the recommendations that the AGSA had made. The Committee could thereby say, on record, that these issues had been raised, and would expect an improvement. There must be a report-back from the departments concerned on follow-up on recommendations emanating from the AGSA's findings. Deliverables were very important to enable the Committee to know whether progress was being achieved. In short he agreed with Members when they proposed that the Committee met with National Treasury and Stats SA and asked them to respond point-by-point. The Committee noted and appreciated the work done by the AGSA and hoped not to see a repeat of these audit findings, otherwise Parliament would not be doing its work.

The Chairperson adjourned the meeting, and advised Members that they would be informed of the next meeting. They should not go home, as there was much work to be done in Parliament.

Apologies
Mr D van Rooyen (ANC), Mr N Koornhof (COPE), and Adv S Swart (ACDP).