Audit outcomes of Department of Home Affairs and entities for 2013

Meeting report

PFMA audit outcomes for the Department of Home Affairs
Mr Nareen Mooloo, Senior Manager: Auditor General of South Africa (AGSA), said that the briefing covered the audit outcomes for the Department of Home Affairs (DHA) and its entities. Looking at the audit opinion history, what the AG was looking for was sustainable solutions. The AG was looking for a situation that was not similar to a heart rate monitor - it wanted to see a rising graph depicting improvement. But what the AG had found was that entities improved one year and then went into decline the following year, which meant that solutions were not sustainable. The AG wanted to get to a point where the entities improved on the past and did not go back and forth.

Mr Mooloo said that the DHAs accounting policy in terms of accounting for revenue was that it went to National Treasury (NT) who approved that the DHA write its own accounting policy on recognising foreign revenue. That policy then would be different from other departments in terms of revenue recognition. Because of the way the Department accounted for the revenue, it meant that a lot of balances were affected. Therefore if there were an issue on foreign revenue, it would affect receivables for departmental revenue and NRF receipts would be surrendered to the Revenue Fund and contingent assets. The other two items, payables and contingent liabilities, were also linked to that revenue as listed in the Annual Report of the DHA. The audit report linked those items together and they were linked to foreign expenditure. Accrual was also affected by foreign expenditure and revenue. He said those were all the items that related the DHA with the Department of International Relations and Cooperation (DIRCO). Basically, it was like someone else was administering and collecting the expenditure for the DHA, but it was accounting for that expenditure. So in a relationship like that there had to be certain controls and processes put in place that extended beyond what was currently in the department. That was similar to telling someone else how to run your operations for you. That required an environment based on understanding and communication, and also to be able to have an agreement in place where everyone agrees that someone would extend one departments controlled environment to the other departments’ environment for the purposes of the operations that department would be running on behalf of the other department. 

The AG reported that the DHA leave balance was inaccurate, but it could not say what the correct leave balance should be.  It had found that the DHA records would show that there were people who had leave days due to them, but in actual fact those people would have taken more leave than they should have, and thus would be owing the DHA work days back. The DHA was busy still reconciling those records, but matters that needed to be addressed were accountability -- from the level of supervisors, chief director, director general and all other oversight personnel.   Leave forms were not being captured or were being captured late – up to three years, in some instances -- and this upset the balances.

In the area of pre-determined objectives (PDO), the DHA had had findings for the past three years, but there had been improvements in that area in terms of the initial objectives that had been set. The AG had in the past found that the objectives that had been set were not adequate, or did not align with certain principles. Currently, that part of the PDOs had been addressed, but the documents and processes that were there to prove the DHA’s performance were not adequate. 

Mr Mooloo said that record keeping was at the heart of the problem. There was no proper record keeping, there was no vetting of the information and there was no proper oversight.  Numbers were being reported, but there was no one verifying those numbers.   The AG was not querying the authenticity of the numbers, but was indicating that the information underlying those numbers was not supporting what was being reported, while in some of the cases, the information could not be provided.

The Film and Publication Board (FPB) had shown a regression in terms of performance information.    What the FPB had planned to achieve and what it had reported on were two different things.  A significant part of the information that the FPB had reported on was not the objectives, targets and indicators that it had planned.

Mr Mooloo noted that the DHA had always had compliance issues, and that would also link back to the audit qualifications.

Qualification Paragraph
Mr Mooloo said the issue with receivables for departmental revenue for the DHA was that the account balances as listed ran through like a thread - the DHA sort of put all the other account balances together. As such the AG did not know what the impact of those account balances was because of the issues relating to items receivable for departmental revenue. Basically those items receivable for departmental revenue was money due to the DHA. It was evident that people were not doing what they were supposed to do. There had been a lot of fines by the end of the financial year, when the financial statements had to be submitted, but there were many fines that had not been verified. This meant the oversight personnel at the borders, who were supposed to validate those fines, had not done so. The DHA had submitted financials, rechecked them and submitted them again, so the audit had been finalised only at the end of September, so it had had an extra two months and still the processes involving local revenue had not been completed. The task was possibly going to be a huge one going forward, but matters were not supposed to be allowed to build up. If conformations were made on a daily basis, and the reconciliations as well, then the task would not be so big that it could not be addressed.

Mr Mooloo noted that foreign revenue was similar to local revenue, in that the reconciliation of account balances between the Department of International Relations and Cooperation (DIRCO) and DHA was not taking place regularly.  As a result, there were issues in terms of those transactions. The AG there felt that there needed to be a solution sought in that area.  The DHA had had to go back to 2004 to reconcile balances, and considering that was how far back the DHA had gone and still could not reconcile the balances, one would have to ask if it was an area that had a solution.  It might be necessary to use a different approach to the issue of documentation.   Did it make sense that a person had a document that had been used all over the world and, when coming to South Africa, it would have to go from DIRCO to DHA, where it would be recorded?   That document would be recorded from where it came, and then recorded at DIRCO and then at DHA.  Was all that recording really necessary?   Where was the documentation getting lost if it was being recorded so many times? The AG thought that maybe it was necessary to start recognising a transaction where it occurred in the world.  However, that kind of solution would require commitment from both DIRCO and the DHA --and possibly NT -- to get an understanding of how it would be accounted for, going forward.

He said it was important to look at the balance between DIRCO and the DHA.  Millions of rands sat between the departments without going into the national revenue fund because those balances remained unreconciled.

Accruals
Mr Mooloo said that accruals related to foreign expenditure that DIRCO had incurred on behalf of the DHA. That in turn had had an impact on the DHA’s contingent liabilities. Foreign operations were proving to be a challenge for the DHA, and there was a need for a sustainable solution.  There needed to be detailed processes between the two departments on how to manage those operations.

Maybe the solution was to ask what DIRCO had to offer, since it already had an established system. Could DIRCO and the DHA take advantage of the systems that were already there and put certain agreements in place?   A memorandum of understanding (MOU) that went very far back was available between the two departments, but was vague on what the two parties expected of each other.

Movable tangibles
The DHA was managing a large number of movable assets, and the record keeping was inadequate, with the result that in verifying its assets at one time in a year, when an asset was missing it would be immediately written off -- without resolving whether that asset was missing or not.  The DHA had over 100 000 assets, but if that number was broken down then maybe verification could be more manageable and at least accountability would be achieved. What was happening currently was that assets were being written off every year, but the following year those very same assets that had been certified as never being there, would reappear.

Financial reporting framework
Mr Mooloo said that because of the exemption that the DHA had received from NT, it could not be compared to other departments. That meant that during the reconciliation process that had gone back as far as 2004, the DHA would be recording a transaction that had occurred in 2004 (where the cash had already been received), as revenue in the 2013 financial year,

The “significant uncertainties” referred to the contingent liabilities listed in the audit history. The liabilities were significant, because the AG was not sure how they were going to be resolved going forward.  In the accounting sense, that was accounted for as a potential obligation.

Mr Mooloo advised that the material losses and impairments paragraph should be read in conjunction with the qualification of assets.

According to the DHA’s accounting officers’ report, the R301 million unauthorised expenditure had been the result of the decision by the DHA to scrap its trading account. The revenue that was to be generated from the rendering of services namely: printing of IDs, passports and courier costs of all those then had to come out of the budget vote of the DHA which then explained that amount.

Key focus areas: Predetermined objectives
The AG said that what had been audited did not agree with what had been reported.

Achievement of planned targets
Looking at the DHAs annual performance plan, it was apparent that there were a lot of targets that had been defined as partially achieved.  However, when the AG looked at all the targets, it had found that NT was of the view that the targets had either been achieved or not, and there was no such thing as “partial” achievements.  That section should be read in light of the unauthorised expenditure in the paragraph dealing with material over-spending of the vote.

Supply chain management
The DHA’s Director General, with the assistance of the internal audit portfolio, had undertaken investigations to find out which employees of the DHA were doing external remunerative work.

Material Misstatements in Financial Statements
Mr Mooloo noted that the quality of the DHA’s financial statements for year 2012/13 had deteriorated, compared with the previous year’s statements. The errors in the FPB’s financial statements could be quantified and thus corrected, which was why there had been no qualification over its misstatements.

The assumption and expectation when an entity was submitting and publishing financial statements, was that there were processes in place which would ensure and give assurance that the information that was reported was supported by valid, accurate and complete underlying documentation. With the DHA, the AG had found that in some cases the underlying information was not supporting what had been reported.

Other Material Non-Compliance
The AG had recommended that reconciliations should be a daily process and a routine discipline. Additionally, the challenge with foreign revenue was that it was being maintained manually, which meant that if someone had deleted a line,that probably threw the entire schedule out.  The AG, or even the DHA, would not know where to start in order to fix that.

The AG had also found a lack of oversight from the leadership of the DHA. The DHA needed to have consequences for persons that habitually failed to deliver what they were supposed to deliver.

Mr Mooloo stressed the value that the AG placed on a proper internal audit unit, as it gave a department a certain level of assurance. Additionally, what hindered that unit was that the chief auditor executive position was still an unresolved issue, and the AG recommended that a resolution be found and that the position be filled.

The risk management processes in the DHA were not effective, as all the actions that had not been taken had been outlined in the audit qualification. The DHA’s action plans to address the audit findings from 2011/12 were too late. Furthermore the AG had found that the departmental trading account had not been properly planned for, and that had resulted in the DHA pulling out at the last minute, which had led to t unauthorised expenditure.

Drivers of internal controls
Mr Mooloo said that in terms of feedback and feed forward mechanisms, there was no adequate communication of information about what needed to be done. This linked back again to the oversight responsibility, where the DHA had to oversee what needed to be carried out and to report back on whether the processes that needed implementation had in fact been implemented.

For a department the size of the DHA, the internal audit unit needed to be robust so that there was a level of assurance that the controls and processes that were being implemented in the DHA sites were being conducted in the way the DHA had envisaged.

The IEC had performed relatively well in this area, as well as GPW and FPB, with a few controls in the yellow.

Mr Mooloo praised the decrease in irregular expenditure of the DHA, taking into account the size of the DHA.  The DHA’s compliance should be seen in the context of the contracts that the DHA had, because they were expansion contracts which could not be changed, but extended year on year.

Commitments

Mr Mooloo said that the AG had facilitated the first meeting between DIRCO and the DHA, but that there had to be a constant dialogue going forward, and this had not happened after the first meeting.

Discussion
Mr G McIntosh (COPE) noted that AGSA had highlighted in recent history the DIRCO sorting out, where it would be trying to match its receipts to a kind of general ledger of some nature but he did not see it. The question of internal auditing still worried him. Could AGSA give clarification on the tender that was being investigated?

Mr A Gaum (ANC) wanted clarity on whether the presence of a qualification paragraph meant that the DHA had a qualified opinion. Since the entities belonging to the DHA had no such qualifications of their own, did that mean they had clean audits? Secondly the way he understood the qualified opinion from last year, it was because of DIRCO issues -- was it correct then to reason that those issues had not been resolved and that there were now more reasons for the DHA’s qualified opinion for year 2012/13?

Mr Mooloo replied that indeed the DHA had had a qualified report, and there were more issues qualified in 2012/13, apart from DIRCO, relative to last year. He listed them as they appeared in the qualification paragraph. The process within the DHA was improving, but it could not be expected to be audited by the AG until its balances were correct, and that was the mandate of the internal audit unit. Relative to the other entities, only the DHA was qualified. The DHA was also qualified with other findings, as evident in the audit opinion history.

The DHA’s accounting officer’s report covered everything about the investigation that was ongoing, and referred to the building that the DHA was leasing for the IEC.

Mr Gaum wanted to know what the threshold was for something to move an audit from “unqualified with findings” to a qualified opinion.

Mr Mooloo said that in the audit there was a materiality and significance framework for national departments and public entities, and there was a certain threshold that the AG calculated. But when the AG was dealing with departments, it looked at the magnitude of the item relative to the financial statement. Then, when looking at entities and their financial results and using the drivers of internal control table, the AG could see that certain areas were causing concern, such as where there had been material adjustments to the financial statements. Those entities needed close watching, because that implied that there were significant errors beyond the threshold previously mentioned. There could be governance and process issues, where an entity could not produce a set of financials in time, or there were major errors on the statements. To avoid a qualification, there needed to be daily disciplines like report backs, reconciliation of receipts, follow ups and all other standard operating procedures. If there was an entity where those procedures were not taking place and the governance structures were not strong enough -- and there were no repercussions and no consequences from management for incomplete or work not done -- then that entity was probably on a downhill slope in terms of a qualification.

On the accounting side, the AG used thresholds that it calculated based on a budgeted figure from the previous year.  Similarly, departments and entities would be working on a threshold in terms of what they reported.

Ms H Makhuba (IFP) commented that she felt a bit disappointed that the DHA had been qualified since 2010/11.  She understood that the internal audit unit was there to keep the DHA in check before external auditing occurred.   She did not know if the Committee had the right to call the DHA to come and account.

The Chairperson felt that maybe the Committee should push the DHA more than before to sort out the impasse between itself and DIRCO, as it seemed that that issue was a major contributor to the status of the qualified opinion against the DHA.

Briefing by the Committee Researcher
Mr Adam Salmon told the Committee that some of the issues he was going to cover overlapped with what AGSA had just presented, and that was because he had not been aware of how much of its report was going to be presented to the Committee. He subsequently took the Committee through the presentations.  (See attached reports)

Discussion
The Chairperson thanked the researcher for the presentation and opened the floor for questions and comments, but there were no questions.

The Chairperson felt that the Committee needed to prepare for the meeting with the DHA when it came to account, so as to curb its progressive decline.  Members needed to go back to the annual report and all other material that had come before the Committee, so as to be able to question the DHA properly and to raise valid concerns. She stressed the trend that the DHA was showing of not heeding the Committee’s concerns.

The meeting was adjourned.