Housing Development Agency 2019/20 Audit: briefing by auditor

Human Settlements, Water and Sanitation

02 March 2021
Chairperson: Ms R Semenya (ANC)
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Meeting Summary

Annual Reports 2019/20

In this virtual meeting, the Committee was briefed by the auditor of the Housing Development Agency, Ngubane & Company Inc on the HDA Annual Report for 2019/20.

The Committee was told that over the last three years, there has been a regression in audit outcomes for the HDA. The HDA received qualified audit opinions the last two years. There were non-compliance findings about the quality of submitted annual financial statements, expenditure management, procurement and contract management, consequence management on the irregular, fruitless and wasteful expenditure. A reportable irregularity had been identified in the audit and this had to be reported to the Independent Regulatory Board for Auditors. The irregularity involved the reduction – without the approval of the Bid Adjudication Committee – to construct 63 housing units from R40 million (but with a R10 million reduction due to over-payments on a previous project). The supplier was paid but only 12 houses were delivered.

Committee members discussed HDA's disappointing financial management; constant change in leadership; financial malfeasance; qualified audit findings; irregular, fruitless and wasteful expenditure; DHS response to the audit findings; performance bonuses; auditors’ interaction with HDA. The Committee requested Auditor-General SA to consider HDA as one of the 2020/21 auditees selected for auditing under the new Public Audit Amendment Act which permits binding remedial action. Several Members argued that the Committee should not pass judgement until the Department and HDA officially presented its Annual Report to the Committee.

Meeting report

Chairperson’s introduction
The Chairperson said this virtual meeting scheduled until 13:00. However, she was in Cape Town and was required to attend a parliamentary plenary sitting in person and the transport arrangements to Parliament required her to leave this meeting by 12:25. She proposed that the Committee should be briefed by the auditors. The Committee could reconvene with the Department of Human Settlements (DHS) later in the week to allow ample time to interact with both the auditors and DHS. Members were asked for their input.

Mr M Tseki (ANC) proposed that the meeting follow the scheduled agenda and the Committee reassess at the time the Chairperson had to leave.

Ms E Powell (DA) proposed that the meeting be split between the auditors’ report and the DHS annual report. This meeting was published as 9:00 to 13:00. All Members are required to be in the House at 14:00 and she did not believe that transport arrangements should be used as a reason to cut short important statutory committee meetings. The Committee's constitutional role is to interrogate and provide effective oversight and not merely listen.

The Chairperson replied that that is what she meant by allowing DHS to present on another day. Questions by Members would be allowed. Transportation was not her arrangement; it was parliamentary arrangement. Members were welcome to proceed with the meeting and an acting chair could take over for the last 35 minutes. She merely suggested that the briefing by the DHS and the Housing Development Agency (HDA) takes place at different sittings.

Mr M Mashego (ANC) said that the meeting should continue as scheduled. When the Chairperson had to leave, the Committee should take it from there. We should be cognisant that it is Parliament that arranges transport. People who have to physically attend Parliament must not be punished for adhering to parliamentary regulations. He agreed that there should be engagement with the audit report and there seems to be agreement that the Committee will not be able to deal with the DHS report.

Ms M Mohlala (EFF) agreed to the Chairperson’s proposal. The Committee should listen to the auditor and engage with the audit report. DHS and HDA can brief the Committee on another day.

The Chairperson noted agreement with her proposal. She said that HDA is audited by private auditors.

Housing Development Agency 2019/20 Audit: briefing by Ngubane & Company
Mr Edwin Chapanduka, Director: Ngubane & Company Inc, took the Committee through the 2019/20 audit report of HDA. As permitted by the Public Audit Act, the Auditor-General has opted not to perform the audit. Ngubane & Company Inc was the appointed auditor of the Housing Development Agency for 2019/20 and has been its auditor for three years. Over the last three years, there has been a regression in audit outcomes for HDA. In the 2017/18 financial year, HDA received an unqualified audit with findings and has received qualified audit opinions in the last two years. HDA again regressed since the 2018/19 audit.

Credible financial reporting
• Project receivables and obligations: HDA did not maintain an adequate record of project receivables and obligations; there were unconfirmed balances or variances from other spheres of government which could not be explained; there was a failure to offset project obligations and project receivables with pre-billings; assets and liabilities were recorded in the financial statement incorrectly and cash holding was not aligned or reconciled to the provincial obligation balances.
• Not all irregular, fruitless and wasteful expenditure was included in the annual financial statements. HDA did not have adequate systems to identify and record all such expenditure.
• Project payables finding was due to clearing accounts that were not cleared, inter-company transfers, and unknown receipts; listings or supporting documents for the uncleared amount could not be provided. Management was able to clear some of these items.

Credible performance reporting
One programme was selected for testing during the audit. Programme 3 on Regional Coordination and Human Settlements Implementation Support Services was selected. The audit noted that although there were listings that HDA was maintaining, those listings did not provide itemised details to allow for alternative procedures especially the completeness test against the listing. The auditors were thus unable to obtain completeness of the indicators on the number of human settlements units delivered/supported, the number of human settlement serviced sites delivered/supported, and the number of title deeds facilitated for registration. Despite this modification, there was an improvement from the previous audit as some of those findings had been addressed.

Disregard for compliance with legislation
There was a non-compliance finding with:
• The quality of submitted annual financial statements: there were misstatements in the financial statements submitted for audit. Some of these misstatements were corrected and those that were not corrected were included in the audit report as modifications.
• Expenditure management (including irregular, fruitless and wasteful expenditure): management did not implement effective steps to prevent irregular, fruitless and wasteful expenditure and certain expenditure was incurred without approved budgets.
• Procurement and contract management: supply chain management requirements
• Consequence management not implemented on the 2018/19 irregular, fruitless and wasteful expenditure.
• Strategic plan and annual performance plan not approved by the executive authority.

Findings on supply chain management
• There was procurement without inviting prescribed number of written price quotations and this deviation was approved even though the reasons were not provided;
• Some of the contracts were extended or modified without approval of a properly delegated official.
• Some contracts awarded to suppliers whose tax matters had not been verified by SARS.
• Some suppliers did not submit a declaration on local production and content.
• Bid documentation did not stipulate the minimum threshold for local production and content.
• Evidence could not be obtained on prescribed minimum threshold for local production and content
• Evidence could not be obtained that major infrastructure projects were reviewed by a gateway review team.

Reportable Irregularity
• A reportable irregularity has been identified in the audit and as obliged by section 45 of the Auditing Profession Act (APA), this had to be reported to the Independent Regulatory Board for Auditors.
• The APA defines a reportable irregularity as any unlawful act or omission committed by any person responsible for the management of an entity, which:
- Has caused or is likely to cause material financial loss, or
- Is fraudulent or amounts to theft; or
- Represents a material breach of any fiduciary duty owed to the entity.
• This irregularity was the reduction in the scope of work. This was more aligned to a ‘material irregularity’ but in this case, HDA was not included in the AGSA evaluation of material irregularity.

There was a Bid Adjudication Committee (BAC) report dated 1 February 2018, that approved an extension of work to the value of R40 million to construct 63 housing units. The scope of work had a price reduction of R10 million for the same number of units; the supplier’s contract amount was reduced without the approval of the BAC due to overpayments that had been effected on a previous project. The supplier subsequently received the reduced contract amount payment, but only 12 houses were delivered. Management could not provide evidence for the delivery of the additional 51 units. Management undertook to investigate this and assess if there was an overpayment amounting to fruitless and wasteful expenditure. By the time the audit was complete, the investigation had not been finalised.

Status of internal controls
There are three categories:
• Leadership: there are concerns over effective leadership.
• Financial and performance management: intervention is required for proper record keeping, daily and monthly controls, and review and monitor compliance.
• Governance: HDA has good risk management

Assurance provided.
Little assurance was provided by senior management for the AFS misstatements. Assurance was provided by the accounting authority, executive authority, internal audit unit, and audit committee.

Financial management
Irregular expenditure increased over two years. Irregular expenditure was R106 million in 2018/19, and R114 million in 2019/20; goods were delivered but the prescribed processes were not followed. The majority was due to contravention of supply chain management (SCM) legislation through deviations and irregularities including the use of contracts after expiry dates and non-adherence to local content requirements.

Fruitless and wasteful expenditure increased over two years. It was R2 million in 2018/19, and R17 million in 2019/20. Most for the current year was caused by payments made for which no work can be certified to have been done or no agreement was entered into for the work performed.

Root Causes
• There was a slow or no response to improving the key controls and addressing risk areas: accounting authority and senior management did not respond with the required urgency to address these.
• Slow response to consequence management: there no investigation into irregular, fruitless and wasteful expenditure of the previous year to take appropriate action.
• Inadequate year-end closing processes.
• Instability and prolonged vacancies in key positions.

COVID-19 Procurement
There were noted instances where HDA did not comply with Treasury requirements, preferential procurement policy framework, and the entity's supply chain management policies.

Recommendations to DHS and HDA
• Vacancies in key positions should be filled timeously with relevant qualified and skilled personnel. Acting appointments should be kept to a minimum. Stability at the senior management level is necessary.
• Consequence management needs to be applied to ensure that staff comply;
• Management should track audit action plans to ensure timely implementation to prevent similar findings.
• There should be urgency by management in addressing risks identified and improving internal controls.
• Finalise the appointment of the Board and ensure that it is constituted in line with HDA Act.

Recommendations to the Committee
The Committee should request management to provide feedback on the implementation and progress of the audit action plan to ensure improvement and monitor the implementation of consequence management.

The overall message is that corrective actions to address internal control deficiencies must be implemented with urgency; leadership should enhance oversight and adopt a zero-tolerance approach to non-compliance with legislation; the work by assurance providers such as audit committee and internal audit has not yet yielded the desired results due to management’s failure to implement their recommendations.

The interim board was appointed in November, there has been significant improvement with policy approvals, and an internal audit manager was appointed who assists with tracking the audit findings. It is believed that this would assist in improving HDA moving forward.

Discussion
The Chairperson thanked Mr Chapanduka and asked if the AGSA representative had further input.

Mr Londoloza Songwevu, Senior Audit Manager: Auditor-General South Africa (AGSA) replied that everything has been covered and he did not have anything to add at that point.

Ms Powell said that the audit report was indicative of an entity in extreme crisis. Not only have the legally required financial control systems almost entirely failed, but there has been a constant reshuffling of senior executives; the appointment, dissolution, and reappointment of two boards; and an extensive and an unparalleled degree of irregular expenditure which is a cause for grave concern. The Committee must act in the best interests of South Africans and finally, ‘once and for all’ demand full and proper explanations to establish full liability for the ongoing financial malfeasance that has continued unabated at this important entity for years.

Before the start of the reporting year, HDA had been placed under the care of administrators twice. The 2019/20 Annual Report notes that HDA’s period of administration ended at the commencement of the reporting period with the appointment of a board in April 2019; it was in office for one quarter only. This was because the executive authority, Minister Sisulu, dissolved that board in July 2019. The entity was again placed under administration in September 2019; and was without an administrator or board between July and September. A second board was appointed in November 2019; this is halfway through the financial year in question. Yet, the Minister’s comments in the Annual Report preface is that she was certain that the board appointed in November 2019 ‘would ensure the implementation of a revised strategy and operating model to effect the necessary interventions to turn the ongoing situation at the entity around.’ A week ago, after the release of this audit report, the Minister fired that board. This suggests that the Minister has lost faith in the same board she appointed. During this year, ‘the entity had three acting Chief CEOs, while the fulltime CEO Mr Pascal Moloi earned a salary of R6.5 million, that was increased by R2.5 million from the previous year.’ Two acting Chief Financial Officers (CFOs) managed HDA’s finances.

Going back to the 2018/19 report, a cash deficit of R36.8 million was declared in contrast to the R497 million in cash that HDA had held. Although HDA can hold cash balances, Mr Neville Chainee, the acting CEO at the time, declared that those funds had been committed to managed projects. However, at the end of 2019/20, the cash reserves of HDA were ‘sitting at a staggering’ R638 million, meaning they were not allocated. This is more than HDA’s entire budget for the year. This means that not only did HDA’s managing agents fail to take any remedial action, but the situation also became worse. This points to wilful financial negligence which can be seen throughout the audit report. In addition, there was no consequence management taken for the previous year’s irregular expenditure.

In the 2018/19 report, National Treasury had instructed HDA to return part of the R2.3 billion cash funds that were reported in the previous year’s cash balance due to concerns about excessive unused funds transferred to HDA in contravention of the Division of Revenue Act (DORA). This indicated the need for an urgent review of its funding model to create one that would adequately support the strategy and ensure the long-term financial sustainability of HDA.

In 2019/20, yet again the target was not met for developing a funding model to prevent the same Auditor-General findings. Can Mr Chainee, now the HDA administrator, tell the Committee why this target was not met? Which officials will take responsibility for, again, what appears to be a deliberate failure to institute critical remedial action to prevent adverse audit findings?

In the 2018/19 report, HDA independent auditors noted a ‘reportable irregularity’ on supply chain management and financial controls. Ms Powell quoted section 45 of the APA: this is an unlawful act or admission committed by any person responsible for the management of an entity which has caused or is likely to cause material financial loss; is fraudulent or amounts to theft, and represents a material breach of any fiduciary duty owed by such person to an entity.

The 2018/19 report found that HDA did not comply with the Public Finance Management Act (PFMA) and its internal SCM policy as payments were made to a contracted party, which, based on the forensic report, implicated certain executives to have acted unlawfully.

The 2019/20 audit report notes again that there were inadequate systems in place for identifying irregular expenditure; payments were made against unknown receipts; overpayments were made for work not performed; work was done without agreements in place with other departments; contracts were awarded to suppliers whose tax matters had not been declared; contracts were extended or modified without the approval of a delegated official, and ‘shockingly’, financial statements were not prepared under the prescribed reporting framework.

R131 million is recorded as irregular, fruitless and wasteful expenditure; up from R109 million in the previous year and ‘this is where things get interesting’: Section 65 of the PFMA states that ‘the executive authority must table to the legislature, the findings of a disciplinary board and the sanctions imposed. The Minister is required by law to inform Parliament of the findings of a disciplinary board that heard a case of financial misconduct against the accounting officer or accounting authority. It is clear from the current audit report that HDA’s executive management and the board may be liable for gross financial negligence. Yet there is no evidence of consequence management taken for previous financial years.

Ms Powell said that she sent a letter on 12 February to the Chairperson, requesting an enquiry that was not ‘even acknowledged’. The Committee has certain obligations in law. The Minister and the accounting authority – which would now be the administrator of the board – needs to be called before the Committee to explain what consequence management was taken in terms of the audit report of 2018/19 and now 2019/20.

What is worse is that despite the criminal negligence and the rank failure, the heads of this entity are now earning up to R2.8m each; while the CEO was given a R2.5m salary increase upping it to R6.5m – that is extortion; on what basis were these salaries approved by the Minister?

She concluded with three recommendations for the Committee.
- In her capacity as a Member of Parliament, she had already referred this audit report to the AG for a special investigation, in terms of section 5(d) of the Public Audit Act. But she believes that in the interests of good governance, the Committee should make further representations towards a special audit and investigation.
- In line with the PFMA, the Minister must be summoned to the Committee to present the full detail of all disciplinary processes arising from the repeated irregular expenditure incurred by this failed entity and the rank failure by the financial reporting controls and mechanisms.
- A full enquiry should be held into the actions of both the executive authority – the Minister herself – and the accounting authority – which would be the board or administrators – from the start of the 2018 financial year to date.

She would send these recommendations in a letter to the Chairperson which she would, ‘in the interests of just good basic manners’ request that it is acknowledged.

The Chairperson said that the Committee had agreed on the agenda. The Committee was supposed to be interacting with the auditors on the audit report. HDA and DHS would later present the annual report to the Committee and Members will be allowed to interact with them at that time.

Ms Mohlala said that she was disappointed with HDA. The Committee saw that something was wrong at HDA when it saw the shacks built for people during COVID-19 and the Committee was proven right. The Committee has been asking about what was happening in the HDA and it did not receive any answers at the time. This audit report is evidence that there are problems at HDA.

The Committee has learned a lot of things today which proves that ‘HDA does not exist’. This is an entity without adequate systems in place to identify and record all irregular, fruitless, and wasteful expenditures; no PFMA adherence; and incurring expenditure without an approved budget. HDA is failing to maintain proper accounting principles; its financial statements were not prepared according to the prescribed framework; there was no evidence of consequence management against the officials that incurred the irregular, fruitless and wasteful expenditure; and the Bid Adjudication Committee was not composed according to policy.

She referred to the Public Audit Amendment Act and asked the auditor what constitutes remedial action for any kind of transgression? Did HDA officials receive performance bonuses? The interim board is a problem as it does not create the stability required. Could the Minister going forward, ‘try by all means’ to appoint a permanent board.

Mr Mashego said that the Committee should only discuss matters officially to presented to it. He was hesitant to engage on items that were not presented. For instance, the Committee did not hear from DHS if there was consequent management. He was sure that Members were prematurely resolving to cast aspersions about "failure" by DHS when it have not given its annual report.

He agreed with Ms Mohlala as whatever she asked was for 'the year under review’ which is 2019/20. Once we jump to 2020/21 it is no longer ‘the year under review’; it is something else.

He agreed that based on the report given today there is ‘a crisis of the highest proportion’ in HDA. HDA is failing on every matter that an entity must do. He would not understand when HDA or DHS presents to the Committee later if they state that the board, the CEO and the CFO are still in office. If they tell us that, then he would agree with Ms Powell that somebody needs to be called to account. But if they report to the Committee that there has been consequence management in the year under review; one might say something different. However, the presentation by the auditors shows that the ‘HDA is a dead body walking’. To him, it seems HDA acquires money, spends money, but then cannot show what the money has been spent on; then they declare they have money in their account, yet, when the auditors questioned where that money was, it could not be shown. ‘Clearly, something is wrong and the auditors have shown the Committee this. The Committee needs to be honest that it is ‘riding a dead horse.’

He was interested to hear the DHS and HDA presentation; they need to answer for the ‘consequential’ matters that the auditors have raised. The auditors have found a reportable matter. This means someone must have acted on that reportable matter – what action has been taken thus far and what is the timeframe for it?

The Committee must get the official DHS report. Some things have been said that might make the Committee eager to act on them without officially hearing from the DHS. He hoped that the Committee waits for the DHS presentation before acting against it. Once the DHS has presented to the Committee, the necessary decisions and assessments going forward can be made.

He agreed with Ms Mohlala that HDA as it stands in the audit cannot exist. HDA cannot take the money and have fruitless and wasteful expenditure. He was hesitant to say that the Minister should do certain things while the Committee awaits the DHS presentation.

Ms N Mvana (ANC) said that she was embarrassed by the report. She did not want to place the cart before the horse since the Committee awaits the HDA report. The auditors should be commended for their work; she thought that they have found what the Committee has been concerned about in the way things have been done in the HDA. The report is disastrous but the Committee cannot ‘throw in the towel’. HDA and the DHS must still present themselves before the Committee. All questions that Members have raised thus far were relevant, but the Committee should wait for HDA to ask those questions. The auditors have shown what has occurred; the fruitless and wasteful expenditure is unacceptable.

Ms S Mokgotho (EFF) commended the good work done by the auditors. HDA did not comply with the PFMA and the SCM regulations in 2018/19 and 2019/20. What was HDA’s response to the 2019/20 qualified audit and for not applying the 2018/19 audit recommendations?

What was the DHS response to the HDA regression? In the opmiom of the auditors, was the HDA board fit to hold office? Was the Minister and DHS doing effective and timely oversight after the audit? Has the Minister and DHS done justice to South African citizens and taxpayers by not taking the audit recommendations seriously? Had they not made the HDA board responsible for the irregular, fruitless and wasteful expenditure and the squandering of money that was supposed to deliver services to the poor people of South Africa?

Ms N Sihlwayi (ANC) commended the auditors for a very clear presentation and clear recommendations, there is no doubt about its credibility on how to do things. "The auditors heard issues that they did not report to us coming from others that we do not know, who are not in front of us". We are waiting for the parliamentary process where DHS will come and report to the Committee and then we engage on the issues.

The audit report is very serious and says something about the committee, and how the committee behaves. "Bringing gossip" – she said ‘gossip’ because it was not here. The Committee is waiting for the DHS report to deal with it then. A credible report, not from gossipers. The Committee has listened to the mandate presented on the procedure of the audit report, and that is in good order. No one would say the report is acceptable; it is a crisis report and it helps the Committee, the officials and the board of HDA. Is this the government that we want? There is legislation on how capacity should be dealt with. This is very worrying. She wanted to wait to listen to the DHS report to allow the Committee to agree on an action plan to deal with the audit findings.
On the recommendations submitted by Ms Powell as an individual, the Committee needs to be told how that can happen – how is it that the Committee has not dealt with the information, yet recommendations have gone out? Parliament and the law exist to lead us and to control those that have "predetermined knowledge". Can the Committee patiently wait for the DHS report?

Mr Tseki said that it was difficult for him to welcome the presentation from the auditors because the first two slides talk about qualified, disclaimer and adverse opinions with findings. The auditor’s presentation ‘was like a workshop’ because they discussed all the various findings, but they are not putting examples on the table. The only example provided was the R10 million reduction in the scope of work. It is prudent that when you say there are findings, they should be included in the report. Mr Mashego has covered him on the way forward. He had advice for Ms Mokgotho and Ms Powell. To Ms Mokgotho, the auditors cannot respond on behalf of DHS.

The Chairperson interrupted Mr Tseki and said that the auditors would answer the questions addressed to them and if not possible, this will be indicated.

Mr Tseki replied that the Chairperson’s advice was taken, and the auditors should be allowed to respond where they can.

The last point he had was for Ms Powell, we need to advise her …..

The Chairperson interrupted Mr Tseki -

Ms Mokgotho interjected and said Mr Tseki was out of order. He should not address Members but address the presentation…

The Chairperson told Members not to advise other Members. If Members needed advice, they would indicate that they do. Members should allow each other to speak without disturbance. She asked that Mr Tseki leave his questions for the auditors. AGSA was also present to hear the Committee’s interaction with the auditors and would respond to the questions addressed to the Auditor-General. DHS is listening to the meeting and the Committee would engage with it later as agreed.

Ms Powell said she wanted to clarify that when she referred to the provisions of the PFMA…

The Chairperson stopped Ms Powell and said that she was out of order as they did not want clarification. The Committee is talking to the auditors and they will respond. That is why she called Mr Tseki to order because the Committee should not talk about those things. The Committee should focus on the agenda. Members were eager to interact with DHS on the audit findings. Where clarity is needed, the auditors would respond. She asked that the meeting proceed.

The Chairperson welcomed the audit report and had a few questions to add. Ngubane & Co have audited HDA since 2017/18 when it received an unqualified finding but received qualified findings in 2018/19 and 2019/20. In their view, what reason did HDA have for its non-response to the management letters sent to them? What reason did HDA give for not addressing the concerns and for regressing?

Is Ngubane & Co interacting with HDA only annually? AGSA usually checks up every three months on the findings raised and if they have been addressed. Has Ngubane & Co interacted with HDA on the concerns raised by the Committee? What was HDA’s reason for not implementing those management letters or the findings? Ngubane & Co have audited HDA since 2017/18, where HDA received a unqualified report; what went wrong in the process?

Ngubane & Company responses
Mr Chapanduka appreciated the positive comments by Members. He proposed that matters about DHS should be addressed by DHS as it would be in a better position to respond to those matters; he would respond to the questions addressed directly to the auditors.

On the Public Audit Amendment Act empowering remedial action by the Auditor-General, currently HDA is not one of the selected auditees according to the phased-in approach of implementing the Amendment Act. As a result, the remedial action is not applicable for the period under review.

Mr Chapanduka replied that no performance bonuses were paid out in the period under audit and he thought that this was highlighted in the financial statements.

On HDA’s inability to implement the previous audit recommendations, from the interactions the auditors have had with HDA, there was an initiative by management where some of those findings were being trained on. By the time the 2019/20 audit commenced, not all matters were addressed.

Some of the reasons for lack of implementation, based on professional judgment, were the leadership changes. These changes delay implementation or monitoring of some of the audit action plan. New leadership requires time to understand the operations and focus on the audit action plan. The professional recommendation provided was that there should be stability in the form of permanent appointments to the board and key positions, rather than acting positions, which would help to set the tone from the top.

On why HDA was taking long to address audit findings and reasons for regression, Mr Chapanduka replied that the audit recommendations highlight that certain controls need to be in place. These controls require regular monitoring, including performing reconciliations and ensuring timely processing of financial information. In the middle of 2018/19, as part of implementation of audit findings, HDA had reconfigured its accounting system and this was not a process that was effectively implemented. This contributed to some of the deficiencies; such as the difficulties in reconciling because of how the information was reconfigured, this also resulted in some gaps which lead to inadequate monitoring of controls. One action implemented when the new board was appointed in November was that an internal auditor was immediately appointed. This person was responsible for the monitoring and implementation of the audit action plan as well as verification. This could contribute to a future positive outlook and accurate information being available to those that make decisions.

When Ngubane presented the audit report at a HDA audit committee and board meeting, it emphasised the need for a ‘controls and evaluation workshop’ to ensure that policies are effectively communicated to individuals and that responsibilities are clearly defined and utilised in performance management. This is what was planned and the intention from that meeting was that management, the audit committee, and the board would be included and this would stretch over time. On the implementation of this, it might have happened but based on the interaction it was clear from the audit committee and board that some of these matters could easily be implemented by ensuring that everyone understood the controls implemented. [Audio lost: 1:49:26-1:52:15] The auditors had a session again with the audit committee and emphasised that the audit recommendations are implemented.

After the reporting period, Ngubane had various interactions with the CFO and his team again on how the audit findings could be addressed. One of these was on the irregular expenditure. The reason provided was that the methodology implemented in ensuring the completeness of the matters from the 2018/19 audit was not sufficient based on the outcome of the 2019/20 audit. As such, there was another meeting with the CFO and his team as the CFO and his team requested advice if the methodology they planned to implement was sufficient. Ngubane participated in providing this and, hopefully, with the recommendations and the ability to track some of those matters, HDA should be able to address some of the matters raised. However, that would also require taking the original recommendations of the report into consideration.

Follow-up discussion
The Chairperson thanked Mr Chapanduka for his response.

Ms Powell said that she appreciated the response and wanted to address three things. First, Mr Chapanduka noted that some of the remedial actions provided for in terms of the Public Audit Amendment Act of 2018 may not be applicable for the year under review. To her knowledge, the PAAA came into effect on 1 April 2019 which would have been the first day of the financial year for the period under review; therefore, she asked what was meant by the PAAA provisions on remedial action not being applicable for the year under review.

Second, it was noted that no performance bonuses were paid. Page 83 of the Annual Report, in the provisional statements, notes that R4.3 million was paid in performance rewards. She asked for clarity as Mr Chapanduka said performance bonuses were not paid, yet the Annual Report notes that they were.

Lastly, on consequence management, the board was appointed in November 2019, this is halfway through the financial year. Several discussions with the board on consequence management were detailed and this requires explanation. The board has now been disbanded. It is known that the Minister had hired then fired a CFO. Then the board had hired the CEO back; in response, the Minister disbanded the board last week. How will a board that has been disbanded continue to be responsible for consequence management? In the absence of the board, who is the ultimate authority for consequence management? Would it be the Minister as the executive authority or the administrator who is taking over the role and duties of the board as accounting authority?

The auditors also noted that meetings on consequence management had been scheduled with the audit committee. After this, you had several engagements with the CFO. There have been various acting CFOs, most recently Brian Mosehla. Which CEO or different CFOs did the auditors have engagements with? Now that the CFO has been terminated (whose tenure was to end in May but was terminated at end of January by the Minister), who is the CFO authority responsible for carrying out the undertakings made in discussions with prior CFOs? It seems that one of the big problems HDA is facing is lack of continuity. Who are you, as the external auditors, dealing with? Who is providing you with continuity on the commitments undertaken in your engagements and ensuring those are implemented? It must be quite difficult in such a tumultuous environment.

Ms Mohlala was concerned about the R4.3 million paid in performance rewards that Ms Powell mentioned. The auditors said that no performance rewards were paid, and the Committee needs an explanation because the Annual Report says that they were.

She did not understand why the auditors could not respond when HDA was not present; the auditors could still respond because they did the audit. The auditors should not just say that they cannot respond because DHS was not present. The auditors should respond where they can and leave what they cannot respond to.

Mr Mashego said that he wanted to warn the auditors not to overreach and speak on behalf of DHS. When DHS comes to present to the Committee, they may present something different from what might be said "on their behalf". The Committee will then hold DHS liable for misleading it when that was not the intention of DHS.

There is a possibility that DHS refutes some of the items that the auditors might say and because it was officially said to the Committee, it would be tantamount to misleading the Committee. Things that are for DHS must be left for DHS and things for the auditors should be dealt with by them. They must never try to represent DHS because they have no mandate to do so.

Ms Mohlala interrupted and asked why Mr Mashego would pre-empt that the auditors would be the ones to mislead the Committee. He did not have any questions to ask; why has he said that it is the auditors and not DHS that would mislead the Committee? [Mr Mashego repeatedly shouted ‘no’ during this and Ms Mohlala shouted over him]

The Chairperson called Members to order and said to Mr Mashego that the auditors should be allowed to respond to what they can respond to.

Ms Mohlala interjected saying she had to call a point of order because the auditors should be allowed to speak.

The Chairperson said that Ms Mohlala was not noted to speak. He asked Mr Chapanduka to respond to the questions asked.

Mr Chapanduka replied that the bonus of R4.3 million was for performance in the 2019 financial period. Those bonus payments were paid to employees with R2 million being for the bonuses of the executive management and exco members. It was paid after the 2019 financial year reporting period. This can be confirmed in our working papers.

Ngubane & Co had meetings with the CFOs, which was then Brian Mosehla, and recently there have been changes to HDA senior leadership. There has not been any interaction with HDA after those announced changes and for now, it is difficult to indicate the current process that HDA is following on consequence management for the matters raised in the 2019/20 audit. He would like to believe that in the previous financial period some work was allocated to the internal auditors to evaluate such as irregular expenditure to assess if action could be taken. An administrator for HDA has recently been appointed and for now, they do not know the scope and focus of what the administrator would be covering. He hoped that the focus would include consequence management and ensuring that the work started by previous leadership is implemented.

Mr Londoloza Songwevu, Audit Manager: Auditor-General South Africa, replied that Ms Powell was correct. The PAA amendments came into effect on 1 April 2019 however, as Office of the Auditor-General, those changes are being implemented in a phased-in approach. For 2019/20, 89 audits were selected for phase 2. Unfortunately, HDA is not one of those. In the Human Settlements portfolio, the NHBRC and the nine provincial departments were selected for phase 2 implementation of the PAA amendments. This is what Mr Chapanduka meant when he said that it did not apply to HDA. If the Committee looks at the presentation there is feedback on the reportable irregularity. In the absence of implementation of a material irregularity then the HDA reportable irregularity is like matters raised that are material or possible material irregularities.

The Chairperson asked, considering the HDA financial status, if it was too late for the AG to include HDA so that material irregularity measures could be implemented.

Mr Songwevu replied that the selection starts at the beginning of the planning process for the audit cycle. Unfortunately, audits have already been selected for the 2020/21 audit cycle, and again, HDA has not been selected. Based on the late completion of the audit and ‘the fact that audit outcomes are only coming in March’ it will then have to be considered for the 2021/22 audit cycle. As the Office of the Auditor-General starts its planning process for 2021/22, this audit will have to be considered. He agreed that the Chairperson’s point should be considered going forward. There is also the possibility that the PAA amendments might have to be implemented for all audits and not just a select few.

The Chairperson thanked Mr Songwevu for his reply. The HDA financial status would be worth the AG’s consideration. She understood that it was late, but Committee advice could still be given on how the process should be taken forward.

Mr Songwevu replied that the comment was noted.

Ms Powell said the external auditor briefed the Committee today and made a decisive statement – that is recorded – that no performance bonuses were paid for the year under review. She and Ms Mohlala had raised this point given the content of the Annual Report and the feedback from the auditor was obscure as he said that performance bonuses were paid, but he would check the amounts. How can the Committee have an external auditor that can place on record in Parliament that no performance bonuses were paid, to then be corrected by Members to the extent that "they would have to go back and check". Is that grounds for referral to the AG? The Committee needs an explanation on what is going on because a material misstatement was made before Parliament. The Committee must get the right information because if incorrect information is given on one matter, how sure can the Committee be that incorrect information is not given on another.

Her recommendation to the Committee is to refer this external audit to the Auditor-General in terms of section 5(d) of the Public Audit Amendment Act that came into effect on 1 April 2019. She had sought clarity and the legal advice she was given was that the remedial action provided for in section 5(d) to request an investigation does not form part of the phased-in approach. Does the phased-in approach prevent the Committee from recommending to the AG a special investigation in terms of section 5(d)? Is the Committee prevented from doing this because of AGSA's phased-in approach of the Amendment Act? Her understanding was that that provision exists as a standalone remedial action available to anyone that would like to refer the matter. This is a matter of grave concern that she wants to get on-record responses to.

The Chairperson asked to whom Ms Powell addressed her questions.    

Ms Powell replied that her first question was to provide the external auditor a final opportunity to provide clarity on the misstatement made that no performance rewards or bonuses were paid. The second question was her seeking advice from the AGSA representative.

The Chairperson said that the auditors have already said that they would look into the performance bonuses and respond to this.

On referring HDA to the Auditor-General, the Chairperson said he had raised a similar concern and AGSA have said that they have noted the concern and the AG will look into how HDA could be included as part of their material irregularity audit, considering the HDA financial challenges. However, Mr Songwevu can repeat what he said when she asked the same question.

Mr Songwevu replied about including HDA as part of phase 2 in implementing the Public Audit Amendment Act. He would take this back to AGSA and see if processes still allow HDA to be included in the 2020/21 audit cycle and feedback can be provided to the Committee. There is nothing wrong about writing to AGSA about a grievance with the auditors, if the Committee feels there is a need to bring something to its attention. This is not frowned upon and it will be looked into and a response provided. Communication can be written to the Office of the AG.

Ms Mohlala asked if Mr Chapanduka could respond about the performance bonuses. Why is it when he was asked again, he said that performance bonuses were paid. From where did the information come that no performance bonuses were paid? Why did he not say that he was not sure and would provide the information later? Why did he say that there were no performance bonuses when the report said otherwise? She was afraid that the auditor report might have more incorrect information. He needed to clarify where he received his information.

Mr Chapanduka apologised for the misunderstanding on performance bonuses. The payment to leadership was done after the 2019 financial period ended and the other component related to the category of employees, but he could provide clarity on the matter at a later stage.

The Chairperson requested that the information be sent in writing to the Committee.

Ms Powell said that she understood that a fuller analysis was required upon receiving the DHS annual report presentation; however, she wanted to understand if the Committee, in this session, has specific recommendations for the audit report that is separate from the annual report. Remedial actions for the audit report differ from annual report remedial actions. She would like to request if there are committee recommendations on the audit report.

She wanted it on record that whilst mistakes do happen, and material misstatements can be made in error; it was of grave concern that such a specific misstatement could be made by the external auditor only to be corrected by Members who have read their documentation. As Ms Mohlala has said, it does potentially put the entire audit in question, because this mistake was not picked up by the external auditor but by the Committee and it does ‘send a signal’ for the whole report.

Mr Chapanduka said that he understood the concern and apologised and hoped it was something the Committee also understood. The auditors have tried to ensure that the entire audit process was performed with great care and that control interventions were implemented.

Ms Mohlala said that when the Committee engages with HDA would it be possible for the auditors to be present for the sake of clarity as she feared that the Committee would find the information received from the auditors did not correspond with the information from HDA.

The Chairperson asked if Ngubane & Co and Mr Songwevu could be part of the meeting.

Mr Chapanduka and Mr Songwevu agreed.

The Chairperson said that research had been circulated by the Parliament Research Unit; Members should read through the research that would assist with their interaction with HDA and its Annual Report.

The meeting was adjourned.

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