Briefing by Auditor General on audit outcomes of 2011/12 Annual Performance Report of Department of Human Settlements

Meeting report

Introduction by the Chairperson
The Chairperson welcomed members and the delegates from the Office of the Auditor-General South Africa (AGSA). The focus of the meeting was the evaluation of the performance of the Department of Human Settlements. The AGSA was an important institution charged with enhancing and advancing the oversight responsibility of the committee.

Presentation by the Office of the Auditor General
The delegation was led by Mr Lourens van Vuuren, Business Executive at AGSA and the presentation was delivered by Mr Andries Segetho.
 
The required level of management assurance, oversight assurance and independent assurance in the Public Sector was matched against the actual assurance levels in respect of the senior management, accounting officers, executive authority, legal and risk, audit committee, oversight, internal audit, coordinating institutions and external audit. A three-year audit outcome applicable to the Department of Human Settlements (DHS) and all of its 11 entities was presented.  Mr Segetho said that the National Home Builders Registration Council (NHBRC) had received a qualified audit owing to irregular expenditure.

On the drivers of internal control, the DHS was assessed in terms of leadership, financials and governance. There was a drop in financial and performance management levels, but the DHS was doing well in terms of governance.

The audit opinion history covered areas of irregular expenditure, predetermined objectives, compliance with laws and regulations and material under-spending of the budget. The DHS had received an unqualified audit with findings, while the NHBRC had a received a disclaimer/adverse audit opinion.

AGSA had found that the accounting officer of the DHS had not taken effective steps to prevent irregular, fruitless and wasteful expenditure in supply chain management (SCM). Contractual obligations and money owed by the DHS had not been settled within 30 days, or an agreed period. The NHBRC had inadequate controls in the SCM unit which had resulted in non-compliance with laws and regulations.

On predetermined objectives, the DHS action plans had been inadequate or not implemented correctly. Management did not understand the Framework for Managing Programme Performance Information (FMPPI) regarding the linkage of the strategic plan to other entities’ plans. At the NHBRC, there was a lack of understanding of the requirements of the FMPPI which had resulted in adequate implementation during the planning and crafting phase of the strategic plan.

In terms of human resources, the DHS did not have an HR plan as required by the Public Service regulations. This had led to inadequate planning and not adhering to the laws and regulations. Employees had been appointed without following a proper process to verify the claims made in their applications, in contravention of the regulations. The AG recommended that the HR plan should be signed off, as the turnaround strategy of the DHS had now been finalised.

The Information Technology Controls policy at the DHS had not been updated, it had inadequate user account management and there was no formal Information Technology (IT) strategic plan. There was a lack of a clear policy regarding new users and the maintenance of user IDs.

On financial and performance management, the DHS management had not prepared regular, accurate and complete financial and performance reports that were supported and evidenced by reliable information. Management had not reviewed and monitored compliance with laws and regulations.

The Committee was presented with findings on other compliance matters involving revenue management, financial misconduct and internal audit. On revenue management, the accounting authority had not taken effective steps to collect all money due as required by the Public Finance Management Act (PFMA) and Treasury regulations. Investigations into allegations of financial misconduct against officials had not been instituted within 30 days of discovery thereof, as required by the Treasury.

Mr Segetho said that during an engagement with the executive on the 11 July 2012, it had been proposed that the Minister follow up quarterly on key controls assessments and the reports from the audit committee on audit-related matters.

On other matters of interest, no unauthorized expenditure was incurred by any of the entities in the portfolio and there was no additional fruitless and wasteful expenditure during the current year. The irregular expenditure of the DHS had dropped from R12.2 million in 2011, to R3 million in 2011. The irregular expenditure of the NHBRC had increased from R0 in 2011 to R201.3 million in 2012.

Mr Segetho said that there were currently no AGSA investigations or performance audits under way.

Mr Van Vuuren said that all the issues which had been raised and presented to the Committee were included in the 2011/12 Annual Report of the DHS.  The report of the Auditor General on the NHBRC was also included in the Annual Report. The NHBRC had issues of non-compliance with the Housing Consumer Protection Act -- a finding which had been noticed for the past three years. It was important for the Committee to engage with the Board of the NHBRC to rectify the issue of non-compliance. One of the key issues in the IT environment was the need for the use of an audit trail. The use of the audit trail ensured that user account management was effectively done and monitored. These controls were not the responsibility of the State Information Technology Agency (SITA). It was the responsibility of the DHS to ensure that IT controls and management were effectively carried out.

The Chairperson asked what the role and responsibility of SITA was.

Mr Van Vuuren replied that SITA was created to manage the IT requirements of government. SITA was running the national IT system, while the various departments and provinces had the responsibility of linking up to the national system. The controls within department were the responsibility of the departments themselves.  SITA was responsible for general and application controls.

Discussion
Mr S Mokgalapa (DA) said that the concerns raised by the AGSA were issues which the Committee had always been concerned about. He had little confidence in the NHBRC, and the qualified audit justified his fears and feelings. The DHS had a history of non-compliance in certain key areas. What did the Committee need to do to ensure that the issues were handled? The DHS was failing in its duty of monitoring the use of the funds it transferred to entities and provinces. Was it the senior or junior management who did not understand the supply chain management laws? Could the committee get a copy of the financial misconduct report? How many “ghost” employees were there in the DHS?

Mr Van Vuuren replied that there was a new Framework for Strategic Planning and Annual Performance Plans, which had been issued by the National Treasury. The new framework had not been properly understood by officials and the AGSA was working in partnership with the National Treasury to enhance the understanding of the framework. There was a need for decisive action by the DHS leadership to develop a proper action plan which could be implemented. Not enough attention was being given to this area. It was important for the Committee to compel entities to complete monthly financial statements. There was the idea in departments that financial statements were compiled annually because it was a requirement of legislation, but it was important for the entities to use monthly financial statements as a management tool.
 
Supply chain management issues were a high risk and complex area, and the lack of understanding could be because of  inadequate training, poor planning, or a lack of time.  The AGSA did not have any specific report of financial misconduct, but the PFMA required that when there was financial misconduct, an investigation should be carried out.  AGSA had not identified any “ghost” workers.

Mr J Matshoba (ANC) asked what advice AGSA could give to the Committee on how to handle the problems which had been caused by the previous board, now that a new board had been appointed.

Mr Van Vuuren replied that it was important for the Committee to look at it from an oversight point of view and have a discussion with the new board and discuss the audit outcomes with them. It was still the duty of the new board to ensure that the irregularities were investigated and all previous transactions were re-visited and properly handled. If this was not done, the qualified audit was not going to go away, as the future audits were going to find out if the recommendations had been acted upon.  The process was clearly driven by legislation.

Mr R Bhoola (MF) asked whether there were any court cases which were a result of the findings of the AGSA audits.  What was the cause of the irregular expenditure?  What did the AGSA do when it realised that its recommendations were not being considered?  What were the corrective measures to be implemented if the AGSA found things going wrong in the Department?

Mr Van Vuuren replied that irregular expenditure did not necessarily mean that money was being wasted. It meant that the spending had not been done in compliance with the legislation or regulations in force. Most of the time, it was an issue of compliance which had caused the irregular expenditure. It was only proper that an investigation should be done in every case of irregular expenditure.

Ms J Sosibo (ANC) asked if there had been any improvement from the previous years. Why was the AGSA dealing only with the DHS and the NHBRC and not all the other entities? What were the reasons for the NHBRC not having proper controls? Had the DHS and its entities improved on the 30-day payment period?

Mr Van Vuuren replied that the other entities were allowed to appoint their own auditors and the AGSA was not the primary auditor. However, the AGSA gave a lot of guidance and instructions to the auditors. The Committee could engage with the other entities to find out the audit outcomes. The payment within 30 days was still a problem. The National Treasury had issued an instruction to all entities on how they should report on a monthly basis and the Committee could follow up with the DHS and its entities.

Ms M Njobe (COPE) said that the weaknesses of the NHBRC were well outlined and the information provided was going to help the Committee to address the matter properly. What was the advice of the AGSA on the weaknesses in the introduction of the turnaround strategy? At what stage did the AGSA intervene in the Department and was it possible for the AGSA to ensure monthly or quarterly reconciliation of reports and statements.

Mr Van Vuuren replied that the AGSA had a process of quarterly key control assessments, where auditees were audited quarterly and management were given feedback on the effectiveness of the key focus areas. There was also a need for departments to conduct internal audits on a continuous basis. The NHBRC needed to improve their internal audit, as the issues raised could not be allowed to continue.

Ms D Dlakude (ANC) asked if the findings by the AGSA were the same as those recorded over the past three years, what could be done to get the DHS to enforce the recommendations of the AGSA?

Mr Van Vuuren replied that the findings were more or less the same, and involved supply chain management, IT controls, financial management, payments within 30 days and compliance issues.

The Chairperson asked if there was any risk management strategy in the DHS. What was the reaction of the AGSA to the issue of the high rate of vacancies and “ghost” workers in the DHS?  Why did the AGSA give institutions unqualified audits when there were findings and matters of emphasis? The idea of having an unqualified audit with findings was a comfort zone for officials and departments because they knew that the overall audit was unqualified and nothing was going to happen to them. The issue of unqualified audits with findings was unacceptable. The turnaround strategy in the DHS was a problem because it was finalised in October 2011, yet it was still an excuse for poor performance.  The picture being painted was that there was no leadership in the DHS.

Mr Van Vuuren replied that it was important for the Committee to request the DHS and the entities to submit action plans and to request feedback on the performance. The action plans outlined how the key focus areas were going to be handled.

An unqualified audit meant that the financial statement had been fairly presented; a qualified audit meant that the financial statement had not been fairly presented. Through the audit process, many of the entities got unqualified audits. Entities felt that an unqualified audit with findings was good, but it was not a desirable position, as it was dangerous and risky.
 
It was critical for the DHS to establish its HR plan. The plan had to be linked to the budget and the strategic plan so that vacancies could be filled properly. It was important for the Committee to use its oversight role to follow up on the issue of the HR plan.  

The Chairperson said that the Committee and the AGSA were going to meet again to do follow-ups on the issues raised.

The meeting was adjourned.