DIRCO & ARF challenges in addressing audit outcomes: Risk and Audit Committee briefing

Meeting report

The Chairperson opened the virtual meeting and welcomed officials from DIRCO’s Risk and Audit Committee. She said this meeting will inform the Committee whether there have been improvements regarding DIRCO’s audit outcomes.

The Chairperson asked why the Portfolio Committee had received the Risk and Audit Committee’s report late.

Ms Precious Mvulane, Chairperson, DIRCO Audit and Risk Committee (ARC), answered that the report was compiled on time and the delay was due to the report being circulated through the Department where there was confusion on how to issue the document to the Portfolio Committee as it was the first time the Risk and Audit Committee had to compile a report of this nature for the Portfolio Committee. She apologised for the delay.

The Chairperson replied that it was not the first time the ARC was presenting a report to the Portfolio Committee. The Committee will follow up on this with matter with the Director-General of DIRCO.

Briefing by the DIRCO Audit and Risk Committee

Ms Mvulane stated that the ARC had reviewed DIRCO’s 2018/19 audit action plan. The plan was inadequate and did not include internal audit and AGSA audit findings. The following issues were identified, and specific recommendations were made:

Issues:

• Overspending of the Employee costs line item (Unauthorised Expenditure)
• Significant spending on foreign lease accommodation expenditure
• Slow spending on the Capital Expenditure

Recommendations:

• The Department must continue to engage with National Treasury and work on expediting the Organisational Structure Review, including the rationalisation of staff in some of the missions.
• Review all foreign accommodation and in countries where there are vacant properties, DIRCO must utilise those for accommodation.
• DIRCO must develop a rating system of all foreign properties to enable the Department to prioritise the rehabilitation infrastructure program.

Governance

DIRCO’s fundamentals of accountability, culture and reporting is inadequate. The ARC recommended a review of the integrated system of internal control/governance. The Department must also adopt appropriate governance principles that create a foundation for implementation of internal controls. The ARC also proposed – Top Management to attend a Public Sector Governance Course offered by the National School of Government.

Performance Information

The performance information has been progressive and also responsive to the requirements by the auditors. However, the ARC recommended that DIRCO should conduct a full baseline assessment, including competency assessment for the whole organisation. The baseline assessment will contribute towards redesigning the new organisational structure and eliminate the unauthorised expenditure which has resulted in overspending of the Employee Costs line item.

Risk Management and Internal Control.

Management interventions and commitment regarding risk management are not effective and do not promote transparency as required by King IV Report on Corporate Governance. Due to the weak risk management systems, the effectiveness of internal controls is generally weak within the organisation.

The ARC recommended that the Director-General’s Forum (DGF) conducts an overall risk assessment both at strategic and operational level. Furthermore, there should be monthly meetings between the Director-General and the Chief Risk Officer, for progress update on the interventions recommended, including the attendance of the DDGs in the Risk Management Committee meetings.

Compliance.

There is no accountability for non-compliance within DIRCO and this exposes the Department to a number of non-compliance issues noted in the Auditor-General’s report.

The ARC recommended that each branch or business Unit should have a dedicated resource, to assist management in all the compliance requirements. The overall co-ordinating responsibility for compliance should reside in the Office of the Director-General.

Internal Audit

The Internal Audit function is currently not adequately capacitated, the number of staff in the function is too small when compared to the size of the Department. Also, the function does not possess any forensic auditing experience and robotic automation capability. The Internal Audit function has developed an implementation plan to address (and monitor) the deficiencies noted. The plan has been approved and is being monitored by the Committee on a quarterly basis.

Auditor- General South Africa (External Audit)

The signing off of the 2019/20 audit opinion (by the AG) has been postponed to 31 October 2020 (instead of 30 September 2020). This was necessitated by the delays in the finalisation of the execution of some of the audit work, such as, the physical verification of assets abroad, due to the ban on international travel.

African Renaissance Fund (ARF)

There is a level of discomfort regarding the crafting of the Performance Indicators (not well defined) and the setting of the annual targets (SMART criteria). This matter is under discussion between the risk and audit committee and management.

Other Matters Identified by the Risk and Audit Committee

• The current structure of reporting lines has not promoted systems of close supervision and personal accountability, and this has led to a lack of performance and consequence management. The principle of ‘collegiality’ is not always evident. There is a need to review how the top management collectively leads the organisation to improve efficiency and effectiveness.
• The slow pace of the implementation of the recommendations from the investigation reports on the prior years’ irregular expenditure (and any other investigations such as Sponsorships, New York Building Project and etc.) identified by the Auditor-General. However, it is encouraging that an Acting Deputy Director-General: Corporate Management has now been appointed, and amongst his priorities is the implementation of the recommendations from the said reports.
• From the review of the recommendations from the 2018/19 Budgetary Review and Recommendations Report (BRRR), it is apparent that the department is not doing well, and the Audit Committee has been monitoring the progress on the implementation of the recommendations.

Discussion

Mr B Nkosi (ANC) said it is clear that there are very serious problems around governance and accountability. He asked what specific actions the ARC is taking in regard to issues around governance and compliance and whether it has raised these issues with the Director-General and the Minister. He asked why the ARC functions as a sub-committee of the audit committee; risk management requires that it be embedded and seen as a strategic aspect of any organisation, classifying it as a sub-committee may lead to risk management being neglected. He said the Portfolio Committee has been asking for the audit action plan from the Department for a while now and has still not received it. It is also clear that the Department does not present adequate information to the ARC and only presents information which the Department thinks is relevant.

Mr D Bergman (DA) thanked the ARC for the sincerity in which they raised the issues. This is a cry for help and if the Portfolio Committee reads between the lines it sounds like the ARC has made recommendations to DIRCO’s top management and is not being listened to. He asked how many recommendations have been made and how many have been implemented by DIRCO’s Chief Financial Officer. He also asked whether the D- Bag tender has been awarded, if not why? He said the Department is still not setting KPI’s correctly and had to go externally to determine this and it is embarrassing. The Department has a fully staffed human resource unit that could have picked this issue up.

Mr Bergman added that the Department does not have the skill set to manage its budget and KPI’s. If the Portfolio Committee is serious about fixing DIRCO’s internal controls, this is a good place to start looking at.

Ms B Swarts (ANC) thanked DIRCO for the report, however she noted that it does not adequately cover the following matters:

• the effectiveness of control systems
• the effectiveness of internal audit functions 
• the risk arears of the Department
• accuracy of financial information
• accounting and auditing concerns identified 
• the Department’s compliance with legal and regulatory provisions

She asked whether the ARC has the power to investigate matters and whether the Department has an asset register. She asked where all the ARC reports are, how many reports have been given to the Chief Financial Officer, how many of these reports have been implemented and how many recommendations have been achieved. The ARC is supposed to advise and provide support to the Department and if the Department is underperforming, it means the ARC is not doing its job. The Report does not adequately cover the power and functions the PMFA and Treasury Regulations empower the ARC to perform. The Report does not say in numbers what has been done and what has not been done.

Ms T Msane (EFF) said the Portfolio Committee needs clarity on the fact that the Deputy Chairperson of the audit committee is also the chairperson of the risk management committee. Members have raised the issue where the roles of the audit team and risk management team will begin to clash, should these roles clash, the Portfolio Committee will have to look at what the responsibilities of the audit committee and risk management committee is respectively. She said this report is not very convincing in addressing issues within DIRCO. She asked how often the ARC has met with a full quorum. The report also does not contain specifics on what work has been done and what the outcomes of this was. She asked whether DIRCO is currently overpaying incorrectly placed staff members. She asked if the ARC has made a recommendation on the filling of the position of the COO. She asked if the ARC has looked at the property management team which was interviewed by the Department and the Portfolio Committee and what recommendations it has on this matter. 

What were the findings on the supply chain management with regards to the procurement of goods and has the internal audit been able to verify how many foreign bank accounts DIRCO has? What findings has the ARC made regarding the D-bag tender.

Mr T Mpanza (ANC) said the report is very disappointing and the picture it paints is that of a crisis within the Department. He said if the Portfolio Committee does not take action there will be a disaster within DIRCO. There is lack of capacity within the Department and most of the work is done by private companies. He asked whether the Department would receive a clean audit this time around. Finally, he recommended that the Portfolio Committee should push the Department to enforce consequence management.

The Chairperson referred to the issue of attendance and said this is not first time this has been raised and wanted to understand the implications non-attendance has on the decision making of the ARC. She asked why DIRCO used an external company to do a skills audit while the ARC already identified to the Department that there is inadequate capacity within the finance unit. The Portfolio Committee has asked for all the CV’s of DIRCO employees and position they occupy but the Department still has not provided this information to the Portfolio Committee. The report also failed to provide the Portfolio Committee with information on the 30-day payment rule and whether the Department has made some improvements in this regard. The filling of critical vacancies has also not been addressed and the report also fails to mention this.

Ms Mvulane said the ARC assessments on bookkeeping at the mission level revealed the individuals heading these missions including the cooperate services attached to missions generally do not have finance backgrounds and the supervisory controls in place is fragmented. This is the root cause of the lack of accountability within the department as internal controls are fragmented.  There are also no clear reporting lines within the Department, information is collected but not reconciled properly.

The ARC has recommended that the Department review its delegation and structures even if this opens up space for a parallel accountability system, it will make space for missions and unit heads to be accountable collectively for the financial results of the Department. Most recommendations have been discussed with the CFO and Director-General. The ARC works with what the Department provides it and makes recommendations based on those. The ARC is an advisory committee, and the accounting officers can take that advice or make their own decisions. The ARC only has the power to advise accounting officers, the final decision is up to accounting officers. She agreed that the report presented today has shortcomings in certain aspects. The ARC did not expect to have this meeting and received the request at very short notice.

The ARC does have a registry of all recommendations made to the Department, including what has been implemented, what is in the process of being implemented and what has not been implemented. She will make sure that the Portfolio Committee is provided with the tracking data of recommendations. Internal Control within the Department are not effective, because they do not give assurance that previous matters dealt with won’t happen again. The Auditor-General had the same finding on the same issue for consecutive years and this means internal controls and risk management is not effective.

The ARC has done a few activities to strengthen internal controls and one of the recommendations was that risk management must form part of the performance agreements between the Deputy-Director Generals and Chief -Directors of the Department. This will enable the measuring of performance agreements. Management has agreed on this principle, but implementation is still slow. Relating to the filling of critical vacancies, the ARC is in the process to monitor this process and receives regular feedback from the Director-General, however it has been hard to find the right candidates for these positions. The filling of the COO post has been put on hold and the post will be reviewed and won’t be back on the organisational structure of the Department.

On the position of CEO, the ARC asked for information and was also advised that the structure will be revised, and this position won’t be on the structure again. Regarding attendance, the members of the ARC do attend meetings. The meetings that are not being attended is the risk management sub-committee.  Internal control and risk management is in place to flag problem arears allowing the Department to fix those problems before an Audit is done by the Auditor-General.

The reasons as to why the risk management committee is a sub-committee and not a stand-alone committee, is that this structure was decided before the current members took up their position on the ARC. The ARC has raised this issue with the Director-General and recommended that the audit and risk committee become joint committees but the issue was that the intention with the risk management sub-committee was that risk management not necessarily become a management role.

The audit committee also made specific recommendations about what it expects from the risk management sub-committee which will help the audit committee make assessments of risk management within the Department. Only 40% of this item has been implemented and these are not new issues. The Director-General did admit that risk management issues were not being adequately dealt with within the Department. He did indicate however that he will be taking action to fast track the implementation process of risk management recommendations. Management has not been proactive in fixing issues of risk management and internal controls.

The Department has a fixed asset registry and there has been some changes to it. It is only this year that the Department moved from excel spreadsheet to a computerised system, since it is the first year of implementation there will still be issues that show up on audit. On the matter of the accuracy of records provided to the ARC, the internal control and record keeping is still a problem across the Department. She had gone through the Department’s Finance unit once and there were files all over the place and she raised this as a concern as this leads to audit problems.

The Department is not managing its filing system adequately. The ARC recommended to corporate service to relook and better manage the filing system, especially in regard to records management and keeping. The ARC receives reports compiled by internal audit and in some instances reports received are not adequate, it was agreed in the last meeting that the ARC shows each unit what reports they need to produce and on what templates these reports should be. Unit heads sent reports to Management and should be sent to the risk and audit committee instead as an oversight and advisory structure.

There is some reconciling and verification currently happening regarding bank accounts and National Treasury is assisting the Department in this regard, because accounts have not been verified and analysed in a long time. This process might take some time. The Department has a problem of sending reports late to the ARC. The ARC has not received the Department’s Strategic Risk and Audit plan. It received some plan from the Department last year but the plan was incomplete, had gaps and not aligned to the set out objectives recommended in the Auditor-General’s report. The items discussed today has also been discussed with the Minister and recommendations have been made. 

Ms Msane said she her question on the clashing of responsibilities of the audit committee and the risk management sub-committee was not responded to. She also did not hear the response on the bank accounts and how many there are. Further, she did not understand the response on the remedies she has proposed regarding supply chain management, especially on procurement of goods. Finally, she asked if the ARC had the privilege to review the proposed property management team and if so, what recommendations did it have on this matter.

Mr Mpanza wanted to know what the African Renaissance Fund (ARF) is doing that other sections of the Department are failing to do in order to have clean audit outcomes. This did not make sense as the ARF is part of the Department.

Ms Mvulane explained that the bank accounts are being cleaned up, National Treasury, together with DIRCO’s finance unit, are finalising some of the items. The amount of money and number of bank accounts are gradually being reduced as the process unfolds. The ARC is waiting for this process to be completed to see whether the clean up has worked.  Regarding remedies on supply chain management, the ARC did make recommendations on how the supply chain model should be working. The Department said it did not have capacity to implement the model and contracted a private service provider, however the approach and methodology used by the private service provider was incorrect. Management withdrew the report and service provider and agreed that they will have to rework and find new ways of addressing this issue. The reason why the ARF is able to receive clean audits and not DIRCO, is because there is a lack of accountability within DIRCO.

The Chairperson thanked the ARC for its presentation. She said serious issues were raised and the Portfolio Committee will be taking it up with the Department. It would be better if the Portfolio Committee Members discussed this report in their ordinary meeting and come up with recommendations for the Department.

The Chairperson explained that the Department for Planning, Monitoring and Evaluation (DPME) and its Minister could not present to the Portfolio Committee today was because of a Cabinet Lekgotla and all Ministers had to attend. The Portfolio Committee will reschedule the meeting with DPME at a later date and will inform Committee Members.

The meeting was adjourned.