International Relations Portfolio Audit Outcomes

Meeting report

The Chairperson welcomed everyone in the meeting, and congratulated Lesotho for having peaceful and successful elections. He said South Africa had participated in monitoring the elections, as part of the Southern Africa Development Community (SADC) delegation deployed to Lesotho, and reports by observers indicated the elections were free and fair. He thanked the people of Lesotho for holding peaceful elections and hoped this would usher in a new era of stability for Lesotho.

AGSA's overview

Ms Kumari Naicker, Deputy Business Unit Leader, Auditor General of South Africa (AGSA), said there had been significant shifts in the AG’s operating environment not only because of COVID-19, but also because of business developments locally and globally. AGSA had seen limited improvement in audit outcomes at a national level and persistent weakness in transparency, accountability and performance within the public service. This had a tremendous impact on the lived reality of ordinary South Africans. It had given rise to a new focus, where AGSA was looking at the influential role in developing a public service characterised by performance, accountability, transparency and integrity.

The AGSA’s strategic aspiration was to have a more direct and stronger impact in improving the lives of ordinary South Africans by helping to improve the public sector culture. AGSA’s success in this regard did not rest only on AGSA's ability to fulfil its mandate, but on the extent to which they could mobilise and bring the collective influence of the accountability eco-system to drive positive change and a culture of performance, accountability, transparency and integrity in the public sector, resulting in meaningful improvements in the lived reality of South Africans. AGSA would leverage its capabilities in generating insights and applying influence on stakeholders such as the Portfolio Committee, shifting the public sector culture towards one of performance and accountability.

Budgetary review and recommendations report (BRRR): AGSA

Mr Thabiso Matladi, Senior Audit Manager, AGSA, said overall audit outcomes in the portfolio had improved when compared to the prior year. The Department of International Relations and Cooperation (DIRCO) had moved from financially qualified with findings, to financially unqualified with findings, and the African Renaissance Fund (ARF) had sustained the clean audit outcome, mainly due to maintaining the basic financial discipline of preparing credible financial reports supported by reliable information, and reviewing and monitoring of compliance with applicable laws and regulations.

Compliance with legislation remained a challenge for the Department, especially in the focus areas of annual financial statements, supply chain management (SCM), expenditure management and consequence management. This was mainly due to consequence management not being implemented on time to address previously reported deficiencies, and a lack of adequate reviews at various levels supporting the preparation of annual financial statements (AFS). An additional non-compliance in revenue management has been identified and reported in the current year. There must be focused interventions to address these matters.

The quality of the DIRCO AFS submitted for audit remained a challenge, as it contained material misstatements which were subsequently corrected by management, resulting in the Department receiving a financially unqualified opinion and material non-compliance with section 40 of the Public Finance Management Act (PFMA). This could be attributable to inadequate reviews at various levels, as most material misstatements came from supporting schedules which did not agree with the AFS submitted for audit.

(See the presentation for further details)

Irregular expenditure

Mr Matladi said AGSA remained concerned that there had been a notable increase in the levels of irregular expenditure in the portfolio, at R311 million (2021: R187 million). The Department had incurred irregular expenditure relating to the current year amounting to R109.9 million compared to the prior year's amount of R19.3 million. This represented a more than 100% increase in irregular expenditure. The increase in irregular expenditure in the current year was a result of non-compliance with the Appropriation Act by exceeding the compensation of employee (CoE) budget without obtaining necessary approvals, which had contributed R100 million to the total irregular expenditure, and non-compliance with SCM legislation, that had contributed R10 million. Mr Matladi also noted an increase in irregular expenditure arising from old contracts in the current year (R201 million) compared to the prior year (R167 million). This was due to the Department continuing to use the services from contracts previously declared as irregular, due to the critical nature of the services to the operations of the Department and its missions.

(See the presentation for further details)

Key root causes in internal control environment

• Ineffective oversight over financial reporting and compliance.
• Inadequate reviews of the annual financial statements.
• Lack of accountability to address previously reported deficiencies and instances of non-compliance.
• Ineffective action plan on compliance monitoring and the quality of financial statements.
• Consequence management was not implemented within the Department, as some irregular expenditure and fruitless and wasteful expenditure for 2017/18, 2018/19 and 2019/20 were not investigated.
• Ineffective oversight over performance reporting on the ARF.
• Inadequate reviews of the annual performance report on the ARF

Recommendations

• Continue with the investigation into the remaining irregular expenditure cases, extend the investigation to fruitless and wasteful expenditure, and action the recommendations of the investigation reports for the investigated cases.
• Enhance the oversight role on compliance with key legislation applicable to the Department by taking corrective action for non-compliance, especially on repeat matters.
• Take necessary action against officials not fulfilling their roles and responsibilities.
• Enhance reviews of the AFS and annual performance report (APR) before submission for audit purposes.
• Relook at the policy for posting officials abroad, as some of the Corporate Service Managers (CSMs) did not have formal finance background training and experience. CSMs were charged with the day-to-day running of the missions, which included managing finances.
• Deputy Directors-General (DDGs) needed to assist the Department by working closely with the heads of mission and the CSMs to determine the true root causes for repeat findings coming from their respective missions, as this would have a positive contribution to the Department’s action plan for 2022/23.
• Ensure the action plan was focused on the root causes and was assessed for effectiveness in addressing the findings.

Recommendations to the Minister

Follow up with the accounting officer (AO) to ensure that the recommendations above were closely monitored and implemented to achieve clean administration.

Recommendations to the Portfolio Committee

Monitoring and regular follow-up with the executive authority and the accounting officer/authority on:

• Progress on audit action plans put in place by the Department and its entity to improve audit outcomes.
• Progress on consequence management.
• The filling of the chief financial officer (CFO) vacancy to ensure stability.
• The implementation of the information technology (IT) modernisation project.

The Chairperson said there would only be one round of questions,

Mr B Nkosi (ANC) asked if the Audit and Risk Committee (ARC) could present first before Members engaged with the presentations.

The Chairperson agreed.

Implementation of Audit Action Plan: ARC presentation

Ms Ayanda Mafuleka, Chairperson: ARC, DIRCO, congratulated DIRCO on getting an unqualified audit opinion with findings from AGSA for the 2021/22 financial year. This milestone would not have been achieved had it not been for the support, dedication and commitment of the Minister, senior management, staff, the Portfolio Committee and various oversight structures within the Department.

High-level observations by ARC

• The AC commended the Department for having an audit action plan (AAP) in place for 2021/22 and for successfully addressing a prior year qualification matter -- the Disallowance Account. However, the AAP had not been effectively implemented. This was evidenced by several repeat audit findings.
• It was evident that a detailed root cause analysis was not performed before the compilation of the plan, resulting in some of the actions/recommendations not addressing internal control deficiencies from the audit findings.
• Management was encouraged to perform a detailed root cause analysis for each finding. The proposed corrective measures were expected to address the root cause, preventing the recurring audit finding.
• Management was also advised to ensure that all findings in the management report were completely transferred to the AAP for 2022/23. The plan had to include all internal audit findings and recommendations to successfully implement the combined assurance mode.
• Most of the information communication technology (ICT)-related findings/recommendations were either not implemented or were in progress due to various reasons.

(See the presentation for further details)

Rental deposits

The Department had failed to implement effective and appropriate steps to recover refunds from rental deposits after the transferred officials’ terms expired. The Department had to write off an amount of R26.9 million. AGSA recommended that the Portfolio Committee continue its oversight of the BRRR implementation of the recommendations, and should note the progress reports on implementing the 2021/22 audit action plans for both DIRCO and the ARF.

Discussion

Mr W Faber (DA) thanked AGSA and DIRCO’s audit and risk committee. He said the IT infrastructure was a concern for the AG, as the infrastructure would be supplied by a South African provider, and there were at least 85 foreign embassies and 101 consulates. The Committee had raised concerns about why it was being supplied by only one service provider based in South Africa -- this had to be sent to all embassies and consulates specifically with service agreements in the IT sector, and this would create havoc if it was not bought in the specific place where the embassy or consulate was located. This was a concern, and the Committee needed to know what DIRCO was doing about it as it would have cost implications.

He referred to page 13 of the AG's report – on the financial assistance to Cuba -- where the AG had said there was a misstatement finding, and asked what this was about. This was a serious finding for the ARF, and had to be taken seriously. Cuba was the only non-African country receiving funding from the ARF because of a long-standing respectable and cordial political relationship between South Africa and Cuba. He asked if the AG found this irregular. In a contract dated 3 March 2012, signed between the South African government and the Cuban government, a funding package of R350 million had been agreed upon, of which R210 million had already been disbursed to Cuba. Minister Naledi Pandor had said an extra R63 million had been dispersed to Cuba for equipment. He asked whether the R63 million had been dispersed before or after the R50 million in aid to Cuba that was stopped by the high court. The Minister had said Cuba continued to repay the loan instalment as per the agreement. He asked how much of the R210 million still had to be paid back, and if the AG looked at this.

Mr D Bergman (DA) said one AGSA report said DIRCO had received an unqualified audit report with findings, and the other said there were some material misstatements with ARF. He respected the AG findings, but the last two AG reports had been qualified audit reports, and this one was an unqualified audit report with findings. The fact there had not been a permanent CFO in the last financial term, and given the issues with the CFO in the past, the AG had to rely on financial statements given to it by DIRCO and the AG’s opinion was expressed based on the validity of the information given to it. This was problematic because there had not been a permanent CFO and the Committee had questioned the correctness of reports given by the CFO in the past. He said the Committee must call on the Director-General (DG) to ask the AG to do a forensic audit report for the last five years, and that would make the Committee comfortable.

Ms T Msane (EFF) said the Committee had just received a report saying the old ICT company was still running and it would be doing so for the next six months. It was disappointing that the previous contract was still running, as the Portfolio Committee had been fighting for the ICT contract to be terminated. It was mostly expired contacts that were still running contributing to irregular expenditure. She asked the AG which other contracts it could highlight, apart from the ICT contract, that also contributed to irregular expenditure. Were the diplomatic bags also contributing to irregular expenditure?

She said that throughout DIRCO’s history, properties leased by officials abroad were always damaged by the time leases ended. She asked if this was one reason why rental deposits were not returned to DIRCO because officials damaged properties, or whether it was because lease contracts were ended before the agreed timeframe, or DIRCO entered into leases that it did not understand and which were not fair towards DIRCO. Why had R26.9 million in rental deposits not been returned? 

National Treasury had issued a condemnation [condonation?] for the New York project, and what this meant for DIRCO. She said the firing of the former DG and CFO was not something to be celebrated, and this could not be called consequence management. The Committee strongly believed the former DG was a scapegoat for the action of the DG that came before him, Jerry Matjila, and he had then been promoted to the UN to represent South Africa. She asked what example DIRCO was setting going forward -- consequence management should have started with the previous Minister and everyone involved in this project.

DIRCO had overspent on the compensation of employees (CoE) while it had a vacancy rate of 16%, and she asked if this could be because DIRCO was still paying salaries to people who were non-employees -- were there ghost workers, were people getting paid while they were at home or were people being overpaid unnecessarily?

She said the Committee had raised the issue of training for embassy and consulate staff for a while now -- its term was ending soon and the issue of training had still not been addressed. There was still the mismanagement of funds because DIRCO was hiring unskilled staff or promoting staff who did not have the necessary skills for the posts. DIRCO was not doing anything about this and would not do anything about it in the near future. These were long-standing items that were not being remedied. She asked if there was anything the AG could do about this matter. The law needed to take its course and punish the mismanagement at DIRCO. An audit needed to be done by the audit and risk committee to see how much money South Africa was wasting on DIRCO’s property management unit.

Mr M Chetty (DA) referred to the issue of Cuba, and said the Committee had been informed in a House sitting that the ARF should be funding African countries for a reciprocal benefit, even though the Minister had acknowledged that it should be funding only African countries. The Minister had still not told the Committee what benefit South Africa got from giving Cuba ARF funding. He asked if the AG was in a position to tell the Committee how much Cuba had paid back to DIRCO and over what period Cuba was expected to pay back this funding.

He said the New York projects had been a gross misunderstanding and misrepresentation if the AG believed the former DG and CFO had been fired because DIRCO wanted to implement consequence management, as it had been because of the pressure from opposition parties. The DG had been used as a scapegoat to protect his predecessor, Jerry Matjila. He asked why there had not been a recovery of the money involved since the DG and CFO were fired, and said criminal charges should surely be laid against them. If DIRCO was serious about consequence management, other officials involved in the property management unit should also have been fired.

The Committee had previously raised the issue of officials damaging property, and had asked DIRCO to hold these officials accountable and make them pay personally for the damage they caused. The AG should make it a recommendation that these deployed diplomats pay for damaged property.

He said the  Committee had tried in vain to terminate the ICT contract, and a further lease of another six months was an attempt to cover up the shenanigans and dealings of the former CFO. The cover-up meant former employees were still working within the system, but without confirmation or denial that they were being paid. There needed to be an investigation into this.

He asked the ARC if they could acknowledge that South Africa was renting some of the most expensive properties around the world, and the committee had compiled a report which was submitted to the Minister and DG, but the Portfolio Committee had not seen it. He asked if the current office space in New York was one of those expensive properties that could have been paid for at a lower price. A supplier wanted to challenge DIRCO in court over the New York pilot project -- what did this mean for DIRCO?

People within DIRCO had been found guilty, yet the Department failed to take adequate action against those officials. People who colluded with officials to defraud DIRCO now had the audacity and grounds to challenge DIRCO in court. This showed that former officials still had control over DIRCO in certain divisions.

Ms B Swarts (ANC) said she was not surprised the Committee was still discussing the ICT matter. At the Committee’s last meeting with DIRCO, it had said the former ICT contract did not exist anymore and that there had been a handover, but today the Committee heard that the contract had been extended for six months.

She said there was always something involving the properties in DIRCO’s APP, and the Committee kept asking for the same thing. The sixth term of Parliament would end, and nothing would have been done on the property issue. DIRCO had put ICT and property management in their APP, but ignored it and did nothing about it. There would be no resolution of these issues.

DIRCO had reported they had cancelled all irregular contracts, and now the Committee was informed that the same contracts had caused an increase in irregular expenditure. She asked the AG to inform the Committee which contracts had caused an increase in irregular expenditure. The issue of corporate managers that were not trained to deal with financial matters at embassies and consulates had been a long-standing problem, which had been raised several times with DIRCO.

Mr B Nkosi (ANC) said the issue of compliance with legislation was particularly a supply chain management challenge, and he asked the AG to clarify the SCM problem. SCM had been discussed in the past and the Committee had called for consequence management, but nothing had happened and it kept on recurring.

He commended DIRCO for the progress it had made on its international relations programme, but it needed to work better with the Department of Trade, Industry and Competition (DTIC) to establish programmes that were beneficial for South Africa. There was less coordination between DIRCO and the DTIC, and the DTIC had closed its trade missions in some countries and wanted to know if the AG was aware of this.

He asked what the impact of staff shortages was, and if the AG had taken this up with DIRCO. Senior managers were normally deployed to embassies and consulates, and this created a gap when these managers left the Head Office to take up other positions. He was concerned about the quality of statements given to the AG, because if the AG had to send statements back that meant DIRCO had no, or weak, internal controls and reporting, and there was no quality assurance within DIRCO. He said the Committee needed to raise this with the DG and Minister. He asked the ARC to share their study report with the Portfolio Committee. The issue of property contract management had been raised before and DIRCO seemed to be doing nothing on this matter. Consequence management was not managed downward, and one could not expect the Minister to be the only one responsible for consequence management. He added that the ARF and DIRCO should be presented separately in future.

Mr T Mpanza (ANC) welcomed the recommendations by the AG, particularly those directed at the Committee. He thanked the AG for confirming the payment to Cuba had been done in line with the ARF Act, as this issue had been politicised for no reason. He asked the AG to clarify what matter was before the court -- was it because of the amount involved, or was it another matter?

He agreed with other Members on the ICT contract and was shocked that it was not cancelled after DIRCO had reported that it was cancelled. He was glad the audit and risk committee had done three oversights visits, and said the Portfolio Committee should do more oversights visits, but it became a "Mount Everest" when it sought approval to do oversights visits, particularly at the missions. There had been virtual oversights during COVID, and it had shocked the Committee when Members saw the state that some of these properties were in. He appealed to the Chairperson to speak to the authorities so that the Portfolio Committee was allowed to do more oversight visits. It was the Committee’s constitutional mandate to do oversight, and the problems AG and the audit and risk committee had been reporting were mostly from the embassies and consulates. Members had to do oversight and understand exactly what was happening at the embassies and consulates. The Foreign Service Act and regulations were in place, and had to be implemented without fear.

He said the process of transferring property to DIRCO must be completed. This would enable the Committee to hold DIRCO properly accountable, and the Department must submit regular reports on the process. He asked when the migration of the ARF would happen, and whether the AG could play a role in this process.

On staffing issues, he asked what internship programme DIRCO was running, as there was a high rate of young graduates being unemployed, and DIRCO could get valuable skills to form this pool and absorb adequate talent.

The Chairperson said the AG should consider suggesting that matters that arose from the auditing should become key performance targets for DIRCO’s top management.

AGSA's response

Ms Naicker responded that the AG had covered the issue involving Cuba on the amounts that were transferred to Cuba, and it had been looked at from a compliance perspective in line with ARF Act. The AG had also looked at the approval process that was followed and whether it was in line with what the Act prescribes, and had not found any issues.

The rental deposits were not refunded because of property damage, which resulted in the landlord withholding deposits or withholding a portion of the money. The AG had highlighted this as a consequence of management concern, and had noted that DIRCO needed to take adequate steps against officials. She said there was a process followed when officials started their lease, where there needed to be a sign-off on the condition and state of the property before officials occupied it, and a similar process when leases ended, with inspections being done in the beginning and at the end of the leases. There should be consequence management against officials who did not maintain properties per lease agreements. There was also a problem of SCM following up with landlords to get refunds back, and the SCM unit needed to be more proactive on this matter.

The ARF misstatements were not about the Cuba funding, but referred to the accuracy of the annual performance report. The AG had asked the ARF to make adjustments on that matter, and no other issue was identified, which gave rise to a clean audit.

She said DIRCO would be best placed to explain why the ICT contract had not been cancelled and extended for six months. Part of AG's discussions with DIRCO had referred to the handover processes that needed to happen between the new and old service providers.

A lot of the irregular spending came from the missions, and this was because did not follow a three-quote process in terms of DIRCO’s policies. Missions also did not follow deviation processes which triggered irregular expenditure.

Mr Matladi responded on the issue of why only one ICT service provider was hired, and why a South African company handled the contract. He said the AG only looked at the process of awarding the contract to the supplier, so DIRCO would be best suited to explain further.

The R63 million was an old contract and was different from the R50 million which was a new funding agreement. DIRCO would be best suited to clarify this matter further. The R50 million was still on hold, and the matter was before the courts.

He said the repayments were still in order, and part of AGSA's work was to test any repayment facility. If there were indications that the debtor missed repayments, this would indicate that Cuba might struggle to repay, but so far, it had managed to repay according to the agreement and there were no outstanding repayments.

He said a forensic audit fell outside the scope of the AGSA, and this would have to be a request from DIRCO asking it to perform additional work. The AGSA would then assess if it could do a forensic audit. If there was a request, AGSA would consider it.

On contracts that contributed to irregular spending, besides ICT, the AG had identified storage and shipping contracts as one of the main contributors. These contracts would continue to contribute towards irregular spending, as all the payments made on these contracts would have to be classified as irregular expenditure.

Mr Matladi said when National Treasury condoned a Department for irregular expenditure it meant non-compliance had been regularised. He said some of the comments of Members could be best responded to by DIRCO.

Based on the work the AG had done at DIRCO, they could not identify that there were ghost workers or employees still being paid, even when they no longer worked for DIRCO. As part of the audit process, tests were run to see if the AG could identify ghost workers.

He said DIRCO needed to relook at their posting policies and must ensure senior managers at embassies had a background in finance, since they were charged with running missions. This had been a standing recommendation by the AG.

On expensive properties leased by DIRCO, the Department had a foreign service code that required compliance when leasing properties. It was also expected of DIRCO to do a rental norm assessment, which was a market analysis to see what the rental norm in particular countries was. DIRCO also had to comply with the PFMA and SCM prescripts. The AG would visit the New York mission as part of the audit process and would be audited in the next financial year.

Mr Matladi said there was continuous non-compliance at DIRCO, and there had to be consequence management to stop this. There needed to be investigations on non-compliance, and officials had to be held accountable.

He said when financial officials transferred abroad to missions, it created additional pressure at DIRCO’s head office. The AG had engaged with DIRCO on transferring individuals, and had recommended that they needed to look at skill sets when posting officials.

The AG would consider separating the ARF and DIRCO’s audit findings.

He said questions not responded to were the best suited to being answered by the Department.

ARC's response

Ms Mafuleka said that the audit and risk committee had asked DIRCO to provide a list of its most expensive properties. She could confirm that the New York Chancery was on the list and was the highest amount South Africa was paying. The ARC could also confirm that the ICT contract was still contributing towards irregular expenditure even in this current quarter. The bulk of irregular expenditure came from the CoE ceiling being exceeded -- the amount was R109 million. They had a report on the state of property management, and with the permission of DIRCO, the ARC could make that report available to the Portfolio Committee.

Ms Mafuleka said the ARC had also done an oversight report on properties they visited, and the state of the properties had shocked committee members.

The Chairperson thanked AGSA and the risk and audit committee for investing time and resources in ensuring there was oversight at DIRCO. The recommendations made would be captured and accepted by the Portfolio Committee.

The meeting was adjourned.