DIRCO & African Renaissance Fund 2017/18 Annual Report, with AGSA, Risk / Audit Committees on financial concerns

Meeting report

African Renaissance Fund/Department of International Relations and Cooperation: AGSA report

Mr Polani Sokombela, Business Executive: Auditor General South Africa (AGSA), said the reputational promise and mandate of the AGSA was to exist as the supreme auditing institute of South Africa, and to strengthen the country’s democracy by enabling oversight, accountability and governance in the public sector through auditing thereby building public confidence.

The role of the AGSA was to reflect on the audit work performed to assist the Portfolio Committee as well as the Department in its oversight role of assessing the performance of the Department, taking into account the objective of the Committee to produce the Budgetary Review and Recommendations (BRR) Report.

Ms Portia Mpete, Senior Manager: AGSA said that in the audit the focus was on three spheres, namely the fair presentation and reliability of financial statements, reliable and credible performance information for predetermined objectives, and compliance with key legislation on financial and performance management.

The audit outcomes for both the African Renaissance Fund (ARF) and the Department of International Relations and Cooperation (DIRCO) for the past five years were presented. Neither of the entities had achieved clean audits for the current and previous years.

On the quality of financial statements, only the ARF had quality, credible annual financial statements -- in other words, no material misstatements were identified in their annual financial statement. However, as it related to DIRCO, the issues identified were that what was submitted as compared to what the auditors were auditing was different, which the auditors had then communicated to management to rectify.

ARF had achieved quality performance reports in the prior year, but had experienced a regression in the current year in that there were inconsistencies and accuracy issues identified in their financial statements. DIRCO had been having issues, even in the prior year, that had resulted in a qualified opinion in the prior year, in relation to programme 4 These had persisted to the current year, although a slight improvement was noted in that last year there were qualifications on two indicators, and in the current year it was only one indicator.

Both entities did not achieve any material findings and compliance with the legislation profile.

The irregular expenditure identified in the 2017-18 year had been R374 million and R368.4 million in 2016-17. On assessing unauthorised expenditure in the current year, it was noted that there was no unauthorised expenditure because the Department had under-spent.

Comparing 2017-18 with the previous year, fruitless and wasteful expenditure had increased to R4 million from R3 million. Irregular expenditure had increased to R374 million from R368 million, R600 000 of which related to ARP in the current year, and R174 million related to a New York project undertaken by the Department in the prior year.

The issues with this expenditure that the Department struggled with, were that it had properties abroad which were to be either converted into chanceries or to be rented out. However when these plans were not effected, it resulted in the Department paying for expenses such as gardening costs, security services and maintenance services which the audit team regarded as fruitless and wasteful because there were no benefits being derived from the properties.

Focusing on the New York project specifically, an issue identified was that the contract had been awarded to a supplier, but the person who had bid for the contract was not that supplier. The person who won the contract had issues relating to some unresolved tax matters, and one of the criteria for approval was that suppliers needed to have audited financial statements, and this was not the case. Furthermore, the square meters approved by the accounting officer had differed from those that were contracted.

Over the years both entities had received qualified audit opinions ,except in the 2016-17 year, where they both received a received unqualified audit opinions with findings based on the same findings for both entities.

For the past four years, DIRCO had had the same recurring issues with regards to its heritage and immovable assets, a factor that had led to a qualified opinion. When the audit team tried to select assets from the floor and trace them back to the asset register, some of these assets were not recorded. The team had also struggled to physically locate some assets recorded on the fixed asset register. It had also encountered the same inconsistencies when they audited the assets at missions.

The ARF in the current year struggled in terms of the consistency and the accuracy of their reporting, but these issues were subsequently corrected. The Fund received an unqualified opinion with regard to issues relating to section 7 of the ARF Act. The ARF Act requires that money not spent must be invested to earn interest, but for the years that the ARF had been unqualified with findings, they had struggled with this part. The auditors could confirm that by the end of the year (31 March 2018), all the money that DIRCO had paid from the prior year had been paid too late in the year, and thus when they looked at the interest that ARF could have earned as a result of this, had resulted in a material amount.

During the audit, DIRCO had struggled with supply chain management (SCM), consequence management, preventing fruitless, wasteful and irregular expenditure, and the credibility of the annual financial statements (AFS), as some sections were corrected only through the auditors’ findings. The auditors had struggled to obtain information to support some of their figures presented in terms of the accuracy and the validity of their employees that were supposedly facilitated at the protocol lounges at the airport, as they could not independently verify that those people were actually facilitated. This was another reason why the Department had received a qualification with reference to programme 4.

On the status of internal controls at the entities, there had been a regression on the part of DIRCO because in the prior year, the Director General (DG) had been instrumental in resolving the heritage asset issues, but in the current year there had been a regression which therefore led to a qualification in terms of movable assets.

The concern noted was related to the ARF, as they assessed that more could have been done with regard to the money that was not invested. The financial performance management and governance of ARF had been assessed to be good.

However, for DIRCO, in terms of the checks and balances, the Department had struggled with monitoring compliance, regular and accurate reporting, and the annual financial statements had material misstatements. There were also record keeping issues throughout the year, as when information had been requested it had taken long to be received by the Committee.

A further breakdown of the irregular expenditure and SCM showed that 64% of the irregular expenditure included payments made on contracts irregularly awarded in a previous year. The main cause of the regression in SCM was that unfair and uncompetitive procurement processes were followed at the entities.

Expanding further on this area, the most common findings on SCM included suppliers' tax affairs not in order being found at both entities; bids not advertised for a minimum number of days was discovered only at DIRCO; contracts extended/modified without approval of a delegated official only at DIRCO; three written quotations not invited at both entities; and competitive bidding documents differing from original specification at both entities.

Root causes for challenges were isolated to a slow response to improving key controls seen at both entities and addressing risk areas, and inadequate consequences for poor performance and transgressions seen at DIRCO only.

Recommendations made were that an accounting officer, or even the executive authority, must institute consequence management, especially around the areas of asset management and supply chain management, and follow up. Further, they must evaluate progress on audit action plans put in place by the Department to address undesirable audit outcomes going forward.

There had been no improvement in the plan-do-check-act cycle. No action plans were created and they were tabled at the audit committee meeting only at the end of the financial year. This served no purpose, as it should be a tool that the entity could use for evaluation and implementation throughout the year.

The audit team had assessed the internal controls at DIRCO as weak, citing this as another reason for the regress.

No consequence management had been identified in the current or prior years, no investigations into the supply chain management findings had been instituted, and the prior year’s unauthorised, irregular, fruitless and wasteful expenditure had continued to grow and was not being investigated.

Discussion

Ms R Lesoma (ANC) asked how ARF had contributed to the irregular expenditure in the current year, and asked for clarity regarding the discrepancy with regards to the supplier who was awarded the New York project versus the person who tendered for it.

Ms Mpete replied that the R600 000 contribution by the ARF to irregular expenditure was related to issues of tax matters. In other words, people who were awarded tenders/contracts had tax clearances that were not up to standard and proper quotations were not obtained.

The Chairperson asked who was making sure that suppliers that applied for a contract or were awarded contracts met the tax complaint requirements. How was the Department supposed to verify this? Was it the Department’s obligation to send a copy of the tax certificates to SARS, and toensure their validity? Further, as it related the New York project, was the Department obliged to take that supplier’s tax certificates to the New York tax authorities and verify their compliance?

Ms Lesoma asked if there was any engagement with the Department, or an indication of the role of the Department of Public Works (DPW) in terms of the Foreign Services Bill, because with regards to any immovable asset, the DPW usually did have a role. Further, in terms of the New York project specifically, had the Department paid for the original specification of the design (i.e. the 40 meters) or did they pay for the design of 20 square meters? Was there any need for decreasing the square meters? She pointed out that she was specifically interested in the money flow. Was the difference paid back, or what happened?

If the action plan was submitted towards the end of the year, how did the Department assess its performance and that of senior management? Had they ever in the previous years paid a performance bonus?

Under human resources (HR), it seemed management had a low appetite to deal with the issues -- would this be because of incapacity or other related issues? Had the Department had any actions because of not addressing issues?

Ms D Raputhi (ANC) referred to the accountability wheel and the process of accountability, and asked what aspects of the accountability check the audit team had identified that needed to be improved on so that a clean audit could be achieved? With regard to financial performance management, what specific interventions were required?
                    
What may be the cause of the non-compliance as it related to supply chain management? When one looks at the most common findings of supply chain management, such as written quotations not being invited and the bids not advertised for the minimum number of days, her understanding was that that needed disciplinary measures. Had the audit team advised the Department with regard to additional measures to be taken? Assessing the highlights that were compulsory and compelling, the figures show that the Department was non-compliant. What was the audit team’s stance therefore?

With regard to the recommendation of evaluating the progress of audit action plans, what did AGSA think the Department must do? Had they had those audit action plans established so far?

Mr D Bergman (DA) said he thought that this was the worst report that had been presented within the last fours years that he had been on the Committee. In assessing the regress over the past five years, it had shown on a high level that the Committee/Department were not learning from their mistakes, which was an important part. The fact that the fingers pointed all towards the senior level meant that the source of the problems could be pin-pointed. This did not necessarily translate on the ground, because when the Committee went on oversight to Namibia, they saw something like DIRCO being responsible for the theft of equipment or assets being removed from their offices, but meanwhile the DPW was responsible for the alarm and the security, so there were two bosses but the accountability lay in the wrong hands. He added that when people started being held accountable, the Department would stop seeing things like fruitless, wasteful and irregular expenditure.

Mr S Mokgalapa (DA) said that the regression was quite unacceptable. The 4th and the 5th Parliament had been dealing with these same issues for almost 10 years now and that this was unacceptable. He then thanked the AG for partnering with the Committee and the Department for the last 10 years, and for sharing their frustrations with them, included that the Committee had highlighted the key issues.

What had been the main contributor between movable and immovable assets? Which one was the most important for asset management so that the Portfolio Committee and the Department could know how and where to move with regard to these? Did the audit committee have a relationship with the Department’s risk and internal audit committees, and did they engage one another at some point? If so, what comes out of those interactions?

Ms S Kalyan (DA) asked what the role of the AG would be going forward. If the AG came across information that had not been acted upon or implemented in terms of the last findings, what mechanisms did they have to say that there was non-compliance? What did the AGSA do to ensure that fraud was not committed, and to bring people to book? What was the AG’s responsibility?

Mr M Lekota (COPE) said that the central question was the one that Ms Kalyan had pointed out. The other question that he had also been reflecting on was that it was important to keep in mind the relationship between the independent constituencies created by the constitution and the Committee, because the Portfolio Committee, as legislators, was now monitoring what the executive was doing. They had an overall independent auditing body -- this was the work that the AG did. Money was budgeted, DIRCO had to do something with that money, and each one of the amounts of money that had been budgeting for must be accounted for by the executives.

He said that it was the responsibility of the Committee, as the legislators, to hold accountable and penalise the executive management in order to find ways in which they compel them to do these things that the AG was exposing to them. All stakeholders must be clear as to what was their responsibility was, where it started and ended. He thanked the AG for pointing out these mistakes.

Mr M Maila (ANC) said that in the 2016/17 financial year, the Department had had a qualification in respect of its assets, but it was not a similar issue to the current year, as in the prior years it had involved heritage assets whereas in the current year it had involved moveable assets in general. He asked if there was something that the Department had been doing right in the prior year that they were not doing right now.

Ms Lesoma, in response to Mr Lekota, said that the Committee must get a sense of why the AG had been raising these issues, because the reasons might differ from the reasons that the Department offered. She said it was important to indicate why the Committee was asking the AG these questions, because he was creating a uninformed statement.

She said that the Department should also ask questions to the AG and also balance the responses from the AG by engaging with the audit and risk committees, as the committees would tell the Department what they had been doing. The AG was an independent body, so they must tell the Department what they had been telling the committees, because the AG did advise the committees.

The Chairperson commended the Members for their observations and comments and the AG for alerting the Committee, in the words of Mr Mokgalapa, to the “serial malady” that had continued to occur in the Department for the last five years.

The Chairperson said that there were a host of issues that the Portfolio Committee should direct to the Department that afternoon, especially concerning the senior management. There was a serial weakness of a lack of consequence management, and that these issues must be brought to the attention of the Director General (DG).

The Chairperson pointed out that a meeting between the Portfolio Committee and the Minister and her deputy’s must be organised, because the lack of consequence management must be put to her, so that when the DG did not act on certain things, she must act because no one was absolute, and each stakeholder was policed by the other. He would organise another meeting with the Minister, as it was necessary.

Regarding the New York project, and bearing in mind Clause 8 of the Foreign Service Bill which relates to property outside the country, and the Giama Act which relates to state property, the Chairperson pointed out that the DPW was also in charge of state property inside and outside the country. The DPW needed to decide which foreign countries they could visit and which they could not.

The Chairperson said he wanted to say that the government should let property outside of the country be moved away from the Department of Public Works and given to DIRCO. Thereafter, a section of the Giama Act which applies to the property would need to be revised in terms of Clause 8, so that DIRCO was held accountable in terms of the Act in the same way that the DPW had to act when it came to the Giama Act and the 1961 State Land Act. This was what needed to be brought to the attention of both the DG and the Minister.

The Chairperson asked whether the Department had paid for the design of the property. How much was paid for the plan? If this project was stopped abruptly, then theoretically the money for the plan was gone and the building was standing there and could not be used, despite the money already been spent on it, so what must happen? He asked if the AG could speak more about the issue so that it could be raised with the Minister, and something could be done.

The Chairperson asked whether, to the knowledge of the AG, the audit team knew of chanceries that were being built, other than the New York one, because the Committee may advise the team that they should go and visit them, as there may others that were finished with no inspections conducted, and then the public (and the Department) would think that the eyes of South Africa could not reach these areas, and fraudulent activities would not be deterred. The Chairperson pointed out the importance of his question, because when the Portfolio Committee brings the above mentioned issues to the attention of the Minister, the Committee should know that it may need to go so far as to include this issue as well.
 
He referred to the irregular expenditure of the ARF, where money did not earn interest. He pointed out that this was similar to a bogus account and money laundering, and indicated instances of fraud.

In response to the question that Ms Kalyan and Mr Mokgalapa were asking, the Chairperson pointed out that what he had seen happening was that the Committee could package matters that would go to the Standing Committee on Public Accounts (SCOPA), since the Chairperson of SCOPA did meet with the heads of the law enforcement agencies. The Committee could give SCOPA these cases, and at least SCOPIA could act on the issues that were being identified as fraudulent etc.

The Chairperson asked for clarity on the issues relating the existence of moveable and immoveable assets.

The Committee should outline which specific company was involved when speaking to the Minister, so that it was clearer when dealing with the issue.

His commended that the AG for their presentation, as it had allowed them to answer some of the questions.

Ms Lesoma asked on a point of clarity whether the AG had said that the person who was awarded the New York project had been a supplier who had not even tendered for the project, indicating that it was somebody who was just pulled out of somewhere.

AGSA’s response

Ms Mpethe replied to the question on the tax clearance certificates, and said the key issue was that when the tender or the bid was awarded, the requirement was that companies had to submit an original from the SA Revenue Service (SARS). If the management or the bid committee or other governance structure suspected that it may not be authentic, SARS had the service to verify those tax certificates on behalf of the entities or Departments. It was the responsibility of the Department or the respective entities to ensure the authenticity of tax clearance certificates.

In response to the question about whether the AG engaged with the audit and risk committee and the Department on a regular basis, she said the AG engages with the DG, the Chief Financial Officer (CFO) and the chairperson of the risk and audit committees.

Regarding asset management, the challenges that DIRCO had were very basic, because they were struggling to account for non-essential movable assets such as chairs, desks, equipment etc. It was very difficult for the Department to account for these small assets that were large in quantity. It was not necessarily that the Department was struggling with immovable property, but rather small moveable property. The issues identified spoke to the credibility of the asset register, and therefore why the Department had received a qualified opinion with regards to this disclosure, because it was not complete based on the audit evidence. This issue was a legacy challenge, because they had experienced a qualified opinion in respect of their assets since the 2013/14 financial year.

Regarding the appetite of management to deal with all the issues outlined in the audit, this was a matter that the AG had discussed with the Department, and it had stressed the importance of whether the officials that were transferred to the various missions were fit for purpose in terms of the disciplines of financial management, especially the corporate services manager. During the audit, the team had looked at the qualifications of a sample of corporate services managers and had noted that some of them did not actually have the required qualifications. In the team’s view, the Department needed to reflect on this and think about what could be done about it.

On the role of other coordinating departments -- the Department of Performance Monitoring and Evaluation (DPME), as well as the Department of Public Service and Administration (DPSA) -- it was very important that the Department communicate with these coordinating departments when they see that there are some things that need assistance.

Turning to the cause of the irregular expenditure, he said the Department had been struggling with supply chain and contract management. The non-compliance with its own SCM process had become a culture that needed to be looked at.

On the matter of the New York project, the advice that the AG was going to give was that in their opinion there was no structure in New York, and there was no evidence that there was value obtained from the money spent on the building.

The question as to what was needed to improve in the Department would be the culture, in terms of accountability, which needed to be clear to each employee, because the culture there was that of non-compliance. As part of consequence management, prompt disciplinary processes needed to be taking place.

Further, investigations needed to be done, because the law outlined that if there was irregular expenditure identified, then the accounting officer should investigate it and the investigation must highlight what the findings were and what needed to happen in terms of financial management and financial misconduct. The frustration that the AG had was that there was no response in terms of these findings, or that the executive management would respond late.

In addition, the pace at which the issues were dealt with was very slow, so it was important that the Department moved with speed in terms of dealing with challenges.

The role of the AG had been outlined in the presentation, and was to audit and communicate the messages that they were getting out of the audit process, and also to come to Parliament with accounts of what they had found during their audits.

The AG’s Plan-Do-Check-Act cycle was very important, because it provided a summary of the audit process. It showed what needed to be addressed and improved on by the Department.

Ms Lesoma said that while the audit team did have a follow up on the issues identified, she suggested that they be put in writing.

Ms Mpethe replied that in terms of the turnaround time that the AG gives to the Department, it was standard practice to give entities or auditees three days to send the information requested. However, with DIRCO, the AG had given them special terms because they were a global entity, and had thus allowed them four days. If information was not being received within the four days, the AG would communicate to management that they were limited in terms of their scope and management, and they then had five days to remedy that situation. By the close of the audit, the team would have information that was available, but during the audit it was not as readily available as per their requirements.

Recurring negative audit outcomes at DIRCO and ARF: Challenges

Mr Martin Sehlapelo, Chairperson: DIRCO Risk Committee, briefed the Committee on the challenges causing recurring negative audit outcomes.

There were two issues emphasised. When dealing with risk issues, there were basically three factors that affected and impacted on the how risks manifested within an organisation. These were primarily people, systems and processes/procedures. There may be some external factors that affected the entity, and these would also have an impact on the people, systems and processes. Sometimes people would want to blame the system, whereas the real problem lay within how the systems were implemented, how the people interacted with the system, whether people had the right training to manage the system, and the procedures that the Department had set up to actually function with the system.

The issues relating to asset management, and particularly to the system itself, started with how the information technology (IT) system was put in place. The IT system was initially used to track IT equipment specifically, and the Department had general problems with asset management to begin with. The Department then decided to expand the scope of the system to address all the different assets, and in that process, normally when there was that type of procurement, the system had to undergo a specific risk assessment. In this case, the system did not go through this process and as result it appeared that the system was not really fit for purpose and therefore the system issues needed to be addressed.

This issue had been raised, and the Department was currently trying to deal with it.

Further, together with the system not being fit for purpose, the processes that the Department were utilising to update the system were not bearing the correct results -- there was a disconnect. Especially when looking at the missions and at head office, there were certain things that could be done only at head office, and this was one of the root causes of why there was a discrepancy between what the mission had and what the system had, as the system was updated at the head office level, despite the changes occurring at a mission level.

Some challenges identified included an ineffective risk management oversight structure; the risk management culture and practices within the Department not being effective; the Departmental leadership’s disengagement with recommendations or advice from risk management structures, and a longstanding lack of consequence management within the Department

Towards the beginning of the next financial year, the new structure of the risk management committee would be put in place to try to get the most senior people involved in the risk management structure.

Not much had been done with regard to the poor buy-in through the Departmental leadership’s disengagement, but engagements were scheduled for October 2018.

Some progress had been noted with reference to the lack of consequence management, as the DG had initiated disciplinary measures against those members involved. The committee had also picked up that whenever there were allegations/issues that needed to be dealt with, the Department did not have a proper means of monitoring, and therefore the committee was assisting with improving the monitoring processes.

There were some key core components, such as supply chain management, ICT and performance information, that the risk management processes do not have the ability to manage. The committee had suggested that the risk function try and asses how it could assist this function, but there had been no progress to date. This was also influenced by the fact that the Department did not have enough money to do what it needed to do, and this was starting to impact on the rest of the other departments. This was why it was important that the Department manage its finances correctly.

Discussion

Mr Mokgalapa pointed out that the risk committee was a tick box accessory, and that it existed only for the Department to be able to say that they had a legislative committee, because all of the recommendations that they made had not been translated into plausible action.

He asked how the risk Committee members were appointed. Perhaps this was where a problem lay as well. Why was the Department not taking their recommendations seriously? Who were in the new risk management committee structures? Had the DG met with the new structure of the risk committee? What really was the role of the committee?

Mr Bergman said that he thought what the committee was trying to say was that in helping the Departmental management, the Portfolio Committee needed to help them. It seemed as though the Department was not listening to their cries. It seemed like the committee had given the Portfolio Committee two clues as to what needed to be done -- the Committee needed to summon the executive and the management specifically to a meeting to discuss this lack of engagement, and to account for the findings.

More importantly, the Portfolio Committee had the ability to review any material findings, so what it needed to do was have the material findings listed and to have the decisions and the findings properly interrogated and reviewed. The urgency in this lay in the fact that the Committee was nearing the end of its term and was going to hand over the reins to a new committee, so people were going be assessing what the Committee had achieved in the last five years, and it was therefore important not to hand over something that had gone completely backwards.

With regard to the issues relating to assets, what needed to be done was to find a way to get the new asset register system to function properly, and to process what the Department had in real time.

Ms C Dudley (ACDP) asked whether the committee had identified within their own sections what the weaknesses were, and how the committee was going to go about solving them. Had the new high level changes that were being implemented been working and making a difference? She asked how the Committee saw themselves being a part of, or being embedded in, the new culture. Were they able to impact that area at all from their section?

Mr Lekota said that the portfolio needed to find out why the work that the risk committee did was not being put into effect. The Department should be following up on the recommendations being given and the committee must insist on an explanation. Why was there no response and therefore correction of the weaknesses that they had identified and resolved to correct?

Mr Maila said that it should be the Portfolio Committee who should make it a point to hold the Department accountable. This was the interdependency of the various committees and the Portfolio Committee. He also suggested that the arrangement that had been agreed to previously, which was that the Portfolio Committee should meet bi-annually with the audit and risk committees, should still stand and be implemented, because they could not meet just once a year.

He then touched on the issue of movable assets and asked if, when an official was placed in a foreign country and where they were lodging there were different sorts of immoveable assets (such as plates, glasses, spoons etc), all the assets within that lodging were the assets of the Department, or were some of them the property of the officials? In which case, these should not necessarily be audited.

He was concerned about the culture at the Department, because by the look of things there was a particular culture which was building itself in the organisation, and it was the responsibility of the portfolio members to ensure that this culture was rooted out.

Ms T Kenye (ANC) said the onus rested on the Department and not the risk and audit or other various committees. She asked if the Committee had any measures in place to assist the Department with their risk controls. She pointed out that monitoring and evaluating was the key, and the Department must make sure that it had serious monitoring and evaluating processes so that it checked what was happening in regard to all of the issues that were being identified.

On the challenges of risk management, with regard to the ARF funding projects, could the time of implementation be checked? Regarding the issue of IT, had the committee ever thought of engaging the State Information Technology Agency (SITA) in an attempt to explore other avenues?

Ms Raputhi commended the risk committee for bringing the deputy DG on board. She said that the risk committee issues should also be reflected in their performance management, because the executive management of the Department must be brought to be held to account. She also expressed her disappointment in the performance of the Department.

Ms Lesoma said she had a sense of comfort in that the new audit and risk committee had given them a brief overview in terms of the new changes they were going to be implementing moving forward. She asked when the acting DG had become the permanent DG. When did he join the organisation? What was his role in the top management?

The Chairperson asked whether the DG had been with the Department in the last five years as a DG or an acting DG? He emphasised that this was an important question because that person must correct the errors and issues that came under their leadership.

In response to the questions asked by Mr Lekota and Mr Mokgalapa, he said that the risk committee was appointed in terms of the Public Service Management Act, the National Treasury regulations and the National Treasury Public Sector Risk Management Framework, or Batho Pele principles. It was a committee that was mandatory to be appointed in the Department, or to exist in the Department. He asked whether the committee was allowed to meet with the Minister if the DG did not perform. In their mandate, were they limited to only the DG?

The Chairperson asked who checked the risk of bids that were valued at less than R499 999.

DIRCO’s response

Ms Massacha Mbonambi, Chairperson: DIRCO Audit Committee, responded on the challenges causing financial performance concerns at DIRCO and ARF.

The committee was disappointed with the regression in the audit opinion, from an unqualified opinion to a qualified opinion in the current year, as this could have been avoided had they adhered to or implemented the recommendations of the auditors timely, specifically the development, implementation and the monitoring of the audit action plan.
 
In response to what the Chairperson had said earlier regarding reporting not only to the DG, since January 2018 and after the end of each meeting, the audit committee writes a report not only to the DG but it also escalates issues to the Minister. As a result, the Minister had requested a meeting with the committee, so some of the issues had been escalated and discussed with the Minister as well.

One of the key root causes that had contributed to the regression in the audit outcomes was the capacity and skills constraints within the finance and supply chain management unit. The committee had requested the DG to do a skills audit, but so far could not report on any progress.

The financials presented for the 2017/18 year had had a lot of errors and in response, management had committed to organising some training for the preparers of the annual financial statement so that they could properly compile them. This had not been done, and a quality reviewer had to be engaged to review the financials before they were submitted to the AG.

Other issues included that at times there had been misleading reports by management, so there needed to be a proper review of information that is provided to the audit committee. The structure of the audit steering committee was also not functioning as it should, and the recommendations by the internal audit and the risk management committee needed to be implemented timeously.

On the matters raised in the past, including the progress update, an area of urgent attention was the maintenance of state owned properties abroad. However, this had been brought to the attention of the DG. Another area outlined of being of huge risk was the poor ICT infrastructure and outdated technology. It was important that the Department address this and the audit committee had communicated that this was being addressed through the risk committee.

Some current challenges and their progress updates included the non-functioning of the audit steering
committee. The issue with this was that it required a driver who not only had the skills and experience, but also had time.

With regard to the recurring irregular, fruitless and wasteful expenditure what was key was to make sure the register for this type of expenditure was complete. Once issues had been raised, the Department needed to confirm whether that was a valid expenditure by performing high level investigations, and then if there was a need, discipline those responsible.

Another recommendation was that the attitude at the top needed to be rectified, and it could be confirmed that this process had started.

It was important that the Department was held to implementing consequence management to ensure that disciplinary measures were taken against guilty parties. The issue with regard to accumulated unauthorised expenditure incurred on unfunded mandates, forex losses had been submitted to SCOPA a couple of times, but they were dealing with the irregular, fruitless and wasteful expenditure first. This was why the matter was still in progress.

A staff culture survey needed to be conducted to get a sense of how the leadership deficiencies had affected the hard working people. A skills audit was important, because it would help the Department identify if there was a need to shift certain people around. What was worrying was that if nothing was done about the ceiling on employee costs, the Department may not be able to fill critical positions.

It was important to speak about the audit action plan. It would be discussed it on either 19 or 26 October. The DG had been informed that the committee would like all the actions to be implemented by the end of December, and they would like the internal audit unit to go in and verify that this was done and report by the end of February.

The committee had agreed with the recommendation that more frequent meetings needed to be held, and the audit committee needed to report to them on how far it had gone in terms of the audit action plan, and they needed to do it before the end of the financial year.

An important matter that the suspended CFO had brought to the attention of the committee, was related to the misappropriation of sponsorship money that he said had been received by some DDGs, and the internal DIRCO processes had not been followed. On hearing about this, the audit committee had requested that an investigation be undertaken. This investigation was initially done by the internal audit, but at some point the committee had been uncomfortable with this as the matter affected very senior members in the Department, and had therefore requested the DG to outsource the investigation. The DG had handed it over to National Treasury. At an appropriate time, the committee would report on the outcome of the investigation.

The committee had received a report from the AG, drafted by the office of the Public Protector. The concern that had been raised was that the committee should not be receiving reports from the AG, but should be receiving them straight from the DG. The committee had asked the Department that when there were such reports, they should be given to them on time by the DG. This had also been reported to the Minister in their report.

Discussion

Ms Lesoma asked whether the misinformation provided to the audit Committee had been deliberate or due to ignorance, in the audit committee’s assessment, or had it been a case of the right positions having the wrong skills? Had there been any deliberate training to improve capacity? What were their thoughts regarding the ITC human resources infrastructure?

Ms Raputi commended the committee for its recommendations.

Ms Kenye asked what measures were being taken by this committee on the issue of the dysfunctional audit steering committee. The matters related to the maintenance and reporting on the asset register should be transferred to Part D as well, because it was still a current challenge as there had been no progress. With regard to the non-functioning audit steering committee, there had been no progress in its resuscitation, so what therefore could be done?

Ms Dudley commended the committee for giving the Portfolio Committee an idea of the direction being taken, especially the action plan coming up and when the committee had set the deadline for when they expected things to be happening.

Mr Bergman asserted that the most important thing was that the Department had gone from a bad report to worse report and in effect, he felt as though the report said that the committee had wasted their time with the reports, because they were really unreliable. He said the Portfolio Committee had the wrong people in the room -- instead of having the senior management, it should have had the lower management -- the grass roots level in the company -- to talk to them because it seemed that the head did not know what the tail was doing, and the tail seemed to know more about what the jobs entailed than the heads did.

He pointed out that he had often called for a skilled audit, but this had not been done, and he thought that the feedback that they were receiving from the various committees should have left them all feeling embarrassed. The question the committee needed to be asking itself was whether they had been misled? Also, had the misleading been intentional or unintentional? Intentional was something more criminal and there would have to be further investigation. As a committee, they needed to start asking the serious questions now about how the committee was going to stop the downfall of the Department before it was too late.

Mr Mokgalapa commended the audit committee for not allowing themselves to be intimidated. He asked, without requiring too much detail, what the Public Protector/AG report was? What was the timeframe of the Treasury investigation?

DIRCO risk committee’s response

Mr Sehlapelo replied on the supposed “toothlessness” of the committees, and said that he did not agree with the statement made that the committees were not relevant because, while they did not have the mandate to actually act and were not part of management, they had the ability to engage with different stakeholders who could act, and that this had been illustrated by the chairperson. This was their relevance, as they could escalate certain issues to the Minister.

Ms Mbonambi pointed out that at this stage the audit committee could not say whether the delay of information was deliberate or if it was a skills issue, as a skills audit was still being conducted.

On the matter of ICT, it should be put to the Department that there was a challenge with the infrastructure and capacity. The audit committee had recognised capacity and skills as an issue, and had asked the Department to look into it.

Regarding the dysfunctional audit steering committee, she explained that it was an internal audit steering committee which looked at issues raised by different assurance providers, so if it got structure and started being functional, it would better help the audit committee. However, at this stage it was not working as well as it was supposed to. The committee had indicated that it needed a driver.

She confirmed that a skills audit would be done eventually and that there was a change in how the audit committee was being treated. It did feel that the way it was treated was improving, and that from the DG’s side there was a lot of support, as well as from the Minister. The culture at the Department was slow in changing, and the committee would be reporting back to the Portfolio Committee as to whether this change was yielding any results.

The Public Protector’s report was an old matter about SCM irregularities picked up at the ARF. She suggested that the Portfolio Committee should request the Department to forward the report or summarise it.

Mr Maila asked if the audit committee could shed light on the issue of auditing moveable assets.

Ms Mbonambi said she did not think there were assets that belonged to individuals that were recorded in the fixed asset register of the Department. All the assets referred to were assets belonging to the Department.

Ms Mpethe replied about the residences abroad where officials were staying, and said that the process of the Department was that if one was abroad, they bought the furniture, so the furniture became an asset of the Department. Officials did not buy their own assets, so all assets belong to the Department.

The Chairperson commended the committees for their reports.

DIRCO/ARF 2017/18 Annual Reports

The Chairperson outlined the performance and issues of the Department over the past five years, and indicated what the next Portfolio Committee would be dealing with.

He said that in the prior year during this period of engagement with the Department, the Portfolio Committee had agreed that there would be a chief operations officer who would have full time functionary powers to oversee while the DG attended to its Parliamentary duties, or when the DG was absent.

In 2016/17, DIRCO had received an unqualified audit opinion, but had regressed as they had obtained a qualified audit opinion in the current year.

The heritage assets had been one of the issues that had been attended to in the previous year.

The last issue identified was the oversight model itself. Ordinary Members of Parliament could not travel to all the foreign mission countries to follow up on the work that was being done by the Department, but the Department did have that ability and should therefore utilise it to ensure that systems, processes and controls were operating effectively.

The responsibility for movable and immovable assets remained within the Department, but needed to be tightened within the Department. Another issue was the irregular tender processes, particularly outside the country, and the ARF struggled with this problem.

The next issue was that of the repair of vacant properties, which had been seen in Namibia, but this may not be the only place that this was occurring.

Ms Delores Kotze, Chief Director: Strategic Planning, Monitoring and Evaluation, DIRCO briefed the Committee on the performance of the Department for 2017/18.

In Programme one (administration), as it related to their financial asset management, only one out of the three objectives had been achieved, mainly relating to the integration of the Department’s IT systems.

On the objective of diplomatic training, the Department had not managed to meet the target for the policy research work that they had been doing, particularly relating to the round tables where the Department engaged stakeholders. It had met all of the targets on the State Law Advisor objective

In assessing programme two (international relations), the Department had two big targets/indicators. One speaks to their politicalness, and the other addressed the strategic objective of strengthening political, economic and social relations. The platforms that they utilised for their engagements to strengthen their political engagements, were particularly their structured engagements and high level visits. The only target not met referred to their high level visits. Here they had a lot of dependencies in terms of the local political principals and the principals of the hosting/receiving state.

Some of the tangible outcomes included the Department meeting their target of 27 structured bilateral mechanisms, and having completed 28 of the 40 high-level visits.

Ms Kotze said that in Programme 3 (International Cooperation), which involved their continental cooperation, the two targets not achieved were related to the New Partnership for Africa’s Development (NEPAD) and the cvilian database. As it related to south-south cooperation, five of the 29 targets were not achieved. These related to the Indian Ocean Rim Association (IORA) leaders summit, the Africa-South America summit which did not take place due to instabilities in that region, and two BRICS (Brazil – Russia – India - China - South Africa) engagements.

On the promotion and protection of human rights, the Department was still standing strong in the work that they do, and the work that they had done with regard to the world food programme had resulted in the agreement of SA hosting the largest UN Humanitarian Response Depot. The agreement had not yet concluded where in SA it would be hosted, however.

The Department a vacancy rate of 9.4%, which was below the target of 10%.

Ms Thandiwe Fadane, Acting Chief Financial Officer: DIRCO, continued the briefing by outlining the financial information of the Department for the 2017/18 and 2016/17 years.

She said the budget for foreign affairs was driven by foreign exchange rates and that it was National Treasury that decided what budget rates should be used. The reporting was done at the spot rate. One of the issues around the foreign affairs international relations budget was the cost containment and the ceilings

In reviewing the expenditure for 2016/17 against 2017/18, she commented that there had been a budget decrease of 6.4% because of some of the issues pointed out and because of achange in employee number, as well as foreign exchange rate fluctuations and cost containment measures.

The variance had been as a result of the under-spending in the Department as a result of the deferment of new capital and ICT projects, as had been indicated earlier during the performance information report.

In assessing the detail of the Department’s spending as it related to administration, a large part of the under-spending was due to deferment of the initiation of the capital expenditure, which referred to the New York project.

The decrease in Programmes two and three was influenced by the rand appreciation. As it related to public diplomacy and state protocol, the spending had decreased mainly due to cost containment.

Ms Dineo Mathlako, HEAD: ARF Secretariat, briefed the Committee on the performance of the Fund for the 2017/18 period.

She outlined some of the performance highlights, including that to date over 40 new boreholes had been completed in Namibia, and that the Fund established a new credit line to Cuba, the first of it’s kind, which illustrated a huge advancement.

The only deviation in the Fund’s key performance indicators (KPIs) was with regard to the United Nations Relief and Works Agency (UNRWA) project for Palestinian refugees, and this was due to the report not being submitted because of political instability in that region.

The Fund had received an unqualified audit opinion in the current year. It had requested to retain the surplus accumulated for the current year and the National Treasury had allowed them to retain R373 million of the R623 million.

Mr Kgabo Mahoai, Director General: DIRCO, said the Department had received a qualified audit opinion and had regressed from the prior year. One of the concerns raised by the AG and other committees was the lack of consequence management, which they had outlined as the main cause for the audit opinion.

The SCM processes had been the key for some of the matters that were identified, and these had led to irregular expenditure being incurred. What the Department had done so far was that they had noticed that the irregular expenditure had been a carryover from the previous two financial years, and had then gone through an investigation process to establish who should be held liable. The report had pointed out that those who should be held liable would be those who had evaluated, adjudicated and granted those tenders.

The chairperson of the adjudication committee, who was also the CFO, had been charged and fined, and there were a number of officials who were being charged and held accountable.

With regard to consequence management, the Department was holding engagements with those charged with governance irregularities.

The root causes identified by the Department had either been human or system failings. The human element was the normal lazy affair, where people did not do what they were supposed to do, but it also included capacity constraints, because some did not have the skills necessary to do their work. The systemic element was that some of the internal controls were lacking and weak. The Department was reviewing these and would be implementing corrections.

He replied to some of the specific issues raised by the Chairperson. The nature of the New York contract as it related to the procurement process -- especially in terms of irregular expenditure -- was that it was an infrastructure type of project, so if it was stopped abruptly then fruitless expenditure would start to be incurred. The contract had been entered into before he was appointed, and what was remaining on the contract was that a supplier had to install a pipeline, and this was therefore increasing what they had to pay.

The Chairperson asked for further clarity on this matter, and on the process of the furniture removal tenders.

Mr Mahoai replied that the reason the Department had embarked on the New York project had been because there was a need for them to have a building of their own, as it was a permanent mission, and previously they were renting. The Department had therefore asked Treasury for the financial go ahead. In the process of doing so, it was discovered that there had been some miscommunication in the briefing for the project, and as a result the approval processes followed had to be changed. Treasury had then re-evaluated the project, based on the new procurement process that needed to be followed, but it had been found that there were some discrepancies, making the award irregular. The Department could not proceed with the project because it had been irregularly awarded.

He stressed that the only way to deal with irregular expenditure would be to hold the parties involved liable, and this tied back to consequence management.

Discussion

Mr Mokgalapa agreed that those found to be responsible must be held to account. There needed to be a focus on consequence management.

Mr Bergman asked what “fit for purpose” was, and who was fit for purpose. He said the Department had a lack of skills in certain functions and that it ticked the boxes of employment, but asked whether it was hiring fit for purpose people. He repeated his disappointment at the performance of the Department.
Although a lot of what had happened at the Department was before the new DG’s appointment, the Department had to show intent in really trying to get to the bottom of all the issues.

What he was calling for was that they call in the executive, both the parliamentary executive as well as the senior level of DIRCO, to interrogate the top 10 to15 findings -- the issues that had been bought up by the audit and risk committee -- and that the Department, as well as the Committee, actually hold people accountable for letting a lot of this happen under their leadership.

Ms Dudley said that risk and internal audit needed to be taken more seriously, and asked whether there was an indication that certain issues could have been avoided. She emphasised that thorough investigations needed to be held. She would like serious feedback on the audit action plan and how its implementation was going, to ensure that it was actually being done.

She asked how the Department would ensure that report from Public Protector that came through the AG instead of the DG, did not happen in future.

She said that although the culture was improving, and the tone at the top was changing, there was still the issue of low staff morale. Attention had to be paid to the hard working people, because they could be seriously impacted.

She asked how much of a relationship the Department had with National Treasury, and why it was not helping the Department with these difficult problems.

Mr Maila (ANC) said the from internal audit i and risk committee issues, what the Portfolio Committee was being told was that there was a culture of impunity manifesting itself in the Department. This needed to be turned around, and he suggested that maybe the first thing to do would be to critically look at the recommendations of these committees.

Ms Kenye asked for clarity on the grey areas. The audit committee had spoken about the dysfunctional audit steering committee, and in the report it had addressed monitoring the implementation of the audit action plan, the first layer of which was the monitoring of the audit steering committee. He asked for an explanation as to which committee was dysfunctional therefore.

On the issue of the Treasury, she said that the non-compliance in SCM was a legislative issue. She asked how there had been a regression in the audit opinion but at the same time the audit plan was subsequently being developed.

Ms Raputi asked about the Department’s span of control -- when the DG saw the audit outcome, as an example. She asked how it happened that a manager could not record the fixed assets of the organisation. What informed the performance management system of the Department’s system of control, because it should reflect the deviations from budget?.

When the auditors request records, it became a tedious exercise. Why had the Department been given a special deadline? Was this because they were a global operation, because she was of the view that as it related to the people that the Department was controlling, everything had to be at their fingertips. This showed that consequence management was greatly lacking, or that people were not serious.

She asked about the Department’s span of control with regard to the heads of missions -- were these the bosses?

Ms Lesoma said that there were two critical functions and mandate of the Department. The one that was the most critical was to maintain a modern and excellent driven Department, domestically and internationally. Internationally the Department was very good, but in terms of their systems she did not think that it was making the taxpayers very proud, especially as it related to the year in question. She said that the Committee and the Department must go back to the core mandate and try and strike a balance.

With regard to the mission officials, who reported to whom?

She commend the ARF for its achievements by pointing out that South Africa was engaging itself as a country, which was a good thing, and involving itself in peace keeping, which was also a good thing. She asked if any successes that had been achieved, and lessons that it could borrow from.

With regard to severance packages, when South Africa employs people in foreign countries, did it use their laws in terms of human relations, or South Africa’s?

The Chairperson asked who the members of the senior management of the Department were. Were they the same faces that were present at the Committee meeting?

He asked when the report that was being adopted would be presented to Parliament.

Mr Lubabalo Sigwela, Committee Secretary, replied that the programme stated that the Budgetary Review and Recommendations Report (BRRR) must be completed by 19 October, but the Portfolio Committee had resolved and received approval to proceed by Wednesday, 24 October.

The Chairperson said he was asking the question because he wanted to host a meeting with the DG and senior management and raise issues of leadership and management that were supposed to be happening or were not happening. The Committee needed to meet with the senior management before meeting with the Minister so that they could address some of the issues outlined and then have the fact that they had discussed and concluded on them in the BRRR Report.

The most important point was that he wanted the Portfolio Committee to meet again with the senior management of the Department before proceeding to have a meeting with the Minister, and that a meeting with the minister was important. He pointed out that the DG would have to act against his own colleagues and fellow executives that had been found to be held accountable.

He said that in the presentation of the ARF annual report, the UNRWA and ARF were referred to as if they were one and the same thing, and asked for clarity on this. He thought the activities of the UNRWA fell under the UN, and that it would report back to it.

On the New York project, the Portfolio Committee wanted to say that all the mission properties should be given to DIRCO, but for now the Department was picking up trouble regarding its moveable assets, so how could it get the responsibility in law to establish missions all over the world and to furbish them in terms of the law? How much damage was going to be caused by this issue?

He replied to Mr Bergman’s comment, which seemed to suggest that the problem was with the entire Department. He argued that there was no lack of skills and professionalism in the Department as a whole, and that the problem was rather with the outflow of finances, their lack of cost control and budgeting. This area was a problem for the DG, and had to be raised with the Minister.

The meeting was adjourned.