Department of Mineral Resources & its entities 2011/12 audit: Auditor-General's comments

Meeting report

Auditor-General on 2011/12 audit outcomes of Department of Mineral Resources & entities
Mr Kevish Lachman, AGSA Business Executive, briefed the Committee on the audit outcomes for the Department of Mineral Resources, the Mine Health and Safety Council (MHSC), the Council for Mineral Technology (MINTEK), the South African Diamond and Precious Metal Regulator (SADPMR), the State Diamond Trader (SDT) and the Council for Geoscience. Mr Lachman said that this portfolio had done well in some respects, but there were some challenges for the upcoming year as well. For 2011/12 there were no qualified audit opinions and no disclaimers or adverse audit opinions, and three entities, MINTEK, SADPMR and SDT, had clean audit opinions. The Department had done well to convert a qualified audit opinion of the previous year into an unqualified audit with findings on predetermined objectives (PDO) and compliance.

However, there was room for improvement. As three of the entities in the portfolio had clean audit opinions it was felt that there was no reason why this should not be achieved by the other three. The majority of the problems were with compliance with laws and regulations, which, given the required effort from leadership, should be easily resolved. Mr Lachman said that there was no reason why the portfolio should not be clean next year. The only thing that was preventing this was compliance.

Mr Lachman gave a breakdown of the key focus areas: supply chain management, predetermined objectives, HR management, IT controls and material errors in the annual financial statements. The Department had no improvement in HR management and material errors in the annual financial statements submitted for the audit. The Mine Health and Safety Council had no improvement in supply chain management. It had some material errors in the annual financial statements, but showed some improvement in this area. The Council for Geoscience still had supply chain management issues and material errors, but showed some improvement in both areas. MINTEK, SADPMR and SDT had no matters in any of the key focus areas. There were no findings on predetermined objectives for the three, which was critical as it showed that the entities were at least reporting properly on this.

Supply Chain Management (SCM)
The Department of Mineral Resources had no material findings identified for SCM.

The Mine Health and Safety Council (MHSC) had a number of SCM findings. The evaluation criteria to be used in awarding preference points, the criteria for functionality or the minimum scores that needed to be obtained for functionality and the maximum points to be awarded for equity ownership by Historically Disadvantaged Individuals (HDI) as well as per category of HDI specified in the request for quotations between R30 000 and R500 000. Sufficient appropriate audit evidence could not be obtained that the award was made based on criteria that was consistent with the original invitations for bids as per the requirement of Treasury Regulation (TR) 16A3.2.

The preference point system was incorrectly applied in procurement of goods and services between R30 000 and R500 000 and as required by section 2(a) of the Preferential Procurement Policy Framework Act.

The terms of reference were not clearly stated on the request for quotations as required by Preferential Procurement Policy Framework Act (PPR 7).

Goods and services with a transaction value between R30 000 and R500 000 were procured without inviting at least three written price quotations from prospective suppliers as per the requirements of section 76(4)(c) of the Public Finance Management Act (PFMA) and National Treasury Practice Note 8 of 2007/8

For goods and services with a transaction value of between R30 000 and R500 000, quotations were not evaluated in two stages which was firstly the assessment of functionality and there-after the suppliers that qualified were evaluated in terms of the 80/20 preference system. The 80 points were used for price only, instead functionality was included in the final decision and 80 points were not allocated for price only as functionality was given a portion of the points as required by the Preferential Policy Framework Act.

The AGSA identified the root causes of these findings as being a lack of leadership and of financial and performance management. There was a need to exercise oversight responsibility regarding financial and performance reporting and compliance and related internal controls. Management did not review and the monitoring of compliance with applicable laws and regulations was not conducted. The AGSA recommended that the MHSC needed to re-look at their controls over monitoring compliance with laws and regulations and compile a list of legislation that council had to comply with and monitor compliance with those laws and regulations.

There were no material SCM findings for MINTEK, SADPMR and SDT. At the Council for Geoscience 100% of irregular expenditure incurred in that year was as a result of contravention of SCM legislation. This amounted to R825 890. In addition, suppliers were not afforded an opportunity to submit quotations, did not declare if any of their members were employed by the state, and did not submit SBD9 declaration forms. The root cause of this was that the Council for Geoscience did not review and monitor compliance with laws and regulations. It needed to re-look at its controls over monitoring compliance with laws and regulations.

Predetermined Objectives
For all entities, no material findings on the usefulness and reliability of the performance information were identified in the performance report. However, attention was drawn to the level of non-achievement of the planned targets – for the Department, the Mine Health and Safety Council, the South African Diamond and Precious Metal Regulator and the Council for Geoscience.

At the Department, 28% of total planned targets were not achieved. The cause of this was that the entity formulated some targets whose achievement was beyond the Department’s control. The recommendations were that the Department should formulate targets in line with their mandate and the achievement of such targets should be within the control of the Department.

The Mine Health and Safety Council, 33% of the total planned targets were not achieved. This was due to leadership problems. The implementation of action plans to address internal control deficiencies which resulted in the non-achievement of targets had not been developed or monitored. AGSA suggested that the root should be investigated and followed up. A plan should be implemented that addressed all identified shortcomings.

The South African Diamond and Precious Metal Regulator achieved only 78 of their planned targets – 22% of the total. This was mainly due to the fact that indicators and targets were not suitably developed during the strategic planning process.

The Council for Geoscience achieved 24 targets, which represented 32% of the total. This was as a result of the institution not considering relevant systems and evidential requirements during the annual strategic planning process. Leadership problems were identified as a root cause, as the institution did not consider relevant systems and evidential requirements during the annual strategic planning process.

Human Resources
At the Department, employees were receiving overtime compensation in excess of 30% of their monthly salaries, in contravention of Public Service Regulation I/V/D.2(d). Employees also acted in higher vacant posts for an uninterrupted period exceeding 12 months, in contravention of the Public Service Regulation 1/VII/B.5.3.This was due to a lack of review and monitoring of the controls to ensure compliance with applicable laws and regulations. AGSA recommended that internal controls be implemented to review the overtime hours worked by employees on a monthly basis to ensure that the compensation they receive for their overtime did not exceed their monthly salaries by 30%. Internal controls should also review the period remaining for employees who were acting in vacant posts to ensure that the necessary steps were timeously taken to advertise for the vacant positions and appoint the employees.

At the Mine Health and Safety Council the following vacancies were not filled: Committee Administrator, IT Controller, IT Specialist, and Safety Research Programme Manager. Furthermore, it was noted that there was no HR plan in place, even though this was not a requirement it would serve as a good form of internal control and good practice and assist with the tracking and filling of vacancies. This was a failure of leadership. Action plans had not been developed and implemented to address internal control deficiencies. Management should ensure that all gaps within the entity were filled so as to achieve the organisation’s goals. A Human Resource Plan should be prepared that aligned MHSC’s human resource requirements to the organisation’s goals.

It was noted that the bonus paid to an employee was not pro-rated even though the employee was not in the employ of the entity for the full year to which the bonus related. The cause of this was poor financial and performance management. Controls over daily and monthly processing and reconciling of transactions were not being implemented. Management should thoroughly review performance bonus calculation before approval and payment. The money should also be recovered from the employee concerned.

It was noted that for technical experts engaged by the MHSC no deductions were made for PAYE and no exemption certificates were submitted by these experts. It was further noted that in procuring the services of these experts the minimum number of price quotations were not obtained and approval of the delegated official was not obtained. This was due to inadequate controls over compliance with laws and regulations. The council needed to re-look at their controls over monitoring compliance with laws and regulations, compile a list of legislations that they should comply with and monitor the compliance. They should also disclose expenditure incurred to date as irregular.

No material findings with regard to human resources were identified at MINTEK, SADPMR, SDT and GCS.

Information Technology Controls
No material findings were identified with regard to information technology controls for any entity.

Material Errors or Omissions in the Annual Financial Statements submitted for Audit
The Department’s financial statements were not prepared in certain aspects in accordance with the prescribed financial reporting framework or supported by full and proper records as required by section 40 (1)(a) and (b) of the Public Finance Management Act which led to material adjustments to the financial statements submitted for audit. This was caused by a lack of review and monitoring of the controls over the proper record keeping in a timely manner to ensure that complete, relevant and accurate information was accessible and available to support financial and performance reporting. All schedules and information supporting the financial statements should be reviewed prior to the financial statements submitted for audit to ensure that they were valid, accurate and complete, and that the financial statements reflected these schedules accurately.

The Mine and Health and Safety Council’s annual financial statements were also not prepared in all material respects in accordance with the requirements of the PFMA. Material misstatements identified by the auditors were subsequently corrected. A retrospective adjustment as required by the GRAP 3 should be made in the financial statements. Internal controls also needed to be implemented to ensure that the commitments schedule was up to date.

No material findings were identified for MINTEK, SADPMR, and SDT.

The Council for Geoscience’s financial statements submitted for auditing were not prepared in some material respects in accordance with the requirements of the PFMA. Material misstatements of irregular expenditure, capital and current assets were identified by the auditors. As these were subsequently corrected by the entity, it meant the financial statements received an unqualified audit opinion.

Other non-compliance matters

Money owing by the Department was not always paid within 30 days of receiving an invoice or statement. The accounting officer did not take reasonable steps to prevent irregular expenditure, did not ensure that appropriate and effective steps were taken to collect all money due, and did not ensure that appropriate processes were developed and implemented to provide for the identification.

The Mine Health and Safety Council’s accounting authority did not take effective and appropriate steps to prevent irregular expenditure as per the requirements of the PFMA.

There were no material findings identified for MHSC, MINTEK, SADPMR, SDT, GCS.

Other Matters of Interest
No unauthorised expenditure was incurred by any of the entities. Fruitless and wasteful expenditure had been maintained at zero by MHSC, MINTEK and SDT and reduced to zero by the Department and SADPMR. Irregular expenditure, however, was at zero only for MINTEK and SDT. It was at R7, 9 million for the Department, showing little movement from the previous year. MHSC had experienced an increase to R6.93 million from the previous year, when it was only R197 000. The Council for Geoscience had also increased from zero in 2011 to R823 000 in 2012. SADPMR showed the only decrease, from R3.2 million to R1.63 million. These regressions were disappointing for the AGSA.

Other AG Reports
No investigations or performance audits were underway as undertaken by the AGSA.

Discussion
Mr E Lucas (IFP) asked what could be done about the problems and who should be held responsible.

The Chairperson commented that prevention was better than cure, and asked how they could intervene before the audit result to ensure a clean audit. This could prevent situations like the Council for Geosciences was experiencing, where they had actually regressed.

Mr Lachman responded that the legislative framework was very clear that responsibility sat with the accounting officer, although the executive was ultimately responsible. However, everyone involved should play a role in ensuring that there was accountability and change. One critical role which the AGSA had identified as lacking was the governance structures – the audit committee and the internal audit. The lack of internal governance structures also answered questions about how to intervene before the audit was released. It was not the AGSA’s mandate to be on the ground giving advice every day, and it was not economically efficient for them to do so. But the entities themselves had governance structures which were supposed to be doing work on a continual basis. If problems were not being picked up early and prevented from impacting on the audit outcome, then one had to ask how effective they were and why they were not picking up on these problems. Mr Lachman suggested that the Committee direct these questions to the Department and its entities, as all the issues in the report were due to weaknesses in the internal control environment.

Mr Lucas asked if the vacancies contributed to the overtime, and if this was not an acceptable explanation.

A member asked if employees who were receiving in excess of three times more than their monthly salaries be asked to pay back the money, instead of letting them “get away with murder”.

Mr Lachman responded that the 30% limit was a public service regulation. People worked over that for various reasons. One of the root causes for that in this case was the lack of filling critical positions and having people permanently employed. Overtime was therefore used as a crisis management stop-gap. It was not caused by people being devious but rather by organisations trying to plug gaps caused by vacancies.

Mr J Lorimer (DA) asked how goods and services were procured without obtaining at least three written quotations. He asked if that may point to some kind of malpractice, perhaps even corruption.

Mr Lachman responded that this was of concern to the AGSA, and that this question would have to be posed to the entity itself. AGSA had given what they saw as a root cause, but individuals at the entity had to be held accountable.

The Chairperson noted that problems with the regulatory frameworks seemed to come up every year, and asked what could be done.

Mr Lachman responded that the chairpersons of the audit committees could come and report to the Committee on a quarterly basis. This would keep the Committee informed, as the internal audit was actually an independent entity, which did not report to management but to the audit committee. The Committee would have to find out from the entities what the action plans were and how often they intended to report back on them. They should at the very least send a written report every quarter.

Mr M Sonto (ANC) asked if the AG’s office interacted with these entities, and how seriously the entities took their recommendations.

Mr Lachman responded that AGSA interacted on a regular basis with the entities and with the executive. These issues were not only reported in the audit report at the end of the year, but on a weekly basis as they came up. The onus of correction of these issues sat with the will of the leadership to ensure that change, but AGSA nonetheless saw it as part of their responsibility as well, as they were all part of the solution.

Mr Sonto asked if that meant that the mistakes were deliberate.

Mr Lachman responded that he would not say they were deliberate but would say that they could be corrected. Disclaimers or adverse opinions would suggest that it was deliberate. But in this case there was some effort being made. There were so few issues that all it would take was a little push for a clean audit.

Mr C Gololo (ANC) asked what the relationship was between the AGSA and the Financial and Fiscal Commission, did they cooperate at all?

Mr Lachman responded that the AGSA worked very closely with Treasury and all the entities that report to Treasury, they therefore had a close relationship with the Financial and Fiscal Commission. This was something that they encouraged others to focus on, as regulations came from the Treasury, so entities needed a direct line of communication with the Treasury.

The Chairperson asked if bonuses were being given undeservedly.

Mr Lachman responded that bonuses were provided as part of complying with legislative frameworks. The AGSA only looked at whether or not people had met the criteria for bonuses, but did not assess the criteria themselves. This was a question that could be posed to the entities.

The Chairperson asked the committee researcher to find information on the policy on bonuses and on vacancies for members to inform themselves before they discussed this with the Department.

Mr Lucas noted that the internal audits were obviously crucial and the Committee should put pressure on the Department that internal audits should be up to date.

Mr Lachman commented that AGSA had engaged with the Minister and encouraged the Minister to meet on a quarterly basis with the audit committee chairs, so that the he could also tackle the issues. Secondly, the audit committee chairs should share knowledge with other entities in the portfolio. If three entities from the same portfolio could get it right, but the others were not, then experiences were not being shared as they should be.

The Chairperson thanked Mr Lachman for the presentation and adjourned the meeting.