Auditor-General on unauthorised, irregular, fruitless and wasteful expenditure; and over- and under-spending of votes

Public Accounts (SCOPA)

05 February 2014
Chairperson: Mr T Godi (APC)
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Meeting Summary

The Chairperson informed the Committee that the engagement with the Auditor-General’s (AG’s) office had been initiated to determine the audit outcomes of departments. The feedback received would assist the Committee in making informed decisions on strategic areas where interventions would be needed to produce the desired quality of financial management in government. The Committee sought to close any gaps that might be the cause of unauthorised, irregular, fruitless and wasteful expenditure.

The Auditor-General reported that the overall audit outcomes for departments and public entities showed that some limited progress had been recorded.  In essence, the Western Cape, the Northern Cape, the Eastern Cape, Free State, Kwazulu-Natal were observed to have improved, North West had made little or no progress, while Gauteng and Limpopo had regressed. It was obvious that much work was still needed to convert the bulk of the expenditures in these provinces to the point where they could report clean audits. The audit outcomes for departments, excluding public entities, portrayed a number of issues on compliance with laws and regulations, as well as accounting and financial management.  Basic accounting, as well as the oversight activities of the qualified auditors, was not at appropriate levels.

The number of clean audits showed a very small percentage increase in total progress made in financial accounting and accurate reporting of financial statements.  Of the 40 national departments, six had improved, 30 had remained unchanged, while four had regressed. There were material findings at 93% of departments regarding non-compliance with legislation.  The key risk areas that should receive attention at national departments were supply chain management (SCM), the quality of performance reports, human resource management (HRM), the quality of financial statements submitted, and information technology controls.  At the HRM level, it had been found that there were people carrying out financial administrative functions who did not have the minimum competence to perform the duties required of them. Continuously paying attention to this issue would help to prevent some of the issues picked up in the audit process. 

It was encouraging to note that there had been a significant reduction in fruitless and wasteful expenditure.  This indicated that not only were the auditees starting to identify the elements of fruitless and wasteful expenditure themselves, but also that their systems were starting to detect and report such expenditures more meaningfully.  The amount of fruitless and wasteful expenditure realised had been R97 million. The key contributors to the figure were the Departments of Justice and Constitutional Development (R39.2 million) and Rural Development and Land Reform (R35.7 million).           

Irregular expenditure had generated a sizeable amount of R2 460 million for the 40 Departments, with a third of those identified during the audit processes. It had been observed that systems that could have prevented and detected irregular expenditure were not at the levels of maturity that they should have been. Furthermore, the Auditor General South Africa (AGSA) had delved into the nature of the irregular expenditure and had confirmed that 96,8% of the instances involved processes relating to managing the supply chain. Of note also was the fact that the amounts were not associated with prior year contracts, but with the present year under review.  The key contributors to irregular expenditure in the year 2012-13 were Cooperative Governance and Traditional Affairs, Public Works, Correctional Services, Transport and Defence.

Unauthorised expenditure had amounted to R861 million in 2012-11 but had dropped significantly to R467 million in 2012-13. The occurrence of unauthorised expenditure had been limited to the Department of Home Affairs (R301 million) and the Department of Public Works (R166 million).

At the provincial level, it had been found that certain departments - especially Education, Health and Public Works - used their conditional grants for general purposes, but their capital projects were not spent appropriately.

During discussion, Members raised concerns over the lack of adequate qualifications among senior executive members of departments, the under-spending of conditional grants by municipalities in rural provinces, persistent contraventions of Treasury and Public Finance Management Act (PFMA) regulations by certain departments, and the prevalence of supply chain management issues.

The Chairperson concluded by proposing that SCOPA, AGSA and SARS would hold a joint meeting to explore the aspects of managing information on companies that were awarded tenders without tax clearances. It would be mandatory for the AG to inform both SCOPA and SARS of repeated instances, so that SARS could pursue it. He informed AGSA that the Committee would communicate with them very soon in this regard.
 

Meeting report

Audit Outcomes of National Departments as at November 2013
The Chairperson welcomed Members to the first meeting of the year. He also welcomed the delegates from the office of the Auditor General (AG) and congratulated the AG on his new appointment.  He said that this engagement with the AG’s office had been initiated to determine the audit outcome of departments in 2013.  Previously, this exercise had taken place before the end of the year, but since this had not been possible last year, the Committee had fixed the beginning of the year to discuss these issues.

The feedback received would assist the Committee in making informed decisions on strategic areas where interventions would be needed to produce the desired quality of financial management in the country. How could the Committee monitor the use of funds that left the national coffers and went to the provinces or the municipalities?  The Committee therefore sought to close any gaps that might have existed which had led to unauthorised, irregular, fruitless and wasteful expenditure. Other areas where Members needed clarification would also be tackled by the AG.

Mr Thembekile Kimi Makwetu, Auditor-General, assured the Committee that the presentation was in line with the issues raised by SCOPA when the request had been made to engage with the AG’s office. He highlighted the issues that would be raised during the presentation. These were:

• Unauthorised, irregular, fruitless and wasteful expenditure, giving the Committee a clear picture of how these results had been translated into the analysis for National Departments and Provinces in the Public Finance Management Act (PFMA) for 2012-13.

• PFMA audit outcomes. These had also been shared on the public domain at the tail end of the former AG’s term.

• National departments, as covered in the general report.

• Over- and under-spending of votes, to the extent that this could be analysed.

• Identifying expenditure patterns on ground.

The overall audit outcomes for departments and public entities showed that some limited progress had been recorded.  In essence, the Western Cape, the Northern Cape, the Eastern Cape, Free State, Kwazulu-Natal were observed to have improved, North West had made little or no progress, while Gauteng and Limpopo had regressed (see presentation for details). It was obvious that much work was still needed to convert the bulk of the expenditures in these provinces to the point where they could report clean audits. The audit outcomes for departments, excluding public entities portrayed a number of issues on compliance with laws and regulations, as well as accounting and financial management.  Basic accounting, as well as the oversight activities of the qualified auditors, was not at appropriate levels.

The audit outcomes of national departments over the past three years had demonstrated an almost stagnant state of improvement. The number of clean audits showed a very small percentage increase in total progress made in financial accounting and accurate reporting of financial statements.  Of the 40 national departments, six had improved, 30 had remained unchanged, while four had regressed. There were material findings at 93% of departments regarding non-compliance with legislation.  It was in these areas that unauthorised, irregular, fruitless and wasteful expenditure could be observed. The areas that depicted non-compliance with legislation were:

• The quality of financial statements submitted for audit purposes (73% of departments).

 • Appointments and performance management and compensation (58%).

• Management of procurement and contracts (43%).

• Approval and control of expenditure and payment within 30 days (43%).

• Prevention and follow-up of unauthorised, irregular/or fruitless and wasteful expenditure (33%).

• Management of strategic planning and performance (30%).

• Management of assets and investments (15%).

The key risk areas that should receive attention at national departments were supply chain management (SCM), the quality of performance reports, human resource management (HRM), the quality of financial statements submitted, and information technology controls.

At the HRM level, it had been found that there were people carrying out financial administrative functions who did not have the minimum competence to perform the duties required of them. Continuously paying attention to this issue would help to prevent some of the issues picked up in the audit process.  Supply chain management involved the manner in which goods and services were procured. The AG’s office had shared with the departments, and with those charged with oversight duties, the steps that should be taken to improve the financial management and performance.  A level of improvement had been recorded with regard to record keeping. An additional issue that should be looked into were the daily and monthly controls. These controls would prevent errors and problems before they occurred.
      
Ms Tsakani Ratsela, National Leader: Audit Services, Auditor-General South Africa, informed the Committee that instances of unauthorised, irregular, fruitless and wasteful expenditure were reported on page 36 of the Consolidated General Report. The definitions and indications of how the analyses were arrived at, could be seen on page 41. (Please see the Consolidated General Report on the National and Provincial Audit Outcomes).

Ms Ratsela defined fruitless and wasteful expenditure as “expenditure made in vain which could have been avoided if reasonable care had been taken in managing the Supply Chain processes in the Departments”. It was encouraging, however, to note that there had been a significant reduction in fruitless and wasteful expenditure.  This indicated that not only were the auditees starting to identify the elements of fruitless and wasteful expenditure themselves, but also that their systems were starting to detect and report such expenditures more meaningfully.

An analysis had been made of the elements of fruitless and wasteful expenditure to determine those expenditures that were associated with actual fruitless and wasteful expenditure, and which elements were associated with expenditure incurred with contracts that had not been delivered. This exercise had been carried out to avoid future irregular and fruitless expenditure. The amount of fruitless and wasteful expenditure realised had been R97 million, the bulk of which (R80 million) had been actual fruitless and wasteful expenditure for the year. The key contributors to the figure were the Departments of Justice and Constitutional Development (R39.2 million) and Rural Development and Land Reform (R35.7 million).            

Irregular expenditure had generated a sizeable amount of R2 460 million for the 40 Departments, with a third of those identified during the audit processes. It had been observed that systems that could have prevented and detected irregular expenditure were not at the levels of maturity that they should have been. Furthermore, the Auditor General South Africa (AGSA) delved into the nature of the irregular expenditure and had confirmed that 96,8% of the instances involved processes relating to managing the supply chain. Of note also was the fact that the amounts were not associated with prior year contracts, but with the present year under review. The top findings associated with supply chain management at the departments related to:

• Three written quotations not being invited. The deviation was not reasonable, justified or approved.

• Procurement from suppliers without a SARS tax clearance.

• Competitive bids not being invited. The deviation was not reasonable, justified or approved.

• Preference point system was not applied.

• The supplier scoring highest points with lowest quotation was not selected.

The key contributors to irregular expenditure in the year 2012-13 were Cooperative Governance and Traditional Affairs, Public Works, Correctional Services, Transport and Defence.

Unauthorised expenditure had amounted to R861 million in 2012-11 but had dropped significantly to R467 million in 2012-13. The occurrence of unauthorised expenditure had been limited to the Department of Home Affairs (R301 million) and the Department of Public Works (R166 million).

At the provincial level, it had been found that certain departments - especially Education, Health and Public Works - used their conditional grants for general purposes, but their capital projects were not spent appropriately.  Page 162 of the Consolidated General Reports had an annexure where the audit outcomes of every auditee were detailed, as well as matters associated with their compliance findings.

Discussion
Mr A Ainslie (ANC) said that in his opinion, the picture portrayed by the presentation showed a slow but steady improvement over the years. The audit outcomes of national departments over the past three years demonstrated an improvement from 67% in 2010-11, to 75% in 2011-12, and then 77% in 2012-13. Additionally, the fruitless and wasteful expenditure incurred by national departments indicated a dramatic reduction, from R429 million incurred on fruitless and wasteful expenditure in 2010-11, to R97 million in 2012-13. However, he wanted to find out why, in the analysis of the drivers of the audit outcomes and the risks to be attended to, the issue of lack of accountability and the qualifications of senior executive members at the departments had not been mentioned.

For the past five years, some departments who persistently contravened the PFMA and Treasury regulations, had constantly appeared before SCOPA.  Yet these departments had never been held accountable for the consequences of their actions.  This issue was a major driver of poor outcomes and a major risk factor that had to be attended to. Similarly, the qualifications of senior executive members should be analysed. Were they qualified to do the work of internal audit of financial controls, or not?  He emphasised that these two issues should not be under-emphasised. Was it as a result of lack of capacity or qualifications that contributed to underspending in the provinces? In the light of the AG’s statement, confirming that some senior managers were not suitably qualified, especially in financial management, could the Committee have an audit conducted that would be similar to the one done by Pricewaterhouse on SABC senior management in those Departments and entities that were serial offenders with regard to audit outcomes?    

Ms M Mangena (ANC) said she was also concerned with the lack of qualification of some of the departmental executives. She wanted to know what would be done to change the situation, and sought clarification on what the presentation meant by portraying that 69% of Limpopo’s municipalities had underspent their conditional grants by more than 10%. She asked the AG what the problem was with non-compliance by the municipalities. What were their excuses for non-compliance?     

Mr S Thobejane (ANC) expressed concern over the SCM and procurement-related issues. He asked whether the office of the AG had been able to identify the causes of these continuous violations, since the sector had been continually identified as a risk area. The presentation had given a list of municipalities that had underspent conditional grants by more than 10%, and it was shocking to see that the rural provinces were the most involved. Was there a known cause for this issue? Could it be that since Cooperative Governance and Traditional Affairs held the highest place of the national departments that had irregular expenditure, this was confirmation that rural areas were underspending? If this was so, then why was it so?

Ms T Chiloane (ANC) asked what the status of compliance with legislation was, since there was no obvious improvement. The 2013 audit outcomes presented had shown a little improvement, but one could not help but wonder what could be done to bring about some major improvements? Could it be a lack of proper monitoring by the Treasury, or by this Standing Committee on Public Accounts?  It was quite unfortunate that the departments who would be in a better place to tell the Committee exactly what the issues were, were not present at this meeting. She wanted to know whether the departments complied with all the relevant procedures in their submission of financial statements. How did the AG deal with the departments that were non-compliant with legislation? 

Dr D George (DA) read out a paragraph on page 63 of the Consolidated General Report on the National and Provincial Audit Outcomes, which stated: “For audit committees to provide the required level of assurance as second-level assurance providers, they depend a lot on the reliability of the assurance provided by senior management and internal audit units”.  He wanted an explanation on what would happen if the senior management and the internal audit did not give the audit committee the adequate information needed for the audit process.

Mr I Mfundisi (UCDP) asked whether the conditional grants had been timeously transferred to the provinces. If the grants had been transferred late, this may have made it difficult for the Municipalities to utilise the funds as allocated.                

Dr P Rabie (DA) read out a paragraph on page 57 of the Consolidated General Report on the National and Provincial Audit Outcomes: “All unauthorised, irregular as well as fruitless and wasteful expenditure should be investigated timeously to determine whether such expenditure should be recovered from the responsible official.”  He wanted to know whether the Department had the capacity to investigate fruitless and wasteful expenditure.

Auditor-General’s response
The AG said that on the issue of improvements noticed, it may look as if there had been improvements, but based on the quality of financial statements submitted, it had been demonstrated that 58% of the national departments had been able to avoid qualification only due to the correction of material statements during the audit process. This meant that the quality of the financial statements before submission had been very lacking, and may not have been termed improvements if there had not been interventions to correct the reports.  In essence, the sustainable system of internal controls that should anchor the activities of financial management in a department were not in place.

On the issue of the lack of accountability and the qualifications of senior executive members at the departments, he agreed with Mr Ainslie that adequate attention must be placed on this issue. He said the presentation slide on the drivers of key controls that would improve audit outcomes, showed that leadership, financial performance management and governance were drivers that would improve audit outcomes.

Furthermore, on the issue of the audit committee, there was a combined assurance model that the AG  focused on which suggested that the primary source of internal control was management, because they were entrusted with the responsibility to look after the finances and the implementation of the programmes.  If management failed to put in place proper governance and a proper internal audit function that would assist them in achieving the goal of reporting accurately, efficiently and effectively, then the audit committee was likely to be ineffective.

As far as qualifications and the minimum competence were concerned, there was a prescribed minimum competence level for this level. This was dealt with by the National Treasury. The duty of AGSA was to evaluate as much as possible, with the information available to them, that the people that were charged with these functions, especially with regards to financial management, were qualified or not. However, there were times when people had the so-called “minimum competence”, but they could not achieve minimum competence. For example, the chief financial officer (CFO) should have a minimum competence in accounting, but if that was not in place, it would create some of the issues highlighted in the presentation. If people who should have the capacity to interpret financial information, could not - because they lacked the minimum level of technical knowledge - the chances would be that they might do what just a bookkeeper would do, and that would be disastrous for the department. If a person did not have the minimum competence or qualification needed to process a transaction, then the chances were that they would produce a set of financial statements that need to be “panel-beaten”.

Underspending of conditional grants by the provinces could be as a result of a lack of minimum qualifications, lack of planning, lack of agreement on the governance or processes needed to be undertaken in a way that they would pass the audit test.           

Ms Ratsela replied that the root causes for underspending were the lack of capacity to deliver, lack of monitoring and overseeing capital projects, and a lack of planning to ensure that the capital projects were sequenced in a manner that made sense. This had been captured on page 51of the general report.  

The Chairperson agreed that there had been a steady but very slow improvement which could be attributed to the fact that departments had been able to make corrections after submission. This meant that the first-time submissions were not that good.  If 73% had had to make changes to their submissions, then it implied that the quality of the financial statements that were being reported may not be accurate or reliable. He suggested that if the issue of accuracy and reliability could be focused on and ensured that it was established, then a host of other things would fall into place. Issues around IT systems always had a high risk factor. Concerning grants, the Standing Committee on Appropriations could be contacted, because it monitored all expenditure. It had to be clarified whether the issue of conditional grants with municipalities were cases of physical dumping, or whether municipalities did not have the wherewithal to utilise the funds that they were given. Discussions of this nature, as presented by the AG, could be completed only if the National Treasury were present to deliberate with SCOPA on how they fulfilled their mandate and how they oversaw the implementation of the PFMA. The Department of Public Service and Administration and the Civil Service Commission would also be contacted, because these departments were about public servants. The State Information and Technology Agency (SITA) would also be contacted, as it was supposed to lead the processes around IT procurement and IT systems in government. SCOPA would also have to look into how to intensify or enhance interaction with the internal audit functions in the departments and the audit committee, so that the issues around internal controls were sorted out.

There had been instances where contracts had been awarded to companies without a SARS tax clearance. Would it be wise to create a bridge between the AGSA and SARS so that when instances of this nature cropped up, it was immediately reported to SARS so that action could be taken, rather than to just have such issues as observations in the report?  There should be consequences for both the companies involved and those who awarded the tenders.

Responding, the AG said that the suggestion made for an alliance with SARS, was noted and this would be followed up so as to explore opportunities in that regard.  Additionally, all the other comments by Members had been noted. These suggestions indicated that something better could be achieved on a sustainable basis. It must be noted, however, that there was nothing that could beat the existence of very strong daily regular disciplines. If these disciplines were put in place as an institutionalised reality, and the oversight functions were triggered into action so as to identify problems prevalent in the departments, and if reliability and accuracy become the focus, then a lot of ground would be covered. He clarified that the presentation slide on underspent conditional grants was not on monetary basis, but reflected the percentage of municipalities in those provinces. For example, only 8% of municipalities in Gauteng had underspent their conditional grants by more than 10%. This meant that Gauteng was leading with the least number of municipalities, since it had fewer municipalities that underspent their conditional grants.

The Chairperson concluded by proposing that SCOPA, AGSA and SARS would hold a joint meeting to explore the aspects of managing information on companies that were awarded tenders without tax clearances. It would be mandatory for the AG to inform both SCOPA and SARS of repeated instances, so that SARS could pursue it. He informed AGSA that the Committee would communicate with them very soon in this regard.

The Chairperson thanked all in attendance.

The meeting was adjourned.
 

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