Department of Social Development & the South African Social Security Agency: Annual Reports and Financial Statements 2009/10: hearing with Minister and Deputy Minister

Public Accounts (SCOPA)

13 June 2011
Chairperson: Mr T Godi (APC)
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Meeting Summary

In the presence of the Minister of Social Development, the Department of Social Development and its entity, the South African Social Security Agency, were questioned on their Annual Reports and Financial Statements for 2009/10. The Department had received a qualified audit opinion, and the South African Social Security Agency a disclaimer.

The Chairperson was displeased at the absence of Cash Paymaster Services, which held the tender for disbursing funds on behalf of the South African Social Security Agency. By not attending, the entity showed a disregard of state institutions.

Members asked the Department about transfers and subsidies, what the lines of accountability between the Department and the South African Social Security Agency were, and why the South African Social Security Agency had been established without clear lines of reporting. 

The Department argued that its reporting lines were clear, but that there was dual accountability between the Department and its agency for the funds allocated for transfer to households. The Department had instituted a corporate governance framework.

Members asked if the Department's and the Agency's audit committees had alerted the accounting officers to the negative impact of having some individuals sitting on both audit committees; asked what measures the Agency was taking to ensure proper systems of control and verify the various data bases; asked if Cash Paymaster Services was a service provider for the Department or for the Agency and how long Cash Paymaster Services was contracted by the Agency; appreciated that Cash Paymaster Services had been employing many young people and regretted that Cash Paymaster Services had not attended the meeting.

The Department responded that it was encouraging the two audit committees to have joint meetings. The Agency was accelerating processing its backlog of appeals and would recruit through the Expanded Public Works Programme young people to assist staff at the warehouse and registry phases to sort loose correspondence. The Agency would progress to an automated system but would continue to have a service provider for the next five years to avoid making mistakes as in other areas in which the Agency had rushed too quickly into automation.  Current contracts, including that of Cash Paymaster Services, would end on 30 September 2011.

Members asked the Agency about payables and bank overdraft, and were very unhappy about the lack of information, evidence or documentation. Members asked how the Agency had begun converting to a new system of accrual-based accounting with staff members who lacked the necessary skills; argued that the problem was not the conversion but the lack of preparation; asked why information was missing from the files; were reluctant to allow an explanation based on assuming that a manual system was inherently disorganised;  asked why the staff of the Agency had authorised payments without sufficient documentation;  and  what the Agency was doing to achieve an effective internal audit unit.

The Agency replied that there had been a massive backlog of filing and had faced staff and skills shortages, which were now being addressed. It denied making any payments without authorisation or supporting documentation. The Department said that it was not fair to question officials on information to which they were not privy.

 Members questioned the Agency on receivables and inventory. Public entities were required to use the accrual accounting system. So someone was guilty of serious dereliction of duty. This new system was implemented without a pilot and with a total lack of capacity. Why was an alternative route not taken to avoid a disclaimer? Why was no action taken against the previous permanent chief executive officer? Members observed that some of the Agency's figures were not worth the paper they were printed on.

The Agency responded that the then permanent chief executive officer had been put on special leave, and that the under statement had become apparent only subsequently. 

A Democratic Alliance Member observed the red hot ball of accountability being tossed around on the other side of the room between the Agency and the Department. He asked about the sheer magnitude of the increase of the accumulated deficit, about intangible assets, what happened to the suspended (permanent) chief financial officer, and about the role, if any, of the Special Investigating Unit. 

Members hoped that they would not hear the words
there were assets lying on the floor that were not captured again. It created a picture of management's casualness at various levels.

The Minister acknowledged that the Agency had been basking under the exemption from the National Treasury. Automation would assist in improvement of the database. The Agency would strive to adopt the best payment model; however, cellular telephones might not be the best approach. Rather than engage contractors for information technology, it was preferred to employ people internally. The Department would strengthen its monitoring role over the Agency.

Meeting report

Introduction
The Chairperson welcomed the Hon. Bathabile Dlamini, Minister and the Hon. Bongi Maria Ntuli, Deputy Minister of Social Development and delegates from the Department and from the South African Social Security Agency (SASSA, the Agency), and, in particular, Ms Virginia Petersen, the new Chief Executive Officer (CEO) of SASSA. He observed that SASSA played a critical role in the alleviation of poverty. The extent to which it was able to fulfil that mandate was very important, but the Committee was disappointed that the Cash Paymaster Service (CPS) officials appeared unwilling to attend, since SASSA itself, through its own employees, did not disburse cash. The Committee had already made considerable effort to accommodate CPS. He was perturbed that the Government had given a tender to certain people who had no regard for state institutions: for such people it was just a money-making process. He emphasised the Committee's displeasure with the CPS and reminded all concerned that the CPS remained on the Committee's agenda.

The Minister thanked the Chairperson for having kindly allowed a postponement because of the Department's summit in Durban and the opportunity to prepare properly.

Transfers and subsidies
Ms T Chiloane (ANC) began questioning the Department of Social Development (DSD, the Department) on transfers and subsidies (DSD, Annual Report, page 115). She noted that the Department's annual financial statements had received a qualified audit opinion in contrast to the two previous unqualified audit opinions. It was important to note that this qualification occurred, not from factors within the Department itself but on account of SASSA.

Ms Chiloane asked what the lines of accountability between the Department and SASSA were.

Ms Chiloane asked why SASSA had been established without clear lines of reporting between the Department and its own agent.

Mr Vusi Madonsela, Director-General, Department of Social Development (DSD, the Department) disagreed with the view that the lines of reporting between SASSA and the Department were not clear.  They were clear, but perhaps the difficulty might be that the reporting lines as they stood in the current arrangement were not sufficient for the Department to do what, in the eyes of the Auditor-General (AG), it was supposed to do. The Department currently had systems of oversight over SASSA; these systems related to the monitoring of monthly financial and quarterly performance reports. The Department received those reports and reviewed them within the limits of the current arrangements. So the reporting lines were clear. What was complicated was that, unlike in many relationships between a department and an agency established in terms of Schedule 3A of the Public Finance Management Act (PFMA), where ordinarily funds that were allocated for the work of the agency would ordinarily be permitted for transfer, in the instance of SASSA this was not the case. This gave rise to what was called, colloquially, dual accountability of the Chief Executive Officer (CEO), SASSA, and the Director-General of the Department.  There was thus a conflation of accountability in respect of the money allocated for transfer to households.

Ms Chiloane asked what plans the Department had to ensure proper lines of reporting to avoid this dual accountability.

Mr Madonsela replied that the Department had established a corporate governance framework together with SASSA. This framework sought to bring together all components of the Department that had an oversight responsibility over SASSA. This included the branch responsible for social assistance together with the finance unit, the entity oversight chief directorate which was coordinating the corporate governance framework and which was responsible for the governance oversight over SASSA. What had become apparent from the findings of the Auditor-General was that there were other components of the Department which would need to be included in that framework. Those would include the Department's internal audit function which would need to satisfy itself of the veracity of the information that the Department received through the quarterly reports from SASSA.  However, it was still necessary to ensure consistency of this arrangement with the status of a Schedule 3A entity which was independent in its operation. The extent to which the Department was able to exercise oversight in the manner contemplated by the Auditor-General was a matter that remained to be tested.

Ms Chiloane asked Mr Madonsela what he had to say about leadership, governance, and the clearly defined responsibilities and accountability in terms of financial performance management as raised by the Auditor-General (DSD, Annual Report, page 117).

Mr Madonsela' indicated that his response should be linked to his earlier reply. He added, however, that whilst the Department had taken steps to fulfil the expectations of the Auditor-General, it had raised the same question that had been raised previously by this Committee on the flow of funds, which was at the heart of the difficulty that the Department was trying to resolve. The Minister had already raised this issue with the Minister of Finance. The National Treasury had since been tasked with finding possible ways of permitting the funds to flow in a manner to avoid the problems of dual accountability referred to.

The Chairperson preferred to focus on the issues arising from the failure of SASSA to do its work.

Ms Chiloane would now focus on SASSA and transfers. He referred to the Auditor-General's remarks about SASSA's Audit Committee whose internal controls were ineffective (SASSA Annual Report, page 39) and asked if the audit committees had alerted the Department to the negative impact of having some individuals sitting on both audit committees– that of SASSA and that of the Department. 

Mr Madonsela was not sure if he still had to respond on matters of transfers or respond to the question as posed.

The Chairperson asked him to respond to Ms Chiloane's question as she had asked it.

Mr Madonsela replied that the audit committees were there to assist the Department's accounting officer and the accountable authority in the Agency, namely the CEO, in the management of finances in the two entities. At present the Department and SASSA had separate audit committees, albeit that, as far as he could recall, only one person sat on both, though it could be more. In fact, rather than it being seen in a negative light, it was probably a good thing. In fact, it was being suggested that it was desirable to have one audit committee, since the transversal risks were effectively part of the same continuum. At present the Department was encouraging the two audit committees to have joint meetings to avoid some of the challenges that the Department and SASSA currently faced. As Members would have seen from the audit reports, matters related to transfers to households had to be dealt with by the audit committee of the Department of Social Development, yet the operations about which the audit was concerned, were to be dealt with by a different audit committee: these operations were the responsibility of SASSA and SASSA appeared before a different audit committee in which those matters did not arise because those matters were not on the financials of SASSA. This was an untenable situation, which was why, in the interim, it was suggested, and indeed supported, that the two audit committees must, from time to time, meet together to compare notes, and to ensure that the continuum was reviewed from beginning to end. 

Ms Chiloane referred to the Auditor-General' statement that in respect of R84 billion of transfers and subsidies his office could not satisfy itself on the occurrence of social grants expenditure to the value of some R10.5 billion. She asked if the Department could explain this.

Mr Madonsela replied that the Auditor-General had extrapolated on the basis of samples taken from across the provincial offices of SASSA, in which samples the Auditor-General could not find all the documents intact in respect of a certain percentage of the beneficiary population. The estimated amount in this regard came to some R10.5 billion. That had to do, as far as Mr Madonsela understood it, with the fact that when the Auditor-General did that exercise, he found some of the beneficiary files without all the documentary files that were supposed to be in place. This was the main issue that had resulted in the Department's audit qualification, in that the Auditor-General was not favoured with all the documents it should have had. Mr Madonsela hoped that this matter would be covered fully when the Agency responded.

Ms Chiloane asked SASSA how many beneficiaries were being paid, even though there were no details of the means test in their files.

Mr Bandile Maqetuka, Executive Manager: Grants Administration, SASSA, replied that the number of missing files in terms of the data population of beneficiaries was 545 076.  The number of critical missing documents was 159 302. Therefore the answer to the question was 159 302 missing records from the files.

Ms Chiloane asked what measures the Agency was taking to ensure proper systems of control and clean up the various data bases on grants.

Mr Maqetuka replied that SASSA had put into operation, in consultation with the National Treasury and with the Department of Social Development, a project plan to address the exceptions that he had just mentioned. SASSA had endeavoured to ensure that all recent documents were correctly placed in the correct files. It had also embarked on a project to ensure that all missing files were presented for audit purposes. SASSA had also improved supervision at a service point level. It had noted that problems had been caused by lack of supervision at the level of service points. SASSA had now appointed supervisors at service offices to ensure that all applications were complete and all the required documentation was filed in the correct files. Responsibilities had also been assigned to ensure quality assurance at an entry level to avoid filing any files that were missing critical documents.

Ms Petersen added that as the new CEO she had reviewed all existing programmes and felt that it was incumbent upon her to strengthen them while accelerating SASSA's addressing its backlog of appeals and would recruit, especially through the Expanded Public Works Programme (EPWP), young people to assist staff at the warehouse and registry phases to deal with loose correspondence and sort it so as to give SASSA the edge in tackling the problem. She saw it as her job to more than halve the projected period of three years and had included this objective in her performance agreement with the Minister.

Ms Chiloane asked if CPS was a service provider for the Department or for SASSA.

Ms Petersen replied that there was a Service Level Agreement (SLA) signed by SASSA with the different pay contractors, in which SASSA currently monitored and evaluated services provided by the contractors.

Ms Chiloane asked how long CPS was contracted by SASSA for the paying of grants and if SASSA had any plans to do the work itself eventually.

Ms Petersen replied that a new tender was out and soon to be concluded. It was one of SASSA's key priorities that organisation’s, during the next five years, would progress to an automated system in which it would be the paymaster itself. However, SASSA would continue to have a service provider in that period, to avoid making mistakes as had been made in other areas in which it had rushed to quickly into automation.  So the new tender was for the additional five years. It was hoped to complete processes for the tender by October 2011. It was not yet known who would be awarded the tender.

Ms Chiloane wanted to check on the terms of reference of CPS until the time of the new tender. One appreciated that the CPS had been employing many young people. The problem was the way in which people were being treated. It was unfortunate that CPS had not attended the meeting. The CPS tenders were being renewed monthly; this was why she wanted to verify CPS's terms of reference.

Ms Petersen replied that SASSA obviously had a situation whereby at the end of September 2011, the tenders for the current service providers would come to an end, and by then SASSA should have completed the process for the new tender. At this time one would know exactly to whom the tender would be awarded, because there would be the technical processes of the bid evaluation and adjudication.  The contracts of the CPS and anyone else that had been contracted until this time would end on 30 September 2011.

Payables and bank overdraft
Ms M Matladi (UCDP) asked SASSA about payables (SASSA Annual Report, page 52). The Agency had received an audit disclaimer.  What had contributed to that disclaimer was the way the Agency was carrying its payables. She was very unhappy about the R178.1 million that could not be accounted for.  There was no information, evidence or documentation on it.  Also on the same page was R31.5 million unaccounted for, and the Auditor-General could not do his work for want of information and documents.  Why did SASSA lack all the information and documents necessary for audit purposes?

Ms Petersen asked Mr Coceko Pakade, Chief Financial Officer (CFO), DSD, who had then been the Acting Chief Executive Officer, SASSA, to respond.

Mr Pakade replied that the Auditor-General had detected six areas where huge balances could not be verified. SASSA had lacked crucial skills to adapt to the new reporting system, which required moving away from the old cash based system to the new accrual system that was required by the PFMA.  There had also been time constraints together with the rush to implement the new financial management system had replaced the old inherited from Government. Most of the balances picked up by the Auditor-General occurred during the conversion of that information. Most of the reconciliations were not complete. The fundamental reasons therefore were that there was a requirement for detailed planning and a roll-out plan to ensure within two to three years a state of readiness to ensure the acquisition of the requisite skills for the new system. Unfortunately for the Agency, the three years exemption from the National Treasury for the requirement to use accrual based accounting in accordance with the PFMA had elapsed. This was the main cause of the problem. Even if it had been possible for the Auditor-General to obtain supporting documentation, there would have been problems with figures that had not been converted to the new system.

Ms Matladi said that it was very clear at the time of audit that SASSA could not know how and when the problem started. Yet now SASSA was able to trace the problem. She asked why.

Mr Pakade replied that great efforts had been made to reconcile and check most of those balances since the time of the audit.  Hence SASSA had identified for each balance what was the root cause of the discrepancy. Most of those balances had been reconciled. Corrective measures included identifying the requisite skills. As he had indicated earlier, SASSA had moved to a new system of accounting.

Ms Matladi asked how SASSA employed people who were not experts in their work.

Mr Pakade replied that its staff had been experienced with the modified cash basis system of accounting that it had inherited from Government. The new system required a completely different methodology and capacity. SASSA had sought to recruit staff who were skilled in the accrual system of accounting and simultaneously re-train existing staff.  It was thus a two-pronged approach, together with hiring external accounting firms to assist.

Ms Matladi reminded Mr Pakade that the Committee dealt with the post mortem, not what the Department or Agency was doing at the present. She was interested in what the problem was then, at the time of the audit. She further asked why salary controls were not cleared at the end of the year after payments were made.

Mr Pakade replied that reconciliations were not completed. The new system was not properly understood by the people who were implementing it.

The Chairperson failed to understand why SASSA had begun converting to a new system with staff who lacked the necessary skills.

Mr Pakade replied that this was actually the root cause.

The Chairperson accepted this but asked why it had been allowed to happen.

Mr Pakade replied that the CEO at the time was faced with the requirement to comply with the PFMA, because the National Treasury was reluctant to extend the three years exemption granted when SASSA was formed in 2006.

The Chairperson argued that the National Treasury had granted an exemption that extended for three years with the object that SASSA would begin preparing for when the exemption would end, not rush to prepare at the end of the exemption period. 

Mr Pakade said that this was the problem that he had identified when he joined SASSA as Acting CEO.

The Chairperson said that this was thus a self-made problem rather than “one that struck like a thunderbolt from the sky”. Nothing was done during the period of exemption, and then, at the end of three years, the Agency had to try to put something together. Here one came back to the responsibilities of the Department in monitoring. What was the Department doing to ensure that there was preparation for the end of the exemption? The problem was not the conversion; the problem was the lack of preparation.

The Chairperson asked further why information was missing from the files. Why were files missing? How?

Mr Pakade replied that there was a massive backlog. Also when beneficiaries migrated the majority of files remained in the regions were the beneficiaries had resided before. Furthermore, the bulk of the staff were in the front end office. There was a serious shortage of staff. The third reason was the manual system which made it hard to track all the interventions.

The Chairperson asked if that was a justification.

Mr Pakade replied that this work should have been done in the first few years of SASSA.

The Chairperson was reluctant to allow an explanation based on assuming that a manual system was inherently disorganised. After all, even if the work was done manually, it was still done by human beings and documents could surely be put in the right place. He said that it was some consolation to be told that SASSA now knew what the problem was, but the balances should have been reconciled at the time.

Ms Matladi asked why the staff of SASSA had authorised payments without sufficient supporting documentation.

Mr Thuli Mothusi, Acting CFO, SASSA, denied that no transactions were paid made without authorisation; if that was the case, it would have been detected by the Auditor-General. There were reasons attached to the payables, as indicated in the report, which were merely because of duplicate transactions from the system and incorrect linking of elements in terms of the payroll. SASSA had never paid any supplier without supporting documentation.

Ms Matladi said that it was a fact. It was a pity that Mr Mothusi did not have the notes from the Auditor-General which stated that SASSA had paid without supporting documentation. Her question was why?

Mr Madonsela intervened to say that it was not fair to question officials on notes to which they were not privy.

Ms Matladi asked why SASSA had not acted on recurrent recommendations of the Auditor-General, and how SASSA would ensure that the same problems would not recur in the next financial year. She wanted proof that next year the Committee would not be talking to SASSA about payables again.

Mr Pakade replied that previously SASSA had an unqualified report which indicated that the circumstances which led to the disclaimer were out of the ordinary and arose from the conversion to the new systems.

The Chairperson noted that although SASSA had previously received an unqualified audit report, there had been substantive issues which had led to engagements with the Committee in the past.

Ms Matladi questioned transactions without supporting documentation. Also, she questioned the bank overdraft which was not supported by documentation.

Mr Mothusi explained the bank overdraft of R35 million. Firstly, some of the transactions were because of the validation of the suppliers' banking details. These details had been rejected by the bank, so the transaction could not go through the bank. 

The Chairperson asked if these explanations were given to the Auditor-General.

Mr Mothusi replied that the Auditor-General, who had questioned the reconciliation of the R35 million, had been informed.

The Chairperson asked if there was no reconciliation.

Mr Mothusi confirmed that there was none, because SASSA had a problem with reconciliation for the whole financial year, which had impacted negatively on all the transactions of the Agency.  

Ms Matladi asked if this allowed SASSA to contravene the PFMA regulations.

Mr Mothusi denied that SASSA had not followed the PFMA. When payments had been made through the bank, there would be confirmation that the supplier concerned had been paid. If payments were not made, reasons would be given.

The Chairperson asked the Office of the Auditor-General what the problem of the R35 million was.

The Office of the Auditor-General replied that the Auditor-General had received financial statements only by 10 August 2010. By 31 May 2010 there were still no financial statements. By 10 August 2010 the Auditor-General expected financial statements with all the reconciliations. As auditors, the Auditor-General audited reconciliations and audit evidence but not audit reasons. For the Auditor-General that was the biggest issue at that stage. SASSA gave reasons but the Auditor-General asked for the bank reconciliations so that the Auditor-General could audit them, but SASSA did not comply; instead it just gave its reasons.

The Chairperson noted that there was no evidence.

Ms Matladi thanked the Office of the Auditor-General. In addition, she asked if internal controls in the finance section were effective. If not, what was being done?

Mr Pakade replied that there had been challenges to internal control in the year under review. Some of the modules did not speak to each other. The creditors module must speak to the general ledger. Those controls were not effective. The environment was inadequate and did not assure the complete safety of all the assets and liabilities.

Ms Matladi asked what SASSA was doing to achieve an effective financial unit.

Mr Pakade referred to the measures indicated by Ms Petersen. SASSA had identified the key governance issues to be addressed and had already initiated joint audit committees to address the internal audit function. Recruitment was under way to achieve the necessary skills. Consultants were being hired to train the financial staff. It was a multi-pronged approach. Ms Petersen would be able to monitor progress.

Ms Matladi asked what the cost of using consultants for training the financial staff was.

Mr Pakade replied that the cost was R15 million.

The Chairperson observed that this was the cost of doing nothing during the three years exemption.

A Member asked if SASSA gave its financials to the Department, which in turn gave them to the Auditor-General.

Mr Madonsela replied that SASSA was a Schedule 3A entity with its own CEO and its own audit committee. So SASSA interacted separately with the Auditor-General.

Receivables and inventory
Mr R Ainslie (ANC), in the absence of Mr S Thobejane (ANC), questioned SASSA with reference to its Annual Report, page 53. He suspected that the reasons for these two disclaimers were very much the same as those uncovered by Ms Matladi- a lack of capacity and inadequate financial system together with lack of filing of filing documentation. The Chairperson had said that SASSA had loitered for three years. However, SASSA was originally established in 1999 as a Schedule 3A public entity, and had therefore actually wasted 12 years. Public entities like SASSA were required to prepare their annual financial statements according to the accrual accounting system. SASSA must have been aware of this since 1999. So someone was guilty of serious dereliction of duty. Why were those 12 years wasted? The Director-General of the Department must oversee this entity of the Department.

The Chairperson said that whether it was three years or 12 years, the principle was the same.

Mr Ainslie said that it seemed that this new system was implemented and rolled-out across the country without a pilot project and with a total lack of capacity. Who was responsible for this gamble? Why was an alternative route not taken to avoid a disclaimer?

The Chairperson asked who was responsible for this decision and what action was being taken against them.

Mr Pakade replied that in the absence of a board it was the then CEO who took a decision.

Mr Ainslie asked why no action was taken against him.

Mr Pakade replied that he was relieved of his duties. 

Mr Madonsela said that the then CEO at the material time had been relieved of his duties for different reasons. These matters regarding the introduction of the new system arose at the time when he was already on special leave in the period leading up to his being relieved of his duties.  So he would not have been in a position in which he would have to answer for the introduction of the new system. 

The Chairperson asked who then was responsible. 

Mr Ainslie said that somebody must have taken the decision to gamble and roll out this complicated system. Who were they? Who was responsible?

The Chairperson asked who, in the absence of the then CEO, was running SASSA.

Mr Madonsela replied that no one other than the CEO of that time would have taken such a decision.

Mr Madonsela added that when issues arose from the introduction of the new system, the CEO at that time was already on special leave in the period leading up to the termination of his services.

The Chairperson noted that no action was taken on those matters.

Mr Ainslie said that this was what he suspected.

Mr Ainslie observed that SASSA had a huge capacity problem. He asked what its vacancy rate was.

Mr Ainslie asked about the inventory (SASSA, Annual Report, page 77,note 6) and the huge difference between 2009 and 2010 figures. Why was there a quadrupling to R24 589 860 million – was this an error?

Mr Mothusi replied that it was an error. Because the system was implemented late, in April 2010, SASSA did not have enough time to check the accuracy of the information in its inventory. Reconciliation of physical stock did not take place.

Mr Ainslie accused SASSA of preparing financial statements whilst knowing that they were incorrect.

Mr Mothusi said that SASSA did not know its figures were overstated until the current financial year.  In the current financial year the figure had decreased to R14 million. This meant that there was an overstatement of R10 million.

Mr Ainslie asked if there were any other errors of a similar kind, for example, trade and receivables (SASSA Annual Report, page 78, note 7).

Mr Mothusi replied that this was also an overstatement.

Mr Ainslie asked if this was an error.

Mr Mothusi replied that this was an overstatement.

Mr Ainslie insisted it was an error.

Mr Mothusi conceded that it was. An overstatement was like an error.

Mr Ainslie asked Mr Mothusi to point out all the errors in SASSA's financial statements and asked him to what extent SASSA's financial statements were not worth the paper on which they were printed. 

Mr Mothusi attempted to give reasons.

Mr Ainslie did not want the reasons but wanted to know the extent to which the financial statements were incorrect.

Mr Mothusi began to list some instances, such as on the inventory, but was interrupted.

Mr Ainslie said that perhaps one should be methodical.

The Chairperson asked Mr Mothusi to give references to the Notes 3-21 in the Annual Report, pages 74-84.

Mr Ainslie counter-suggested that Mr  Mothusi proceed note by note from page 74.

Mr Mothusi did so. The major errors were in notes 3 to 13.

Mr Ainslie said that the figures were not worth the paper they were printed on. He asked why the Committee had not been notified. Why had the Speaker of the National Assembly not been notified that the report was completely inaccurate?

Mr Pakade replied that there had been no intention to submit incorrect information. The Acting CFO had indicated that the magnitude of the error was established only after further reconciliations. Part of the challenges was the lack of skills. The permanent CFO was on suspension. SASSA was recruiting appropriate skills so that this matter would not be repeated.  Management relied on the information provided by the CFO. At the time the [Acting] CFO had not able to give management that assurance because of the lack of skills. This unfortunately was the reality.

Mr Ainslie rested his case. He was sure that these were good reasons, but complained that the Committee was not notified.  He protested against an assumption that Members did not read financial reports or understand them.

The Chairperson observed that once an audit report was given a disclaimer it raised the serious possibility that there were errors, because certain figures from supporting documents could not be confirmed. He expected corrections in the next SASSA Annual Report.

Accumulated deficit and intangible assets
Mr M Steele (DA) said that it was a depressing experience to observe the red hot ball of accountability being tossed around on the other side of the room between SASSA and the Department.  Whilst SASSA had received a disclaimer, the Department had received a qualified opinion precisely because of the problems in the Agency.

Mr Steele asked what happened to the suspended (permanent) CFO who had been suspended, and about the role of the Special Investigating Unit (SIU) in the matter.

Ms Petersen replied that disciplinary processes had commenced on 01 June 2011 after completing a charge sheet. The suspended (permanent) CFO had sought legal assistance and the proceedings would resume on 16 July 2011. SASSA would inform the Minister and the Committee about the developments going forward. As far as the charges related to management and expenditure without proper clearance within SASSA, there was no connection with SIU in the matter of the suspended (permanent) CFO. However, SASSA had a relationship with the SIU dating back to 2005.  Currently Ms Petersen was reviewing the agreement with the SIU. SASSA would keep the Committee informed on the conviction rate. 

Ms Thandi Sibanyoni, Executive Manager: Internal Audit, SASSA, gave the figures on the accumulated case numbers which stood at 15 238 people brought before the court as at the end of March 2010.  14 325 cases had been finalised by the court. 13 145 people had been convicted.

Mr Steele asked for the figures in writing.

The Chairperson was pleased that SASSA had used the SIU since it was a public entity. It was cheaper and more cost effective. The public sector must be kept public. This was how it was supposed to be.

Mr Steele asked about the sheer magnitude of the increase in the accumulated deficit which had increased to R884 million from R393 million in 2009 (SASSA Annual Report, page 56). Why was SASSA still in business if this was how it conducted its affairs?

Mr Pakade explained the main reasons for the deficit incurred by SASSA as the commitments that the Agency had incurred over the years which were brought into the books in the year under review as the Agency converted to the accrual system of accounting and the challenge of managing its own budget. 

Mr Steele noted that SASSA had taken on certain obligations from the past.

Mr Pakade replied that there were other commitments incurred as SASSA had established offices throughout the country.

Mr Steele asked what handling fees were.

Mr Pakade replied that these were fees paid to contractors for carrying out the work of making payments to beneficiaries.

Mr Steele understood these handling fees to be payments to others to do the work that SASSA was supposed to do. 

Mr Pakade replied that SASSA would do this work if it had the capacity to do so. SASSA's long term strategy was to develop that capacity. In the meantime it sought to rework the contracts so as to be favourable to Government. SASSA had inherited a very unfavourable contract. This was why it had put out a new tender to rid itself completely of these old contracts.

Mr Steele said that SASSA was established to administer, manage and pay social grants. Yet it did not have the capacity to do that which it was established to do.

The Chairperson commented that this was the case. SASSA was not yet disbursing grants. 

Mr Steele asked about the R13.7 million of the accumulated deficit for which the Auditor-General could not find complete accurate records. He also wanted to know about intangible assets.

Mr Mothusi replied that SASSA had two major accounts. These related to assets that had to be recaptured from 2006, when SASSA began, until 2010.  Because of the volume of the work, some of the assets had not been recaptured by 2010.  When SASSA prepared its financial statements, the Director-General had picked up some of the assets that were 'lying on the floor' and not tallying with the asset register.

Mr Steele noted that “there were assets lying on the floor that weren't captured
. He hoped that Members never heard those words again.

The Chairperson agreed. It created a picture of management’s casualness at various levels and a lack of monitoring and supervision. 

Ms Petersen replied that SASSA was now working with bar-codes and taking proper care of tax payers' assets.

Ms Steele said that Members of the Committee had long memories and would hold Ms Petersen to her assurance.  He asked about the intangible assets. What was the accounting policy on the valuation of computer software? He could not understand how computer software could have a value and therefore be considered an intangible asset.  How was its depreciation reckoned, and how did the R37.2 million relate to the software?

Mr Mothusi replied with reference to Generally Recognised Accounting Practices (GRAP) which defined intangible assets and how to calculate them.  The Auditor-General had insisted that some of the intangible assets were not disclosed – hence there had been understatements of these assets.

The Office of the Auditor-General responded that the Oracle system implemented by SASSA was not part of those assets at that time. Not all the computer software that SASSA had on hand was valued at the correct value.

Mr Steele understood that there was an understatement of the assets and the Auditor-General was not able to verify SASSA's assessment.

Mr Mothusi said that was correct and that there were some development costs that were not included in the intangible assets. 

Mr Steele said that this should have been included in the books according to the GRAP directive.

Mr Mothusi agreed.

Mr Steele observed that it did appear in this instance that SASSA knew what needed to be done going forward.

The Chairperson agreed.

Mr P Pretorius found difficulty with the presentation of information in SASSA's 2009/10 Annual Report as compared with the previous year's report. It was very difficult to compare operating expenditure with that of the previous year. He asked about the R1 billion overdraft mentioned on page 26 of SASSA's Annual Report.

Mr Mothusi replied that this was an error. The reference should have been to a deficit. 

Mr N Singh (IFP) said that SASSA was working on an operating deficit of some R453 million (SASSA Annual Report, page 44), yet the PFMA ruled that a public entity could not budget for a deficit. He asked if the Department had a service level agreement with SASSA. How would the Department and SASSA rate their budget management?

Mr Pakade replied that there had been an improvement on the deficit for the year.

Mr Madonsela replied that the Department signed a service level agreement with SASSA on an annual basis. This agreement set out the responsibilities of the two parties. It was the Department's responsibility to oversee, support and formulate policies. SASSA's responsibility was to ensure the payment of social grants and provide quarterly performance reports to the Department in the normal course of its business together with regular monthly financial reports.

Mr Singh asked if there was monitoring of the service level agreement.

Mr Madonsela replied in the affirmative. 

Mr Ainslie said that there seemed to be a lack of oversight by the Department. Why did the Department not intervene? It would have known as far back as 1999 that eventually its public entity would have to account using the accrual system.

Mr Madonsela replied it was only in 2006 that SASSA had come into operation. It had not even been contemplated in 1999, when the PFMA became law. In 2006 SASSA was granted an exemption, initially for two years, with an extension of one year. There was a conflation of matters of law and matters of opinion. As a matter of law, SASSA was an independent entity.  The Department exercised oversight only over SASSA's achievements on the goals set for it as a Schedule 3A entity, not over its operations. Involvement in the daily operations of SASSA would make nonsense of its separate existence, although the Auditor-General had expressed the opinion that the Department's arrangements for oversight were not adequate and had advised introducing into its oversight role measures that would, in the Department's view, intrude on the operations of SASSA. The Department would take a leap of faith in line with the Auditor-General's expectations and impose on the good nature of the Chief Executive Officer of SASSA.  It would have to extend the capacity of the internal audit to cover offices in nine provinces. It was a very complex matter.

Mr Ainslie asked about the vacancy rate in SASSA. His research showed an establishment of 18 000 positions, but with only about 7 000 filled – a 58% rate of vacancies. This was why one saw so many problems. The staff structure was originally premised on the basis of one staff member to 800 beneficiaries. Currently there was one staff member to three thousand beneficiaries.  Did SASSA have enough staff to do the filing. 

Ms Petersen confirmed Mr Ainslie's figures but said that they must be seen against SASSA's current operations and projections. National Treasury would have to be lobbied to understand SASSA's situation.

Mr Pretorius asked about the sustainability of the whole social grant system. The number of beneficiaries had grown by 28% over a four year period. This amounted to an annual growth that exceeded growth in gross domestic product (GDP). How could this be sustained? Did the Department envisage a stabilisation in the number of beneficiaries.

Mr Steele asked SASSA about the Office of the Inspectorate for Social Assistance to be established in the 2013/14 financial year. What plans were in place to address the need to combat social grant fraud in the meantime?

Ms Petersen said that the Department would address this matter.

The Department responded that it did not foresee any significant growth in the number of beneficiaries as long as the economy continued to grow. 

Mr Steele asked the Department about its future use of technology and cost savings measures. He noted that 13 million South Africans, 27% of the total population, did not have bank accounts yet 94% of the adult population owned or had access to cell phones. He asked if the Department would consider using cell phone technology to facilitate grant payments in the near future. This could save a good deal of public money. 

Ms Petersen said that SASSA would insist on thorough piloting of any new systems to avoid mistakes.

Ms Matladi said that the Department had a mandate to pay social grants but delegated this to an agency, namely SASSA. However, SASSA failed, so SASSA employed CPS to do so. How much of the tax payers' money was being used to defray merely the cost of managing the paying of grants. Was it necessary to spend that money?

Ms Petersen said that it was not just CPS which was involved, but other payment contractors.

Mr Pakade added that the new payment model was likely to affect substantial savings. A thorough cost benefit study and piloting was needed to ensure the correct choice of a replacement system.

Mr Singh asked who was responsible for ensuring proper facilities were available for old people to receive their payments.

Ms Petersen acknowledged that there was work to be done.

Conclusion
The Minister assured Members of the Department's efforts to ensure good governance, service delivery, dignity and human rights for recipients. The Department was facing the challenges of a huge deficit overdraft and the migration from the cash basis to the accrual system of accounting. Sophisticated people were needed. Moving from an unqualified audit to a disclaimer was cause for great concern. The Department and Agency had been basking under the exemption from the National Treasury. Progress, however, had been made towards levelling the playing field. The Agency was working to halve its deficit and reduce irregular expenditure. The new Chief Executive Officer had been appointed. Automation would help in establishing a sound data base. She acknowledged the work of the previous Minister. She thought that cellular telephones might not prove a satisfactory solution to the challenge of making payments. It was desired to employ people internally rather than depend on contractors for information technology. There would be reconciliation and balancing of the statements on a monthly basis, and strengthening of the Department's monitoring role of SASSA.

The Chairperson adjourned the meeting.

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