Audit outcomes of Department of Public Enterprises: AGSA briefing

Meeting report

Opening remarks by Acting Chairperson

The Acting Chairperson welcomed Members and participating officials to the meeting and indicated that the purpose of the meeting was to get a briefing from the Auditor-General of South Africa (AGSA) on the audit outcome of the Department of Public Enterprises for 2013/14. Apologies were received from the Deputy Minister, Mr Bulelani Magwanishe, Mr N kwankwa (UDM), Dr Z Luyenge (ANC) and the Chairperson, Ms D Letsatsi-Duba (ANC). The Acting Chairperson indicated that the presenter needs to summarise the presentation of the public entities so that Members can have enough time for discussions.

Briefing by the Auditor-General of South Africa (AGSA)

Mr Sybrand Struwig, Senior Manager at AGSA welcomed everyone to the Committee meeting and then followed by introducing his delegations. The presentation was going to focus on the financial statement of the Department and its entities in order to check whether there were any qualifications. The budget for the Department for 2013/14 financial year was R294 million (R1.376 billion 2012/13). The decrease of R1.082 billion in the annual appropriation from R1.3376 billion in the prior year to R294 million is mainly as a result of a drive for individual financial sustainability and profitability within each State-Owned Company (SOC) in a constrained economic environment. Total transfer payment of R57 million (R118 million 2012/13) was made to Denel SOC Limited during the 2013/14 financial year.

The Department provided shareholder oversight to 8 State Owned Companies (SOCs) including Alexkor SOC Limited, Broadband Infranco Limited, Denel SOC Limited, Eskom SOC Limited, the South African Forestry SOC Limited, South African Express SOC Limited and Transnet SOC Limited.  The Department’s primary objective is to ensure that the State’s shareholdings in these companies are financially sustainable and deliver on Government’s strategic objectives. In 2013/14 financial year, the Department and Eskom received a clean audit opinion and this was an improvement from the previous financial year as it received an unqualified audit opinion with findings on predetermined objectives and compliance. SAA and SAX were not included in the audit process as they are yet to release their financial statements.

Denel SOC Limited was commended for receiving a clean audit opinion for the past 5 years. This was a sign of effective leadership, especially looking at the importance of taking immediate action on prior audit findings and those found to have committed transgressions and ensuring that the entity or the Department has required skills. The AGSA often covers the findings, the root cause of financial irregularities and the recommendations on action the management can take to improve the financial statement. The assurance level assess the assurance provided by the senior management, the accounting officers, accounting, executive authority (Minister) and then look at the internal audit and audit committee and then the Portfolio Committee. The reflection of assurance provided talks directly to the audit outcomes as AGSA needs to provide assurance around the areas of senior management accounting authority. The AGSA also looks at the key drivers of internal control and how these would influence the audit outcomes with a major focus on financial statements, performance reporting and compliance with legislation.

There were 4 entities that had findings on compliance with laws and legislation including Transnet, Broadband Infranco, South African Forestry Company and Alexkor.  On performance report, there were 7 entities which had no findings and under financial statements, there were 7 entities with unqualified findings and 3 with outstanding audits. The Department was clean in terms of financial statement presented and this need to be commended as it was a huge improvement. In the financial and performance management, the focus here is on whether there was daily discipline of reconciliation, ensuring that the records are kept for all matters that are in the financial statements or performance report.

Mr Struwig highlighted that on performance reporting, the major problem with most entities was on documentation of sufficient evidence to support the achievements. The daily and monthly controls processing and controls focus directly to misstatements in financial statements, asset management and reviewing and monitoring compliance focusing mainly on legislations. There was also major improvement in the quality of submitted financial statements but still needs improvement in ensuring there was compliance with legislation as this was a major challenge from most entities.

Mr Struwig stated that on key risk areas the AGSA focused on the following 6 key areas including:

§  The quality of financial statements shows that 5 of the entities were in good place and 2 required intervention

§  The quality of the submitted performance report and 5 entities were in good place with 2 that required intervention

§  The supply chain management and there was intervention required in 2 entities,  and 5 that were good place

§  The financial health focused on the ability of the entity to continue operations going forward and there were concerns with 5 of the entities

§  The AGSA also identified problems in human resource as there were concerns with 5 of the entities and the significant problem was in the Department 

§  Information technology (IT) focused on ensuring that the data is provided by the entities meets the requirements for audit purposes and there were concerns with 7 of the entities including the Department

Mr Struwig stated that the assurance level has been divided into 3 three levels and it is critical important for the Committee to play an essential role on the third level. The first level of insurance was where the management involved on the oversight of the entity, as required taking ownership, monitoring and controlling the entire activities of the entity. There is the assurance accounting officer, accounting authorities and the executive authority. The second level of assurance is where there is oversight of National Treasury (NT) and the Department of Public Service and Administration (DPSA) on laws and regulations that had been provided. In each of these entities the Department is an internal control function which they need to provide additional measures from third level which complement with the audit committee that internal audits are required to report to.

The Committee Members had a critical role to play in the oversight of the public sector and the robust financial performance was a key to achieving a clean audit opinion and reduces irregular and fruitless expenditure. The AG was required to have the relevant reporting so as to address accountability and find possible recommendations for poor performance.

Discussion

Ms M Michael (DA) was concerned about the lack of effective leadership in SAA and wanted to know whether there was assistance that was given to the entity in order to address poor performance. Was AGSA performing audits for Mango or only focused to SAA? She commended Denel for maintaining a clean audit opinion for the past 5 years as this was a good story to tell to other poorly performing entities.

Mr Struwig responded that the Department was very active and had so far created and implemented forum consisting of Chief Executive Officers (CEOs), Chief Financial Officers (CFOs) and Chairpersons of the Board together who meet on a quarterly basis on progress report.

Mr Cal Wessels from the Office of AGSA, added that the AGSA and the auditor of SAA and SAX will be co-presenting the audit report and findings of the SAA. He emphasised that all entities were regarded as one organisation and often share critical skills and information. There was a separate audit for Mango, however, the AGSA assists and supervise the process to ensure that all the necessary documents are available. 

Mr N Singh (IFP) asked the name of the two entities where intervention was still required. There was also concern around the failure of senior management to put measures in place to eliminate risks. What kind of assurances was the AGSA looking for? What kind of assurances level was not provided by the entities? What are the measures in place to curb irregular expenditures in entities like SAFCOL (R60 million), ESKOM (R22 million) and Transnet (R49 million?). What was the kind of fraud investigated to SAFCOL? It was worrying that most of the entities spend all their funds without meeting the predetermined objectives. 

Mr Struwig responded that there was progress in the entities in terms of addressing risk issues and their accountings and financial are being reviewed to avoid risk areas. All the senior management is working together and there is effective and efficient monitoring mechanism put in place to ensure that there are necessary skills support provided to assist the entities moving forward. The investigations of fraud on SAFCOL was still under way and promised to forward to the Members as soon as completed and the issue was primarily on the budget management of the entity.

Mr R Tseli (ANC) noted that some of the targets set by the entities were unrealistic and asked whether the internal auditors are used effectively to address this problem

Mr Struwig responded that there was budget allocated to each Department and targets are set within the budget limit and performance indices so that the personnel are aware of the major focus areas. There was target ratio to ensure that the entities are given targets that are realistic and achievable and this again depends mostly on the available resources. There were quarterly meetings to ascertain the state of position of the targets and plans in place to achieve them. 

Mr P Van Damme (DA) asked about the reason for the delays in the finalisations of SAA report as it was taking more than a year now.

Mr Struwig responded that the delays in the finalisations of SAA report was concerning and suggested that the question must best directed to SAA, though assured the Members that there was progress so far and measures are being put in place and action plan to ensure that the report is  released soon.  

The Acting Chairperson mentioned that in the next Committee meeting, the entities will be asked for detailed reports of various entities. She thanked the AGSA for the presentation and emphasised that there was a lot that has been achieved but there is always a room for improvement for other entities. The concern should be on developing the country in addressing pressing challenges like unemployment, poverty and inequality as identified in the National Development Plan (NDP) and the State of the Nation Address (SONA).

The meeting was adjourned.