Department of Public Works 201415 audit outcomes: briefing by Auditor-General

Meeting report

Auditor General of South Africa (AGSA) presentation

Mr Vusi Msibi, Corporate Executive, AGSA, explained the scope of the audits. The audits conducted by AGSA provide assurance that they are free from misstatements, they look at the usefulness and reliability of the information in the annual performance report, report on material non-compliance with relevant key legislation and finally, they identify the key internal control deficiencies to be addressed. The AGSA also assesses the risk of fraud. However, they do not deal with fraud identification and fraud prevention.

Ms Ilze Slabbert, Senior Manager, AGSA, explained the regression in audit outcomes, especially on the Independent Development Trust (IDT), which had previously been qualified. In this financial year it had received a disclaimer, while the DPW, the Construction Industry Development Board (CIDB) and the Council for the Built Environment (CBE) had remained unqualified, although they had compliance findings. The Property Management Trading Entity (PMTE) remained qualified.

No opinion could be expressed on the IDT, and the four main points in the disclaimer were:

• It had not done a proper reconciliation of funds received, therefore it was difficult to assess how much they owed their creditors or how much their debtors owed them;
• On trade and receivables, the IDT had internal control weaknesses and could not identify all invoices and account for them in the current financial year. As a consequence, it was impossible to spell out whether the management fee had been accurately stated.
• It had not stipulated individual assessment on projects with respect to losses.
• There were immaterial and uncorrected misstatements in the financial statement on the expenditure, income, trade etc.

The PMTE had received a qualified opinion. The main concern was the fact that during the financial year they had implemented a new accounting system, even though not all modules had been implemented. As a consequence, they still had to revert to the manual process, which sometimes could be influenced by human errors. Receivables from exchange transactions had been understated. Finally, on operating expenses, when it came to property rights, it was difficult to match the properties with particular individuals in order to know which ones had been paid for by the PMTE. Further, considering the asset record was not ready, they could not confidently state that all property rights were valid.

On risk areas, especially with regard to financial health, PMTE’s overdraft had increased from R433 million in 2014 to R674 million at the end of the year. The liability situation had also deteriorated. However, it was now comfortably in a net asset position. The overall report, therefore, showed that PMTE was unfavourable but improving. The root cause of the problem for PMTE was the late or non-recovery of amounts owing to it by clients. As a consequence, it was recommended that it should consider changing its business model by billing client departments in advance, as opposed to recovering the expenditure afterwards.

Based on the assessment carried out on a going concern, the IDT was not a going concern, even though AGSA could not render an opinion on the financial statements. As a consequence, the IDT was still at risk. As for the other entities, there was no significant going concern to amount to a financial health issue.

Ms Slabbert referred to the impairments disclosed by management, of which the PMTE had R100 million, the DPW had R53 million, and the IDT had R41 million.

With regard to human resource management, she noted the transfer of functions from the DPW to the PMTE, which had resulted in posts not being filled 12 months after becoming vacant due to the delay in finalising the organisational structure. Further, the total employee cost budget that had been allocated to the Department had not been sufficient to fill the vacant posts. The recommendation given was to ensure that the organisational structure was approved and the relevant funding secured with the National Treasury to enable the Department fill the vacant posts.

She said that the IDT did not have enough capacity to manage the projects undertaken.

As for CBE, there had been instability in leadership which had culminated in investigations of the Council and the recruitment process. However, the report was yet to be published.

On information technology (IT), she said that the major issue concerned the accounting system in relation to the Expanded Public Works Programme (EPWP). The PMTE had so far introduced the new accounting system, even though they had not implemented all the modules, while the IDT’s system was not in a position to perform the reconciliation of Department funds.

Ms Slabbert referred to the three levels of assurance. These were management assurance, oversight assurance and independent assurance. For management assurance, it was the role of senior management to take immediate action and address specific recommendations and adhere to financial management and internal control systems. For the accounting officers, it was their role to hold officials accountable for the implementation of internal controls and report on the progress quarterly and annually. The executive authority’s role was to monitor the progress of performance and enforce accountability. As for the oversight assurance role, the National Treasury should ensure compliance with laws, the internal audit should follow up on management’s actions and the audit committee should monitor the risks and the implementation of commitments. The role of independent assurance, especially the oversight committees, was to review and monitor the progress in the implementation of plans and address deficiencies, while the public accounts committee had to exercise oversight on a regular basis. The National Assembly had consequently to provide independent oversight on the reliability, accuracy and credibility of the national and provincial governments.

She also discussed the internal control deficiencies, highlighting the slow response by management in addressing the root causes of poor audit outcomes, vacancies in key official positions and the lack of consequences for poor performance and transgressions.

On the status of key commitments by the Minister, she said that the most significant one was to ensure that the leadership positions in the PMTE and DPW were held by permanent officials.

She indicated that most auditees had not complied with legislation. The main reason for non-compliance was poor planning. On the issue of lease procurement, AGSA could not find supporting documentation for leases to the tune of R800 million.

The DPW and PMTE had reduced unauthorised expenditure while the IDT, CIDB and CBE had increased unauthorised expenditure.

The recommendations she presented included commitment to the implementation of action to address the audit findings, implementation of the appropriate information systems at the PMTE, monitoring the effectiveness of internal audits in contributing to a clean administration in the portfolio, monitoring management’s actions to resolve issues regarding the financial health at the PMTE, and monitoring the spending on expenditure.

The Chairperson asked whether there were any further contributions from AGSA.

Mr Msibi emphasised the issue of bad debts, and said that the DPW needed to liaise with the user departments, especially on accommodation sourced by the DPW but which was never utilised. He added that the IDT was responsible for project costs, but there were many disputes on project costs considering that no recoveries were made from the projects. He asked the Portfolio Committee to look into the root causes of some of the issues.

Discussion

The Chairperson thanked the AGSA for the presentation and opened the floor to Members of the Committee to comment on the presentation.

Ms A Dreyer (DA) asked whether the reorganisation involving the move of the PMTE to the DPW had been the best way forward, considering the PMTE had been ranked the worst performing department. She enquired about the asset register, noting that it was yet to be finalised. She expressed her concern about not having a valuation attached to the assets, which would make the whole process meaningless. She noted the irregular expenses attached to lease agreements and asked what could be done to ensure that they were managed properly. Finally, she pointed out discrepancies in the AGSA presentation, where slides on the non-compliance with legislation did not tally.

Ms P Adams (ANC) posed her questions in Afrikaans.

The Chairperson interpreted her questions and said that she had expected more information from the Auditor General’s office than had been presented. She felt that the recommendations presented had been directed to the Portfolio Committee on what to do. She wondered what the function of the respective boards was, considering that in her opinion this was not part of the mandate of the Committee. She also asked about the cost of the regression at the IDT, and said that key officials lacked the competencies to carry out the work they had been appointed to perform.

Ms D Mathebe (ANC) expressed her concern about immoveable assets, saying that it was not clear which ones belonged to the national government and which ones belonged to the provinces. She also asked about the Green Building Policy, and asked why the same opportunities to provide the technology could not be given to South African companies, as opposed to outsourcing to German companies. She also asked what would be the best way to deal with the high vacancy rate in Human Resources. With respect to irregular expenditure at the PMTE, she asked how long the investigations would take, as she felt it was time a deadline was imposed. Finally, with respect to lease offices, she asked whether a list could be provided so that the Portfolio Committee would know how many offices had been leased thus far.

The Chairperson explained to Members that the responsibility of the Auditor General’s office was to carry out audits, and questions to AGSA should have been related to this. Some of the questions that had been asked were the preserve of the Department, and not AGSA. He therefore asked the Members to pose these questions to the Department at the afternoon meeting.

Ms Dreyer then asked the AGSA to explain what had happened to Agrément South Africa.

Mr Msibi said that the restructuring at PMTE did not change the audit scope, whether it was located in the PMTE or the DPW. On the issue of leases he confirmed that from the audit carried out there were no issues on the lease contracts, only on the costs incidental thereto. AGSA was therefore comfortable from an audit perspective.

The Chairperson told the Members that the restructuring of the PMTE was a policy issue, so it was to be dealt with by the Department.

Ms Slabbert said that that money advanced to Agrément South Africa had been accounted for as irregular expenditure. On regression, she said that the IDT had expanded significantly, and there had been insufficient capacity to manage the operation efficiently. The vacancies were linked to the organisational structure, and she was of the opinion that management needed to provide a further explanation.

The meeting was adjourned.