DSBD 2019/20 Audit outcomes: AGSA briefing; DSBD BRRR

Meeting report

Department of Small Business Development audit outcomes

Mr Rehaan Mohamed Alli, Senior Manager, Auditor-General of South Africa (AGSA), said that Covid-19 had affected the scope of its auditing activities and had limited the number of entities it was able to look at. This year they had been limited to auditing the Department of Small Business Development (DSBD) and the Small Enterprise Development Agency (Seda), and had been limited to certain programmes.

Looking at the audit outcomes of the past five years, Seda had maintained a clean audit status with the exception of the 2016/2017 financial year, where there had been an element of irregular expenditure. There had been two major stumbling blocks to Seda achieving a clean audit status:

• Compliance with guidelines in terms of the different incentives; and
• Performance information reporting.

However, the findings from the previous years had reduced significantly and showed a marked level of improvement.

This year, both the Department and Seda had produced financial statements that were free of material mistakes. The AG commended them for this. With regard to performance information, there were issues with Seda, which had inconsistencies in the targets included in the plan and targets included in the performance report, but it had not resulted in material findings and they had still obtained a clean audit. In the Department, programme four had indicators relating to incentives, and it had been found that there were adjustments required for those indicators, including the indicator relating to blended finance. The AG said that there was room for improvement in relation to performance information.

The leadership of both Seda and the Department were commended for their work and their ability to take appropriate action when non-compliance was identified. However, they needed to improve on their record keeping, their daily and monthly controls in relation to laws and regulations and contract management, to ensure that payments did not exceed the contract amount in order to avoid irregular expenditure.

From a risk management perspective, the AG was concerned that the Department had not had an established audit committee for the past 11 months, and advised that they attend to and establish one as soon as possible.

The management and delivery of key programmes had varying outcomes. The Black Business Supplier Development Programme (BBSDP) had a 59.9% achievement, the Cooperatives Incentives Scheme (CIS) had a 97.4% achievement, the Blended Finance programme had an 80% achievement, and the National informal Business Upliftment Strategy had a 352% achievement. In these programmes, the main concerns were compliance deviations from the schemes’ guidelines.

From a financial health perspective, the Department had a liability relating to the BBSDP and the CIS. These were applications that had been partially approved and were waiting for further documentation to be produced by the applicants. The AG’s concerns were that the Department had not included the R124 million liability in the 2020/2021 budget.

In terms of fruitless and wasteful expenditure, there were no significant concerns in Seda or the Department. There were only two instances where fruitless expenditure amounted to R36 000, but these had been identified in the internal audit and consequence management had been implemented. There were no instances of irregular expenditure at Seda. At the Department, they had R500 000 in total from four instances. In all instances where management had detected it prior to the audit, consequence management had taken place.

The AG had made recommendations to the Department and the entities, including the need for urgency by management in responding to risks and control deficiencies identified through the audit process. Adequate monitoring and a review of the evidence supporting the achievements reported in the annual performance report was important, and the evidence had to be thoroughly evaluated and verified The appointment of the DSBD audit committee should be prioritised, and the Portfolio Committee should request the accounting officers/authorities and the Minister to provide feedback on the implementation and progress of action plans to ensure improvement in the audit outcomes of the portfolio.

A special report on Covid-19 relief initiatives had been made, and the AG had looked at the spaza shop support scheme which had been implemented at the Small Enterprise Finance Agency (Sefa). They were happy with the control environment, but had identified one concern that would impede the effective implementation of the scheme, which was the ‘batch process.’ 

Budget Review and Recommendations Report 

Mr Sibusiso Gumede, Committee Content Advisor, said that the Budget Review and Recommendations Report (BRRR) was based on information from the quarterly reports from the Department and the entities. He focused on the observations and the recommendations.

Observations

Some of the observations were that the Portfolio Committee was pleased with the overall performance of the portfolio -- the DSBD, Seda and Sefa -- but felt that there was still room for improvement. Seda had achieved a second year of clean audits, with the Department achieving an unqualified audit. The Committee had noted that not more could have been achieved in the financial year under review. Due to the national general elections in May 2019, and the period of transition, annual plans and service delivery plans had been impacted. One of the areas of under-performance had been the filling of vacancies in senior management posts. There were also concerns that poor provinces received less attention from Seda and Sefa, and this pattern had persisted throughout the financial years. The quarterly reports showed that most of the assistance had been disbursed in Gauteng and KwaZulu-Natal. 

Another major policy area reported regularly by Seda was its inability to establish secure finance for newly established cooperatives because of their weak balance sheets and the banks’ strict lending criteria. However, according to Seda, this was on course to improve with the merger of Seda and Sefa, which would hopefully result in the streamlining of their operations.

Sefa, on the other hand, attributed some of its under-performance to the unavailability of financial intermediaries, and their stage of readiness. This was in spite of the Portfolio Committee prioritising community and village-owned banks, such as cooperative financial institutions, owing to their licensing challenges. Due to their registration, licensing and regulation difficulties, Sefa was unable to organise oversight over micro finance institutions, for instance, with regard to the interest rate that they charged to small enterprises, as they were not administered or overseen by a prudential authority or the Financial Sector Conduct Authority.

In the 2019 BRRR, the Committee had welcomed the replacement of the KPMG auditing firm by SizweNtsalubaGobodo (SNG). However, considering the nature of business that Sefa did on behalf of the government and the amount of money appropriated to them on an annual basis, the Committee remained of the view that Sefa’s books would be better handled by the supreme audit institution of South Africa, which was AGSA.

The Portfolio Committee wanted to reiterate some of the previous recommendations. Some of the strategic posts remained vacant, and the Department needed a permanent Director General (DG). Filling the post of accounting officer and other posts should be done before the end of the financial year. During the previous BRRR process, the use of financial intermediaries was not properly registered and regulated by institutions such as the Financial Sector Authority, and the Committee recommended that Sefa should consider in-sourcing or finding alternative approaches to lending money to its clients.

The Department had to prioritise the stabilisation of Sefa through appointing a permanent accounting authority before it undermined the agency’s operations and stability. It had to ensure that the guidelines for the different incentive schemes were aligned so they were not susceptible to abuse before the finalisation of the blended financial model had been rolled out.  Furthermore, the unequal spread of funds and resources to Gauteng and KZN at the expense of other struggling provinces needed urgent attention.

The management of the Bid Adjudication Committee (BAC) should ensure strict adherence to the guidelines and standard operating procedures of the BBSDP and cooperative incentive schemes. The responsibility for ensuring the compliance of the guidelines of the BBSDP should be clearly allocated, the responsible officials should be held accountable, and the Portfolio Committee should be informed quarterly on the progress attained, because this was one of the reasons that prevented the Department from attaining clean audits as presented by the AG from the last appearance in 2019, and in this report as well. Management and officials should be responsible and have an obligation to conduct site visits to verify that the goods and services were actually delivered to beneficiaries that applied for them under the different programmes, for example, the cooperative incentive scheme (CIS).

Discussion

Ms M Lubengo (ANC) commended Seda on achieving a clean audit and maintaining quality financial statements, as per the AG’s report. She said it had improved in the areas of effective leadership, proper record keeping and daily and monthly controls as part of its financial and performance management.

Mr Z Mbhele (DA) said it sounded like there had been overall improvement over the past two financial years, and that credit must be given to Seda and the Department. He hoped this progress would continue for the remainder of this term and that important areas such as the filling of vacancies would be addressed. He asked how the AG was monitoring and able to do a thorough audit of the spaza shop support scheme, which was being administered primarily by the banks. He said that the presentation had highlighted key points, such as bottlenecks in the application process, with poor feedback, and a big gap between what had been approved and what was paid.

Mr F Jacobs (ANC) agreed with his colleagues and commended the Department for consistent and good reports. He agreed that the filling of vacancies was a pressing issue that needed to be resolved. He noted that Sefa was not providing reports through the AG, and this was the second year that they had not received their report. The Committee had to find a mechanism to deal and engage with that report.

He said there were concerns around money transfers, especially to retail financial institutions in the micro finance sector, but he would leave that to another day. He had also picked up gaps between the application approval and disbursement in the spaza shop support scheme, and asked for further clarification on that. He said there had been progress on the cooperative incentive schemes, the informal business strategy and the blended finance programme. He said that as a Committee, they must adopt the recommendations made by the AG to have quarterly reports from the Department on the audit findings.

Mr H April (ANC) asked why the Committee had not seen financial reports from Sefa, and what the AG’s opinion on that was. He then retracted his question, and said they would call Sefa to come on another occasion in light of the time constraints. 

The Chairperson said the Committee welcomed the recommendations that had been made by the AG. She agreed that the Department needed to deal with the issue of vacancies, and that they should prioritise setting up an internal audit committee to deal with risks in the Department. She was happy with the way the Department was responding to certain issues, like enhancing their application forms to accommodate everyone and to be inclusive and regularly publishing information on their website to keep the public informed. She thanked Seda for a clean audit, and said she believed the DSBD itself was coming close to that standard. 

AGSA response

Mr Alli said that the spaza shop support scheme had different avenues through which applicants could apply. One of them was through the bank, and the other was through their online platform. The banks compiled the applications into batches and then sent them to the Department, and that was when they could do their audit processes.

The bottleneck problem was because the applications were handled in batches before they were sent back to the bank to be administered, but if there was a discrepancy in one application, then the whole batch may get delayed. In September, they had received 9 000 applications and over 7 000 of them had been adjudicated, but there was still a backlog. Management was looking at finding a way to streamline the process.

He said that moving forward, the Committee may invite Sefa to present the findings from their audit outcomes. Sefa had submitted their financial statements in time, and had concluded their audit within the regulated time frame, which was within two months of the end of the financial year. He said Sefa had a clean internal audit.

The Chairperson said that this presentation was inclusive of the quarterly reports, and that they should make recommendations and suggestions before they could adopt it.

Mr Mbhele said his issue was about the use of technology at Seda and Sefa to address problems that had been flagged, and alleviating them. The South African Revenue Service (SARS), for example, was transitioning to an automated system, and he asked if there was a way in which the majority of the application processes for the different programmes could be done through an automated system. Such a system would do an comprehensive check for compliance so that by the time an application had arrived at the adjudicating committee, the system errors that could arise as a result of negligence or malice by officials would have been avoided. He asked if there was a way for the Department to have an automated system to help them mitigate risks around human error. Technology was a value-add, and he wanted to know if there was a way of adding it into the BRRR.

Mr G Hendricks (Al Jama-ah) said the presentation had strengthened his belief that the Committee had been hamstrung for over a year by the fact that the DSBD, over which they were supposed to be exercising oversight, had been grappling with whether or not Seda and Sefa were going to merge and become a single entity. He said this issue should be resolved by the leadership, and that it affected the Committee because it was not clear what they were having oversight of. There was no use having a dramatic overhaul if one of the entities was going to be collapsed into another.

Mr Jacobs said that the Committee should formally ask the Department to respond urgently to the BRRR of 2019, which had indicated that there were gaps that need3e to be filled. He agreed with Mr Mbhele’s point about looking at how the Department could automate the system, given Covid-19. Automation was a risk mitigator, and it made business sense to have an information technology (IT) automation plan, and to migrate their whole value chain to it. There were 10 recommendations, and the Committee should strongly support them. They should also get the Minister’s feedback on the recommendations, particularly on the progress around the financial intermediaries and how they could ensure greater access to small, micro and informal businesses. It was an issue that had not been addressed for a while, and the Portfolio Committee needed to find a way to provide oversight over it.

Content Advisor’s response

Mr Gumede said he agreed that the point made by the Mr Mbhele should be included in the observations. He had posted on a WhatsApp group the website ‘eservices.gov.’ The national government was trying to accelerate the automation of services that were available to various government institutions and entities, and to departments such as Seda and Sefa. In that website, there was the Department of Small Business Development, but he was not sure what the services available were, and this should be included in their observations and recommendations -- to follow up on the eservices government website to ensure it actually addressed what the Portfolio Committee was trying to achieve.

Some of the recommendations had been in the public domain for some time, such as the issue of vacancies and the the structure of Seda and Sefa. At some point, those issues needed to be addressed. The executive was busy working on the previous years’ BRRRs.

Regarding micro finance, there was an appetite from the DSBD to move towards South African Reserve Bank-registered entities. The Minister had spoken about the Financial Services Board, although she had meant the Financial Sector Conduct Authority, and that they were now trying to inculcate a culture in Sefa to prioritise entities that were monitored and licensed by the Financial Sector Conduct Authority. The Committee should support that, and make sure that it was done.  

The Chairperson said she agreed with all that had been said, and the points raised should be added to the recommendations and observations of the report. The Committee would engage with the Department on their responses.

Members suggested that since this was the first tabling of the report, they would allow for the suggestions made today to be added to the report, and the Committee would move the adoption of the report at the meeting on 18 November.

The Committee considered and adopted the minutes from 4 November 2020.

The meeting was adjourned.