2019/20 PFMA Audit Outcomes: Auditor-General briefing

Meeting report

The Chairperson welcomed all attendees and apologies were noted.

He told members that the purpose of the meeting was for the Auditor-General of South Africa (AG) to brief the Committee on the audit outcomes for the 2019/2020 period. He said that the AG’s office was involved in a “very tough environment” due to the effects of the Covid-19 pandemic. This has given rise to delays and requests for extensions for the submission of financial information. He said the presentation should take no longer than an hour.

He then recognised the AG for her presentation.

Briefing by the Auditor-General
Ms Tsakani Maluleke, Auditor-General, AGSA, thanked the Chairperson and indicated that after all relevant engagements, she would be tabling the report she was about to present to the Committee at the end of the month.

She reminded members that when presenting the previous general report to the Committee, the Auditor-General’s message included:

-Sustainable solutions required to prevent accountability failures
-Consequences for accountability failures
-Urgent attention should be paid to financial management
-With the new administration, opportunities for progressive and sustainable change were evident

On the impact of Covid-19 on the 2019/2020 audits of the national and provincial governments, she presented that the Finance Minister gave PFMA auditees a two-month extension to submit financial statements (from 31 May 2020 to 31 July 2020). The legislated audit completion date for PFMA auditees moved from 31 July 2020 to 30 September 2020. The outcomes in the current presentation are for the financial year ended 31 March 2020. The Covid-19-related expenditure occurred after this year-end and the AG audited—or is currently auditing—it for reporting on the 2020/2021 financial year.

She said that the headline for the 2019/2020 audits was that the AG was “worried that our messages, our call for action was simply not heeded adequately. We’ve seen some slight improvement in the outcomes, however, we caution that there is no evidence that there is sustainable improvements at hand. There is no evidence that there is progress—meaningful progress—in building the preventative controls […] whether you’re talking about IT controls, about the diligence on record keeping, or even about the audit actions plans that are created at the end of our audit: we’re not seeing that those audit action plans are implemented with the diligence that’s required if we are to drive improvements on a sustainable basis. We’re still continuing to see weaknesses on a widespread basis, on the basic internal controls environment. And this is so necessary if we are going to stem the tide around leakages”. She added that “We are concerned about the level of assurance that’s being provided by senior managers and by accounting officers. In that group I would also include the CFOs, the internal audit function, as well as the audit committees. We’ve got to galvanise all of those activities in those different functions so that we do drive the improvements that are required, because if we don’t deal with that, we’re not going to get the benefit associated with the improvements we’re seeing on oversight and the improvements that we see in the level of engagement by executive authorities (EAs). And we’re also not going to see the improvements that should come because we’re seeing the coordinating departments—the provincial treasuries, the National Treasury, the offices of the premier in different provinces—actually playing a bigger role. So what I’m saying is that we’re coordinating departments playing an improving role, we’re seeing greater improvements in the level of assurances provided by EAs as well by oversight. The key weakness remains what happens at [the] institutional level.”

On the audit outcomes, she said “we’re seeing more clean audits, so an improvement by 13. So 13 more clean audits than we had before. We had a 173 unqualified audits. Still [a] high number of disclaimers: 18 auditees.” The number of outstanding audits were 44 for the 2019/2020 period. She said the AG had to cut off at the end of November 2020 its internal analysis but it continues to work on the audit.

She said “the number of clean audits is increasing, indeed. Those auditees represent 17 percent of the expenditure budget that’s entrusted within this sphere.” She added “if you look at the same story around unqualified audits, and combine the 40 percent and the 17 percent, what we’re saying is that only 57 percent of the expenditure budget was in the hands of auditees that were able to prepare credible financial information at the end of the audit process.”

On where improvements were identified, she said “we had a total of 66 improvements in different areas, and we’ve analysed what it is that goes right. How do we get to these improvements and what can be learned in terms of what makes improvements possible? One of the key features,” she continued, “is that the accounting officers—the CFOs, the supply chain management—those roles are filled, so the vacancies are health with, and the is stability in those roles. What we are saying is that where you have an auditee that enjoys stability at those key management levels, that’s where it is possible to attain a clean audit and importantly that way it is possible (sic) to retain a clean audit. So our message about the correlation—the direct correlation—between stability at management level and clean administration—effective administration—that message remains appropriate. And our analysis this year has reconfirmed it when we’ve looked at what is it that drives improvements, and also what is it that results in stagnation and regression. Where there’s instability in those key roles, we see things going the wrong direction.”

On the number of outstanding audits, she said “we had the 10 percent of audits uncompleted at the end of November. Since then we’ve completed another 30 audits, and we’ve analysed those outcomes. If we compare those outcomes to the picture I’ve just shared, it doesn’t change significantly.” She said that the “audits that we completed subsequently, those were the outcomes: very few clean audits, majority of auditees sitting in the ‘unqualified with findings’ zone, some ‘qualified’ and a number that are ‘disclaimer’ audits. The reason that we still have 14 audits uncompleted, even at the present time, is that the financial statements that are either not submitted or are submitted very late, or where there are delays in terms of the audit process. We will continue to pursue in as far as possible the completion of the outstanding audits.”

On the outcomes concerning the provinces, she said “we’ve done a deep dive into each of the provinces and our key message […] is that we’re slow uptick in terms of the number of improvements in the different provinces. So each of the provinces has had a small increase in the number of clean audits, a small increase in improvements, save for Gauteng, where there was a net regression, and the Western Cape where there was a net regression. However, the Western Cape retains its track record as the place where there are the highest number of clean audits.” She said “you’ll see a slight improvement in terms of the colours and then of the number of clean audits, but in substance, we are still cautioning that the key controls that ought to be in place that would give comfort that we are genuinely on a sustainable journey of improvement: those controls are not in place. And as a result of this slow movement—and these slight improvements without the sustainable changes, the consequence is that the financial health of different auditees across provinces is being compromised. And so one of the key messages we’ve included in our report is the one that eliminates the risk of financial health especially in the departments of education and health across different provinces.”

She then moved on to the highlights around the quality of financial statements that were published. She said “at the end of the audit process a combination of the auditees that we looked at had 74 percent of them publishing credible financial statements. However, a close look confirms that at the beginning of the audit process less than 50 percent—specifically 49 percent—of auditees submitted financials that did not have much misstatements. Meaning, therefore, that 25 percent of auditees used the audit process to correct their misstatements. That’s all good and well because we get to credible financial statements at the end of the audit process, however it does raise some important questions about the stability of the financial reporting mechanisms within an environment. And if we [are] unable to deal with those basic disciplines that allow those that run different entities in [the] government to management cashflows, to manage resources during the year, we are going to have ongoing problems around financial health. And if we are unable to deal with the basic disciplines of making sure that everybody in the chain—internal audit, audit committees, CFOs, senior managers—review financial information, perform the key reconciliations, and are vigilant around maintaining proper records, we’re not going to see improvements in this area. We’ve shared some insights in the areas of the material misstatements that we’re picking up, and they are pretty much the same as what we’ve seen in prior years. And the impact of all of these disciplines not being in place is directly linked to the financial health deterioration over time. And the numbers that we have demonstrate that out of the expenditure budget there are far too many auditees that do not have financial health indicators as problem (sic)—that don’t an indication of problems around financial health for far too many of them.”

Continuing with the financial health of auditees, she said that “two percent of the auditees [that] were looked at didn’t have financials statements that were reliable enough for us to look at financial health. Twelve percent of the auditees themselves indicated in their own reports that they are concerned about their own financial health. And 66 percent of auditees had some or other indicator of financial strain. And this was at the end of the [2019/2020] financial year, at the beginning of the pressures around the Covid-19 pandemic and the response that needed to be made. So we are still to look at the impact of the past year when we audit the [2020/2021] financial year.”

On financial health indicators, she said that some of these “include matters around how long it takes to pay creditors. In so many instances you find that auditees struggle to pay their creditors within the 30 days. And often that’s an issue around financial health issues—around cashflow constraints. Another indicator that concerns us is where we see that there’s a net deficit at the end of the year where the income is less than the expenditure that has been generated through the year. In other respects, we’re seeing on the balance side that assets are less than the liabilities at the end of the year. And in the context of departments, we look at the accruals that have been generated at the end of the year and we compare that to the cash on hand, and we [are] seeing that there are far too many accruals that will then have to be caught up using the funds for the following year which will eat into the expenditure budget and the delivery of services for the forthcoming year. One of the threats we’ve raised before is around the litigation claims, especially on medical negligence claims, and that is putting a particular burden on a number of auditees across provinces.”

Turning to the unauthorised expenditure reports, she said that “in the year that we’ve audited, we’ve seen unauthorised expenditure increasing from R1.65 billion last year to R18 billion this year. A closer look confirmed that the Department of Social Development had R15 billion of unauthorised expenditure and much of that was about the payments for the Covid-19 grants—the special grants that had to be made. So that we were able to assess and confirm was the basis for this uptick in unauthorised expenditure. Having said that, the education sector across many provinces is one that needs some attention, especially on the unauthorised expenditure. So if you look at KZN, if you look at the Eastern Cape, we’re seeing the departments of education there showing up with unauthorised expenditure which is associated with questions around the number of employees on their payroll and the budget that they have available to them. So that does need some attention. In KZN, another source of unauthorised expenditure was the maintenance costs associated with having to fix schools following the storm that damaged a number of schools’ infrastructure.”

On the identification of the “real pressures” impacting especially the provincial education and health departments, the “Eastern Cape shows up especially on education as does KZN. And these are auditees where for a number of years now we have been cautioning about the financial health indicators that were suggesting that there were problems and real financial pressures in each of those departments. Insofar as the Department of Health, we give you a sense of the outcomes. So most of those departments had qualified audits across the different provinces with the Eastern Cape and North West departments demonstrating high levels of financial health distress. And this is story that we shared with the honourable members in previous years as well.”

On the financial health pressures in state-owned entities (SOEs), she said that they were “pretty well documented, even though we have not yet completed a number of the SOEs audits: TCTA, Denel, Land Bank, Safcol, IDT—those were completed after the cutoff date, and I’m aware that a number of portfolio committees have been engaging with the outcomes of those audits. The audits that are still in progress are those for Necsa and SAPO, and I think again the problems at SAPO in particular are well documented, especially about the instability at key levels as well as the financial health pressures there. The annual financial statements for SAA and SA Express remain un-submitted, so we have not completed those audits. We have completed audits at Armscor, Acsa, DBSA, CEF, SABC and the 9 subsidiaries in those different groups. And key issues here about deficits at the end of the year, balance sheet issues in terms of the assets being less than liabilities and we [are] also noting that even those auditees in a number of instances are reporting about their own concerns of financial health. Although we did not audit Eskom, we do report that Eskom itself had a reported a deficit for R20 billion at the end of the 2020 financial year whereas Transnet had reported a profit of R3.9 billion for [the] 2020 financial year.” She said that members would recall that “this is now the first year where we’re going to audit Transnet; the 2021 audit of Transnet will be signed off by the AG. The audit of Eskom will continue to be signed off by private sector auditors, however we are deploying a few staff members from our office to work with the auditors that are appointed, so that over time we can get to know the entity better as well as support those auditors that are appointed, and make sure that oversight benefits from the input of the office of the AG in that audit.”

She said that “other public entities that don’t always hit the radar because of their scale […] relative to the big ones; these ones are much smaller. But if you look closely, you’ll see that there a number of smaller public entities that are showing signs of distress and we’ve been reporting on these for a number of years. So for six years now we’ve reporting about financial health pressures at Sanral, at [the] Road Accident Fund as well as Golden Leopard Resorts in the North West. For five years now we’ve reported on financial pressures at Autopax, which is part of Prasa. We reported on [the] North West Development Corporation having financial year issues; Corridor Mining Resources (in Limpopo); Mayibuye Transport (in the Eastern Cape); as well as the TVET college Motheo (in the Free State). And that’s been a journey of highlighting these issues and our concern is that if we don’t attend to the financial health issues in these smaller public entities, over time they too will become a drain on the fiscus, so we do need to attend to the financial health of all these entities right across [the] government.”

On fruitless and wasteful expenditure, she said “the number has increased very slightly from R2.36 billion to R2.39 billion. I hasten to caution that this number of R2.39 billion is likely to be understated. For a number of auditees who were qualified on the completeness of their disclosure on fruitless and wasteful expenditure. So if you didn’t have those auditees without reliable information, we would be able to confirm a higher number on fruitless and wasteful expenditure.”

On the matters that result in fruitless and wasteful expenditure, she said these were preventable had “greater care been taken. Things like penalties and interest to creditors, specifically SARS; overpayments on EPW projects were because we’re not implementing the key controls to confirm that we’re not paying more than we should for specific projects we end up having financial loss incurred in the environment. And there are a number of other similar issues where had we implemented the key controls to prevent overpayments and to prevent the incurring of interest and penalties we would not have this level of fruitless and wasteful expenditure.”

On supply chain management findings, she said that they remain “part of our report, and indeed through our audits we still find the matters we’ve reported on before. We still find that employees and political office bearers conduct business with the state; we still find that suppliers have false declarations; we’re still finding that we find limitations in the course of our audits where financial records are not availed to us to confirm the credibility of the transactions that have gone through the bank account. And we’re also still finding instances of uncompetitive and unfair procurement processes. Whether it’s about not finding three quotes, whether it’s about not going back to the market to confirm that we’re getting the very best price and the very best quality for what we’re buying and rather extending multi-year contracts beyond the allowable period; whether we’re even flouting regulations around local content so that we end up awarding bids to people who don’t comply with those provisions, provisions which are intended to help us rebuild our economy and save South African jobs. And we’re also still finding that the preference points system is not being complied with and we end up appointing bidders that are not the best ones insofar as our own evaluation was concerned. Supply chain management findings are those that result in irregular expenditure and the figure this year is R54.1 billion. Last year we reported R66.9 billion; this year we’re reporting R54 billion. Some of the limitations in terms of confirming whether that number is a fair representation you have heard before: You’ve heard us say that in too many instances we still find auditees whose disclosure of irregular expenditure is incomplete. So we do have some caution on this number by saying that where you [have] got 28 auditees whose irregular expenditure number has not been confirmed as being complete, you run the risk that R54 billion is an understatement. Transnet and Eskom: They have big numbers and its prudent for us to make sure that we give you line on sight on those. Transnet R56.2 billion and Eskom R11 billion for the [2019/2020] financial year.”

On contributors to annual irregular expenditure, she said “much of it sits in the national government (because of the scale), KZN and Gauteng. And then we also drill down to the specific auditees where there were high numbers for irregular expenditure. The transport department in KZN, for example, had a big number, and much of that was associated with extensions on the bus contract. So payments that were being made on this contract that had long expired. At the department of defence, we found R2.8 billion that was paid for employee compensation. At the department of health in Gauteng we also found procurement findings (sic) that resulted in irregular expenditure. So we’ve given some sense of the highest contributors to irregular expenditure as well as the basis for it.” She said that one of the key concerns was that “whilst irregular expenditure requires the accounting officer to go and investigate the basis for that irregular expenditure and to deal with it, whether to get it written off, condoned or recover money, those actions are not being taken by accounting officers. And as a result irregular expenditure continues to grow and accumulate. So the number—the closing balance this year is R262 million which represents irregular expenditure that has not yet been investigated and properly dealt with.” She added that “the call for action that we made around accounting officers dealing with irregular expenditure that’s been identified through the audit process—that call has not been heeded and as a result we continue to see an accumulation of irregular expenditure across the system.”

On material irregularity process, she said this was a process “that this Committee is particularly well-versed in.” She said “we are using the moment that we have when we share these outcomes with the executive, with the administration and with the legislatures. We’re using the moment to remind all of our audiences why this mechanism is in place, its potential to drive accountability improvements across [the] government, as well as giving them some insight on how we are approaching the implementation of the instrument. This Committee would know very well that the instrument is one that is complimentary to the overnight system; it’s complimentary to role of accounting officers as well as the role of executive authority. Where the accounting officer—what they’re supposed to do in terms of law, there’s no need for us to step in. We step in if there’s failure. Where the executive authorities on oversight ensure that accounting officers do what they’re required to do, we don’t have to step in. We step in when there is failure. And so our view is that this instrument has a potential to support accounting officers—inspire accounting officers—to do what’s required, and to actually fulfill their legal obligations as given in section 38 of the PFMA. So that when we identify material irregularity we can support the accounting officer by channeling their efforts to deal with the most urgent matters. Out of the material irregularity number, we can show them which transactions are posing the biggest risks to their financial resources, to their enterprises, or to the ability of the institutions to deliver. Our notification process, also, because we give twenty working days in which an accounting officer ought to indicate what they are going to do with the material irregularity—that notification process can serve to ensure that accounting officers take appropriate actions on a timely basis and take swift action as provided for in law. Which action would include stemming the losses through canceling contracts, recovering lost funds, reporting matters to law enforcement agencies as it may be required, instilling discipline where officials within the environments have done wrong, and closing the internal controls weaknesses so that the matters do not recur. At every turn it’s important for us to notify the accounting officer, to hold them accountable, and yet to give them space to implement the actions that they have set out to do. So indeed we’re seeing and implementing this as a complimentary mechanism. When we talk to accounting officers, part of our message is about ensuring that they understand how this instrument can help them do their jobs better; how this instrument can support them in fulfilling their responsibilities as given in law.”

She said “one of the beauties of this instrument where we have the power to refer matters for investigation, we have the power to recommend issues for the accounting officer to act on, and to include that recommendation in an audit report where we have the power to issue binding remedial action if the accounting officer does not act, and where we have the obligation and the right to issue a certificate of debt where the accounting officer still fails to implement binding remedial action. Those powers we are well on our way towards implementing. The beauty of it is this: not only do we audit and report at the end of the year, but can identify material irregularities at any time in the year, we don’t have to wait for the following year, and we can follow up on the implementation of a recommendations and of our remedial action during the course of the year so that we’re not leaving things for yet another year before we come back. So no longer will it be that our audit reports sit on shelf at the end of an audit process and are only pulled out at the beginning of the next year’s audit. The material irregularity process is a continuous one. And we’ve used this process in the journey of the real-time audits where we are able to demonstrate the real-time impact of the work that we can do. Specifically, in the [2019/2020] financial year, we implemented the MI process at a total of 89 auditees across [the] government—PFMA cycle, that is. We identified a total of 78 MIs—this is now at the end of the second year of us implementing these [inaudible]. And these 78 MIs we have estimated a financial loss for R5.8 billion.”

“The areas where these material irregularities occur are in procurement, expenditure management, revenue management and resource management. And these are the same areas that we have highlighted a caution around weak controls.”

On procurement, she said “the material irregularities relate to overpricing of goods and services that were procured following an unfair or an uncompetitive procurement process. We also found that in some instances we ended up—accounting officers ended up—appointing suppliers that did not deliver, and that was a result of an unfair procurement process. And there were losses associated with those processes.”

On expenditure management, she said “we found instances where there were payments made for goods and services that were either not received or there was poor quality of delivery, and yet there were payments made. We also found that were invoices or claims are not paid on time, we end up incurring interest or penalties.”

On revenue management, she said “we found instances of revenue simply not billed, or where debts that had been incurred by others—and those people owe us money—we were not getting it back.”

On resource management, she said “we found issues specifically around safeguarding of assets, where key controls around keeping physical assets safe have failed us and we end up losing assets and assets which are meant to deliver goods and services to citizens.”

She said “the legal obligations of the accounting officers and accounting authorities to address irregularities, whether they are irregular expenditure or material irregularities—those obligations remain in force.”

She said that the law requires the AG to “follow up on material irregularities that would have been issued the previous year, and to ensure that our new report reports properly on the follow-up mechanism. So at the end of the [2018/2019] audit we had identified 39 material irregularities, and at that time we reported that in 36 instances accounting officers or authorities were taking action. We also had highlighted recommendations in two audit reports for the accounting officer and the accounting authority to action and we had referred a matter to the National Treasury, and that was specifically relating to the department of health in the Northern Cape. Where we are now having followed up on the issues: as at the end of [2019/2020] financial year, 24 of the those instances we’ve been able to confirm that there has been appropriate action taken by accounting officers and that this remains in process. So ours is to continue to track it. In some instances, we found that the matter has been closed or resolved; an example would be where the accounting officer has investigated, they had come to a view that there isn’t wrongdoing on the part of the particular official, and they’re able to deal with the matter. Once instance was where an accounting officer got back interest that had been inappropriately paid to a contractor. So that money came back into the business. Six instances there was a lack of progress by accounting officers, and this resulted in us escalating the matter towards a recommendation which is included now in the audit report. The investigation by the National Treasury on the Northern Cape matter remains in process and one of the recommendations from last year has been already implemented by the accounting officer.”

She said that “in the course of this follow-up […] what we’re finding is that this year we had delays around Covid-19 and some concerns about the space we needed to give accounting officers to follow up on matters. But we are finding two limitations that we need to attend to. One is the instability at the accounting officer and the accounting authority level, where we issue a material irregularity and then the accounting officer moves on, and now we have to pick up the issue with the new accounting officer. The law says that we must then still continue to deal with the new accounting officer and at that time for us to be fair to them we’ve got to give them the time to engage with the issue properly and then confirm the action that they’re going to take. However, we are finding this a disruptive set of circumstances, this level of instability. An example would be at Prasa, where over the last year that we’ve been tracking an MI from the previous year, there have been a number of different accounting authorities: you had a board, you had an administrator, then you had another board, and at each instance you’ve got to give the new administration an opportunity to engage with the matter and make commitments about how they’re going to handle it.”

She added that “we also have a dependence on other public bodies. So matters such as the National Treasury, for example, where the Northern Cape was concerned, we’re still waiting for the outcome of that work, and we’ve got ensure that we maintain the conversation with them so that they are able to attend to this. There is also the limitation that if a matter is reported to the Hawks, you then got to wait for the issue to run its course. And in some instances matters have been referred to the Hawks by accounting authorities, indeed, which is the appropriate action that we would want to have and matters in some instances have been referred to the SIU. The honourable members might recall that in [the 2018/2019 financial year] we had reported on a particular transaction at the transport department in the North West relating to the contract for a learner drivers’ intervention, and this contract was issued to someone and there was a payment made—a prepayment made—and that money went towards settling the appointed contractors tax obligation instead of delivering on the project. And so the accounting officer there has now referred the matter to the Hawks for them to go and find this individual and get the money back but, indeed, they have reported the matter to law enforcement as required in law. And as a result, ours is to track it and await the completion of that journey with the Hawks.”

She then emphasised to the Committee the importance of swift action in bringing about accountability and reiterated the AG’s commitment to advance accountability without fear or favour. She said “we close off our story around this PFMA cycle by continuing our call for all of us to act with urgency on accountability failures; to urgently deal with issues around preventative controls so that we can close leakages and recover money that’s been lost; to ensure that we follow good financial management disciplines; and to support state-owned entities as well as the struggling public entities that may be small enough to go under the radar; and to also deal with the capacity and the ability of the key service delivery departments to meet their obligation. We’re calling, once again, for sustainable solutions to be effected, so that we prevent accountability failures, so that we can detect them quickly when they do occur, and apply swift and effective consequences where its required, and this all of us must do collaboratively, and we must do with courage, and we must do so on a consistent basis because that’s what this moment of urgency requires.”

The Chairperson thanked the AG for her presentation and opened the Committee up for discussion.

Discussion
Ms C Seoposengwe (ANC) raised the question of delays in payment due to companies. She said it takes “a long time [for] the Department to pay.” This, she said, especially affected small businesses, most of which end up going “bankrupt.” She said that the government was known for “that type of attitude,” namely of “not paying in 30 days.”

She also raised the question of the over-expenditure in KZN concerning the fixing of schools, especially during times of harsh and stormy weather. She asked whether this was not part of the disaster budget. She wanted to know why it is considered an over-expenditure, and asked whether it was not part of the budget. She said “we do have [a] disaster fund.”

She wanted the AG to also “reiterate what she was saying about the Northern Cape.”

Mr N Singh (IFP) said “this report paints a very, very bleak picture of financial management within government departments generally and state-owned enterprises. And I think for us it’s just information but I do know—and perhaps the AG can confirm—that all these individual reports are shared with the ministers, with the premiers, and with the portfolio committees so that they need to take the action. You know I always say in this Committee: we receive the report, lamentation, lamentation, lamentation. But there seems to be no progress. Corruption has now become an economic activity in our country. And AG, you know these teams that you belong to: we need to meet them…what coordinated effort is there going to be to prevent this kind of poor, inexcusable lack of financial management that we have in our country.” He said it was “disgraceful that this kind of financial management can occur,” in South Africa. He added that “we must be grateful and thankful for having an office of the Auditor-General that can point out all these irregularities: fruitless and wasteful expenditure et cetera.”

Mr H Hoosen (DA) said the AG’s presentation reflected a “very depressing state of affairs” because “year-on-year when you see these reports—and every time the AG presents a report—the situation appears to be getting worse over time. And granted I think that there are some areas of excellence where there is some progress being made, and I mustn’t be unfair about that. But from a bird’s-eyed view the unfortunate reality is that over the years the situation does seem to be getting worse. And it does point to poor administration and poor financial management and a growing rate of corruption in the country.” He said “the situation is never going to get better with better reporting. It’s only going to get better when there is going to be better action and accountability taken for those reports. So, it’s one thing having a brilliant report that points out what the weaknesses are. But what we do with that information thereafter becomes critical or else we will continue in the situation we are at, where because of a lack of accountability and consequences, the situation gets worse. People do as they please because they know they can get away with it. And just to use one example, Chairperson, the one thing that I picked up from this report of 605 false declarations by suppliers (sic). What does that tell you? It tells you that there are suppliers who know—who think—that they can get away with it. And in my mind I question surely that is a criminal offense where somebody takes the chance to mislead [the] government in order to be able to secure a contract or a tender or something—and deliberately so. And yet very seldom do we actually hear of the police knocking on some company’s door because they provided false information. That must be a criminal offence and I just want to hear—and I’m not as familiar with what the consequences of that are for private companies who take those chances.” He asked if the AG could “alert us to what provision in law is there in respect of that. And I’m sure there must a criminal offence because if we’re not going to start taking action at private companies for the chances that they take, as the famous saying going that ‘wherever there is corruption there is a corruptee and a corruptor’: you have to attack it from both ends. And this is one of the core reasons why the situation is getting worse is because there are also private companies who know that they can get away with these things.”

He said “unauthorised expenditure, irregular expenditure just seems to be getting worse year-on-year and I want to raise a question with the AG: Is that I don’t—and I know that we don’t—expect the AG to be taking action against individuals; that’s not their core business. Their core business is to go and look into it, and provide their reports and there are other institutions in our country that must take that information and implement corrective action. But the one thing that I do find—and the AG spent some time explaining the role of the accounting officers and how important it is for them to do their work—but there are many cases where the accounting officers themselves do nothing. And because they know nothing is going to happen to them, there are no consequences for that. Then they just do as they please. So here you have a report that’s presented to the accounting officer to say these are the areas of weakness that we found in your institution. These areas point towards poor financial management on the parts of very specific officials and you recommend corrective action. But that accounting officer takes no action thereafter, and the next year a similar thing happens. Is there any monitoring of accounting officers themselves? So, to give you an example: A dashboard that is ‘in this particular instance we found a risk last year, these are the areas where there were weaknesses. We have a hundred examples of that, where there are accounting officers should have taken action and only 10 percent of them actually acted upon it. Then those accounting officers must also be exposed to a—for not doing work that they’re supposed to be doing. So in short what I’m trying to say, Chairperson, is that for as long as the institutions and the people in authority who have the power to do something and take action against individuals for misconduct, irregular expenditure, corruption and so on. The Auditor-General can provide the best reports and it will get worse every year. But if we’re not going to shift our focus and put more pressure on those institutions that are actually supposed to implement the findings of this—of the Auditor-General’s report—and take corrective action and hold people accountable, you and I and the rest of this Portfolio Committee (sic) will be seeing this picture every single week for the rest of our lives for as long as we sit on this Portfolio Committee (sic). So I’d like to hear the Auditor-General’s comments on some of the points and the questions that I’ve raised.”

The Chairperson noted that “we have identified through the audit about R116 million which has gone to government employees through contracts in terms of procurement or office bearers. Having identified this lack of control, is there any referral that has been made on these matters, or [does it] still rest with accounting officers to ensure that something is done directly on these matters? Because there is a clear directive on this matter (sic). The second area which I think we should worry ourselves on is the question of non-submission of financial statements for the audits. That we have entities that continue to benefit from the public purse but they fail to make adequate submission in terms of financial statements on time for such audits to take place. It is [a] very concerning matter which I think we really need to ensure that those who are in authority in such institutions— they must be made to account on such kind (sic) of unwarranted action. The third area relates to what the AG has identified as contributors on both the areas of wasteful and fruitless expenditure. And looking into the amounts involved, the parameters that have forced such and such instances would require that the accounting officers concerned would have to account on such areas. Notably, some of the areas have been dealt with which have been identified through the Covid-19 audit which account for a huge amount in such instances looking into social development. One last point which I think we need to advance as a Committee and appreciate what the AG’s office is doing, is on the MI activities, where thought the process take[s] its own time, the point which is very critical is to identify where the areas of attention would have to be and what has been done so far by such accounting officers or executive authorities on those matters. Because that’s where the actual essence of the review of the public audit act has been. To ensure that this office would push through its own work in identifying some witnesses make some people account and such individuals ought to be accountable; they ought to show cause for such accountability. Lastly, the area that is an impediment of the AG’s office to effect such a material irregularity (MI) auditors (sic) which she has identified as instability in the highest officers of various entities. And that as a causal factor would create a spiral in as far as the actual resolving of those critical matters which are found to be witnesses in those areas which have been identified (sic).”

He then recognised the AG for her response.

Ms Maluleke said the concern about the late payments is something that the AG had been raising for a while. Until the basic disciplines can be sorted out concerning timely payments for goods and services received at a good quality and price, “not only are we going to ensure that we maintain the resources that we need so that we can pay for services that we are procuring and manage our cashflows accordingly, but also we’re then going to ensure that the small businesses are able to sustain [it].”

On the question relating to KZN and the fixing of schools in that province, she said “It wouldn’t have been budgeted for in the context of this crisis that arose. The disaster management fund would not have been adequate to deal with this scale of expenditure. However, what we did see in KZN is that there is [a] coordinated effort around responding to this disaster which has been, I think, quite helpful in driving an effective and swift response to maintaining the schools that were damaged.”

On the question of the Northern Cape, she said “The point I was making on the Department of Health was that we had found a number of [inaudible] which really had their roots in supply chain management findings where there was a bid issued to a supplier who really didn’t score the highest points, especially on pricing. And when we raised the non-compliance finding, we looked more carefully to see if there was evidence of financial loss, and we found that on this particular contract the Department had overpaid for the service because it issued the contract to this particular service provider. The accounting officer in that instance disagreed with us. They agreed with us on other matters. But on this one they disagreed. So we both agreed that the best arbiter on this one would be the National Treasury. So we needed to make sure that we get the space for the Treasury to look at this. So we’ve enjoyed cooperation from the National Treasury. The point I was making is that we have not yet completed the journey. The other point I would want to make around the Department of Health in the Northern Cape—which is really what we saying around instability—is that we were working with a particular accounting officer on this MI and another one as well, and that accounting officer has now shifted so there’s a new one which is delaying action that is required on some of the matters that we’ve raised. So we’ve to give the acting accounting officer the space to engage on the matter, [to] become obey au fait with the Act and shape their own response to it.”

In response to Mr Singh, she said “I’m hearing you say that you’d like to meet the team with whom we’re working [with] and, if I understood you correctly, it’s really about saying ‘with whom are we collaborating when we hand over these matters and how can we best find each other so that we can drive greater speed in implementing consequences and I think that’s something we’d welcome.”

Responding to Mr Hoosen, she said “I agree with you that we do need to find every way to get those that must act to act. There’s a role for executive authorities; there’s a role for oversight, and as we’ve done before at the office of the AG we stand ready to plan with the Portfolio Committees in Parliament to share insight on what we found and to help them shape their oversight work so that accountability can become a feature arising from all the different reports that we conduct. It’s going to be difficult to sit only with the consolidated report. I think the magic will happen when there’s the specificity that must happen at Portfolio Committee level when we deal with specific auditees.”

On the question whether there is opportunity to hold private companies accountable for matters that arise in finings of irregular expenditure and material irregularity, she said “Absolutely, and that’s where we’ve got to get the law enforcement machinery up and running. Because the best way to pursue the other side of the transaction is by getting the law enforcement agencies to act on these things. As I’ve said before in this Committee, the experience that we’ve had in collaborating in the context of the Fusion Centre is something we can all learn from and build on going forward.”

On “the R116 million that went to government employees and public officials,” she said “that sits with the accounting officer to follow up, because in those contracts we’ve not found instances of financial loss. We were not able to link that specific transgression to financial loss. If we ever do, the matter will end up with a material irregularity. We raise the issue because accounting officers must act on it, but also I think it sharpens all of our focus on the culture of non-compliance that sites within the system, and it also highlights the need for us to advocate for a different way of doing things, especially around public procurement.”

On the matter of the non-submission of financial statements, she said “the good news is that we have seen higher levels of submissions of financial statements over time, so there are those specific cases that need attention. What we worry about is that yes there are submissions, but in far too many instances the submissions are of such poor quality that not only is the audit process painful, it is also unnecessarily costly. And so we need to stem that. But, importantly, it is also an indication that the basic controls of managing finances are simply not in place. So when we see an auditee that’s got an unqualified audit with findings, where they are in that yellow zone, it’s good to celebrate that they have credible financials statements, but it’s also important to recognise that underneath that are major transgressions and weaknesses and problems that are leading towards diminished capacity to maintain resources: supply chain findings, procurement issues, contract management issues, quality reporting problems in terms of decision making during the year. So those auditees in that yellow zone, I think, need more attention than what we’ve given before. There tends to be some comfort in that yellow zone, because auditees say ‘well, at least I have financials that are unqualified.’ Well that’s one step. Underneath that are major problems that are creating service delivery issues and that are creating leakages of public funds. And those weaknesses need to be attended to urgently.”

On fruitless and wasteful expenditure, she said “the controls […] are the ones that we need to deal with, so that the discipline of managing our processes, our cash flows, the discipline of managing our records, all of those things, I think, are going to stand us in good stead so that we can reduce the instances of fruitless and wasteful expenditure. Some of that fruitless and wasteful expenditure has resulted in material irregularities and some of it hasn’t. However, we’ll continue to raise the matter with accounting officers, for them to attend to in terms of preventing these instance but also acting quickly so that you can build a culture less tolerant of fruitless and wasteful expenditure.”

On the outcomes of the real-time audits on the Covid relief funds, she said “We are following up on the material irregularities that would have arisen from those audits. So you’ll start to see those coming through the process. So we have not waited for the year to end and for us to complete the 2020/21 financial audits. We will continue to track those [inaudible] and take them through the process that we’ve mapped out. The good thing is we’re starting to see a responsiveness amongst accounting officers, and for that we were quite pleased. And it gives us some hope that controls will be fixed, that accounting officers will start to embrace their duties as set out in [the] law. And, yes, the impediment of instability at key levels makes it difficult to complete the journey on MIs but importantly it is compromising the capability of different departments and entities within [the] government. That does require urgent attention.”

The Chairperson thanked the AG and said “taking note of your response on the categorisation of the financial statements based on the scale of credibility and the worst that have been submitted, and those who have leaned towards the process of audit (sic) to correct their own financials, if you were to say we can do it now or probably you can choose to be given time to do so that from the number of such categories of the standing of the financials from the best to the worst, how many would you categorise as the classification from clean audit up to the disclaimed audits and beyond—would somewhat want to have created an analogy of what you started to get in in terms of the basis of determination that you can have a credible statement but within that credible statement there might be things that are hidden in terms of various items which are somewhat leaning towards some malpractices beneath such a statements (sic). If from time (sic) we could have that kind of classification which would assist to see that kind of benefit, you correct your statements, you end up being classified at the end of that audit as being part of the clean audit outcomes auditees, or disclaimed, what have you. So you could as well correlate that kind of strength of weakness to the actual outcome which is provided through the end of the audit (sic). If that is possible whether now or on time (sic) we’ll really appreciate that so we can see that much time must be spent on ensuring that your actual financials are done properly for this kind of audit (sic).”

Ms Maluleke said that she was “happy to provide more insight on this, but what I will say, though, is the fact that only 49 percent of auditees had credible financial information. That tells you that you’ve got the bulk of auditees in the PFMA cycle unable to maintain credible financial records during the year. And the financial reporting framework for these entities, especially the departments, that framework is not that complex, it really isn’t. So it’s not about difficult financial reporting requirements. It’s just about disciplines of maintaining our financial records. So I think that’s a problem that we need to attend to. So anyone who doesn’t have the ability to give credible financial information at the end of the year needs attention from an oversight point of view. The ones that have ‘unqualified with findings’: most of those findings are associated with procurement findings. So that majority of those in the yellow zone—and then you can count all of them in the ‘qualified’ and ‘disclaimer’ zone[s] as well—but right from unqualified, most of those have procurement findings. And those procurement findings are the matters that result in irregular expenditure and are the matters that result in financial loss. And even if we can’t track financial loss for material irregularity in that it’s direct, even if we can’t track it and say ‘well non-compliance led to an overpayment in this way’: if there’s a non-compliance where we’ve issues a contract to someone who doesn’t meet their tax obligations, in that they don’t deliver a credible or a valid tax clearance certificate, it means that we diminishing the capacity of [the] government to collect the taxes that are due. So those findings are just as important as the material irregularity was. The ones that end up in ‘material irregularity’ are the ones that need urgent attention so we can stem the direct financial loss. The ones that might not end up in that bucket of MIs are still needing attention, because we must deal with how we procure so that we can preserve jobs and meet our local content imperatives from a policy point of view, otherwise that instrument won’t work. Where it’s a tax compliance matter, we’ve got to drive a culture of tax compliance; we’ve got make sure that the fiscus gets what its due, especially in the course of procuring goods and services from suppliers. Those that are about bids that are uncompetitive: if a bid is unfair, we are compromising the ability of institutions of government to demonstrate that citizens can trust that they are servicing in their interests; that citizens can trust that they are meeting the objectives as set out in section 217 of the Constitution. So what I'm saying, Chair, is let’s not allow anyone to be complacent when they sit in the yellow zone. That’s a tricky space; that’s the space where there is leakage. Yes, it’s not as bad as a disclaimer, but it’s actually not that impressive, especially in the PFMA cycle where the financial reporting standards are not that tricky. Some of the public entities report on the basis of IFRS, which is a little bit more complex, and we would have some sympathy for that. But the majority of the 400 plus audits that we completed are for financial reporting standards that are not that complex. So it’s about discipline and if someone can’t put together financials, you’ve got to wonder how they are comfortable that they’re able to maintain their resources during the year.”

The Chairperson thanked the AG for her report, but said it was very “very steep” because she “emphasised the fact that only 57 percent of the budget that put guarantees that South Africans could be happy that it’s properly accounted for…. and the rest is something to worry about….”

Her thanked her again for her report and her work.

He said the Committee was “happy” that she had not “highlighted any further difficulties except for the environment, no matters of security hitches that you have experienced, and in this regard, at least we can be, stand firm (sic) to say at least your work has been done within an environment which is a bit peaceful but hectic.”

He thanked all attendees and then adjourned the meeting.