CONSOLIDATED GENERAL REPORT on NATIONAL and PROVINCIAL audit outcomes

PFMA 2011-12

CONSOLIDATED GENERAL REPORT ON NATIONAL AND PROVINCIAL AUDIT OUTCOMES

2011-12

RP07/2013 ISBN: 978-0-621-41523-0

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Ourreputation promise/mission

The Auditor-General of South Africa (AGSA) has a constitutional mandate and, as the Supreme Audit Institution (SAI) of South Africa,

it exists to strengthen our country’s democracy by enabling oversight, accountability and governance in the

public sector through auditing, thereby building public confidence.

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The information and insights presented in this flagship

publication of my office are aimed at empowering oversight structures

and executive leaders to focus on those issues that will result in reliable

financial statements, credible reporting on service delivery

and compliance with laws and regulations.

This publication also captures the commitments that leaders have

made to improve audit outcomes.

Our responsibility extends to citizens who trust us to make a

contribution towards a better South Africa

AudItoR-GeNeRAl: teReNce NomBemBe

4

over

view

Message from the

Auditor-General

Slow progress towards clean audits with more regressions than

improvements (Part 1)

117 auditees achieved clean audits (Part 1)

Some progress made towards improving the reliability and usefulness of

service delivery reporting

(Part 1)

High levels of unauthorised, irregular as well as fruitless and

wasteful expenditure(Part 1)

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38

39

9169

Continuing high level

of non-compliance

with laws and

regulations(Part 1)

79

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Audit outcomes of ministerial portfolios and commitments made

for improvement(Part 2)

Audit outcomes and weaknesses in implementation of key national programmes in Health, Human Settlements, Education, Social

Development and Public Works sectors(Part 3)

The audit outcomes of 3 provinces

regress (Part 4)

Indications of financial health issues at some

departments and public entities

(Part 1)

HR and IT management needs further attention

(Part 1)

Executive leadership, coordinating institutions and legislative oversight should

strengthen their contributions(Part 1)

Auditees’ internal control systems are not improving

(Part 1)106 168

178

428

470

115

138

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cleAN AudItS 2011-12 11

FoReWoRd 24

PARt oNe: coNSolIdAted ANAlYSIS oF tHe AudIt outcomeS oF NAtIoNAl ANd PRoVINcIAl GoVeRNmeNt

SectIoN 1: executIVe SummARY 30

SectIoN 2: oVeRVIeW oF AudIt outcomeS 382.1 oVeRAll AudIt outcomeS 38

2.1.1 Summary of overall audit outcomes 382.1.2 Financially unqualified financial statements – five-year progress 462.1.3 useful and reliable reporting against predetermined objectives – three-year progress 472.1.4 compliance with key laws and regulations – three-year progress 482.1.5 Status and outcomes of audits not finalised by 15 october 2012 492.1.6 outcomes of audits not conducted by the AGSA 50

2.2 FINdINGS ARISING FRom tHe AudIt oF FINANcIAl StAtemeNtS 552.2.1 material misstatements in financial statements (corrected and uncorrected) 552.2.2 Financial statement qualification findings – departments 57ta

ble

of c

onte

nts

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2.2.3 Financial statement qualification findings – public entities 592.2.4 Root causes identified and best practice recommendations 612.2.5 outcomes of the audit of consolidated financial statements and revenue funds 64

2.3 FINdINGS ARISING FRom tHe AudIt oF RePoRtING oN PRedeteRmINed oBjectIVeS 692.3.1 overall outcomes from the audit of reporting on predetermined objectives 692.3.2 Findings on predetermined objectives 712.3.3 Root causes and best practice recommendations 74

2.4 FINdINGS ARISING FRom tHe AudIt oF comPlIANce WItH lAWS ANd ReGulAtIoNS 792.4.1 overall outcomes from the audit of compliance with laws and regulations 792.4.2 Findings on compliance with laws and regulations 812.4.3 Findings arising from the audit of supply chain management 832.4.4 unauthorised, irregular as well as fruitless and wasteful expenditure incurred 912.4.5 Root causes identified and good practice recommendations 100

SectIoN 3: AudIteeS’ SYStemS oF INteRNAl coNtRol 1063.1 tHe dRIVeRS oF INteRNAl coNtRol 1063.2 eFFectIVe HumAN ReSouRce mANAGemeNt AS A SPecIFIc dRIVeR oF AudIt outcomeS 1153.3 FINdINGS ARISING FRom PeRFoRmANce AudItS oN tHe uSe oN coNSultANtS At Selected

GoVeRNmeNt dePARtmeNtS119

3.4 INFoRmAtIoN tecHNoloGY mANAGemeNt AS A keY dRIVeR oF AudIt outcomeS 1203.4.1 Information technology governance 1213.4.2 Summary of weaknesses identified in the management of financial information systems 1223.4.3 Project risks in developing or implementing major systems in government 1253.4.4 Summary of identified weaknesses in the management of performance information

systems 126

3.4.5 drivers of It control weaknesses 1313.4.6 Recommendations and quick wins in resolving information technology

management weaknesses131

3.5 AudIt commItteeS ANd INteRNAl AudIt 132

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SectIoN 4: ImPAct oF keY Role PlAYeRS oN AudIt outcomeS ANd commItmeNtS mAde

138

4.1 ASSuRANce PRoVIdeRS IN NAtIoNAl ANd PRoVINcIAl GoVeRNmeNt 1384.2 leGISlAtIVe oVeRSIGHt 1434.3 executIVe leAdeRSHIP ANd cooRdINAtING INStItutIoNS 1554.4 ReSPoNSIBIlItY oF keY Role PlAYeRS to AddReSS PooR PeRFoRmANce

ANd tRANSGReSSIoNS163

4.5 AGSA INItIAtIVeS to eNcouRAGe cleAN AudItS 165

SectIoN 5: emeRGING mAtteRS ANd AudIteeS’ FINANcIAl HeAltH INdIcAtoRS

168

5.1 otHeR cuRReNt ANd emeRGING mAtteRS tHAt RequIRe AtteNtIoN 168

5.2 AudIteeS’ FINANcIAl HeAltH INdIcAtoRS 170

5.2.1 Financial management by departments on the modified cash basis of accounting 170

5.2.2 underspending of capital budgets and conditional grants by departments 171

5.2.3 debtors management 172

5.2.4 Financial health risks at public entities 173

5.2.5 conclusions around auditees’ financial health indicators 173

PARt tWo: AudIt outcomeS oF mINISteRIAl PoRtFolIoS 178

SectIoN 2.1: keY ASPectS oF AudIt outcomeS oF GoVeRNmeNt ANd mINISteRIAl PoRtFolIoS

178

SectIoN 2.2: AudIt outcomeS oF INdIVIduAl mINISteRIAl PoRtFolIoS 1832.2.1 ceNtRAl GoVeRNmeNt AdmINIStRAtIoN 184

Vote 1: the Presidency [including Performance monitoring and evaluation and Government communication and Information Systems (GcIS)] 184

Vote 2: Parliament (including provincial legislatures) 190 Vote 3: cooperative Governance and traditional Affairs 196 Vote 4: Home Affairs 202 Vote 5: International Relations and cooperation 208

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Vote 6: Performance monitoring and evaluation (included under Vote 1: The Presidency)

Vote 7: Public Works 214 Vote 8: Women, children and People with disabilities 220

2.2.2 FINANcIAl ANd AdmINIStRAtIVe SeRVIceS 226 Vote 9: Government communication and Information Systems (GcIS)

(included under Vote 1: The Presidency)

Vote 10: National treasury (Finance) 226 Vote 11: Public enterprises 236 Vote 12: Public Service and Administration 242 Vote 13: Statistics South Africa 248

2.2.3 SocIAl SeRVIceS 254 Vote 14: Arts and culture 254 Vote 15: Basic education 264 Vote 16: Health 270 Vote 17: Higher education and training 276 Vote 18: labour 300 Vote 19: Social development 306 Vote 20: Sport and Recreation South Africa 312

2.2.4 juStIce ANd PRotectIoN SeRVIceS 318 Vote 21: correctional Services 318 Vote 22: defence and military Veterans 324 Vote 23: Independent Police Investigative directorate (Independent complaints directorate)

(included under Vote 25: Police)

Vote 24: justice and constitutional development 330 Vote 25: Police 336

2.2.5 ecoNomIc SeRVIceS ANd INFRAStRuctuRe 342Vote 26: Agriculture, Forestry and Fisheries 342Vote 27: communications 348Vote 28: economic development 354Vote 29: energy 360

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Vote 30: environmental Affairs 366Vote 31: Human Settlements 372Vote 32: mineral Resources 378Vote 33: Rural development and land Reform 384Vote 34: Science and technology 390Vote 35: tourism 396Vote 36: trade and Industry 402Vote 37: transport 410Vote 38: Water Affairs 418

PARt tHRee: SectoR AudIt outcomeS 428

3.1 AudIt outcomeS oF SectoR dePARtmeNtS 428

3.1.1 educAtIoN 4343.1.2 HeAltH 4403.1.3 HumAN SettlemeNtS 4463.1.4 PuBlIc WoRkS 4523.1.5 SocIAl deVeloPmeNt 460

PARt FouR: HIGHlIGHtS oF PRoVINcIAl AudIt outcomeS 4704.1 AudIt outcomeS oF tHe eASteRN cAPe PRoVINce 4764.2 AudIt outcomeS oF tHe FRee StAte PRoVINce 4784.3 AudIt outcomeS oF GAuteNG PRoVINce 4804.4 AudIt outcomeS oF kWAZulu-NAtAl 4824.5 AudIt outcomeS oF tHe lImPoPo PRoVINce 4844.6 AudIt outcomeS oF mPumAlANGA PRoVINce 4864.7 AudIt outcomeS oF tHe NoRtHeRN cAPe 4884.8 AudIt outcomeS oF tHe NoRtH WeSt PRoVINce 4904.9 AudIt outcomeS oF tHe WeSteRN cAPe 492

GloSSARY oF teRmS, AcRoNYmS ANd ABBReVIAtIoNS 497

CLEAN AUDITS 2011-12

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Clean audit = Unqualified financial statements with no material findings on predetermined objectives or compliance with laws and regulations

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NATIONAL CLEAN AUDITS 2011-12

dePARtmeNt

Environmental AffairsPublic EnterprisesPublic Service Commission

PuBlIc eNtItY

AEC-Amersham (Pty) LtdArecsa Human Capital (Pty) LtdArmscor Defence Institutes (Pty) LtdBanking Sector Education and Training Authority (BANKSETA)Chemical Industries Education and Training AuthorityCompanies TribunalCouncil for Medical SchemesCouncil for Mineral Technology (Mintek)Council for Scientific and Industrial Research (CSIR)Council on Higher EducationCyclotope (Pty) LtdEducation, Training and Development Practices Sector Education and Training AuthorityEnergy Africa RehabilitationErasmusrand Eiendomme (Pty) Ltd

PuBlIc eNtItY

Erf 706 RietfonteinFinance and Accounting Services Sector Education and Training AuthorityFinancial Services BoardFluoro Pack (Pty) LtdFluoropharm (Pty) LtdFreedom Park TrustGamma Film Industries (Pty) LtdGammatec NDT Supplies (Pty) LtdHuman Sciences Research CouncilIndependent Regulatory Board for AuditorsInstitute for Maritime Technology (Pty) LtdInternational Frontier Technologies (Interfront) SOC LtdiSimangaliso Wetland Park Authority Iziko Museums of Cape TownKlippoortje Koolmyne (Pty) LtdKwaZulu-Natal MuseumKwaZulu-Natal Performing Arts CompanyLand and Agricultural Bank of South AfricaLuthuli MuseumMahne’s Areas (Pty) LtdMarket Theatre FoundationMedia, Information and Communication Technologies Sector Education and Training AuthorityMINDEV (Pty) LtdMining Qualifications Sector Education and Training Authority

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NATIONAL CLEAN AUDITS 2011-12

PuBlIc eNtItY

Msunduzi/Voortrekker MuseumNational Agricultural Marketing CouncilNational Research FoundationNTP Logistics (Pty) LtdNTP Radiosotopes (Pty) Ltd Oospark (Pty) LtdPelchemPetroleum Oil and Gas Corporation of SA (Namibia) (Pty) LtdPetrosa Brass (Pty) LtdPetrosa Gryphon Marin Permit (Pty) LtdPetrosa Iris (Pty) LtdPetrosa Sudan (Pty) LtdPetrosa Synfuels International (Pty) LtdPetrosa Themis (Pty) LtdPresident’s FundProject Development FacilitySA Bureau of Standards (SABS)Small Enterprise Development AgencySouth Africa Diamond and Precious Metals RegulatorSouth African Agency for Promotion of Petroleum Exploration and Exploitation (Pty) LtdSouth African Defence Force FundSouth African Housing Fund

PuBlIc eNtItY

South African National AIDS TrustSouth African National Energy Research Institute (Pty) LtdSouth African National ParksSouth African Qualifications AuthoritySouth African Revenue Services (Administered Revenue)South African Revenue Services (Own Account)South African Social Security Agency (SASSA)South African Weather ServicesSportsrand (Pty) LtdState Diamond TraderTechnical Assistance UnitTechnology and Human Resources for Industry ProgrammeThe South African National Roads Agency LimitedUnemployment Insurance Fund

FREE STATE CLEAN AUDITS 2011-12

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dePARtmeNtFree State Provincial legislatureFree State Provincial treasuryoffice of the Premier

PuBlIc eNtItYjames Robertson Bursary FundNature conservation trust FundPrivate Patients Fund trustRecreation Fund trustthomas Robertson Bursary Fund

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GAUTENG CLEAN AUDITS 2011-12

1515

PuBlIc eNtItY

AIdc development centrecradle of Humankind trading entitydinokeng World Heritage trading entityGauteng Partnership FundGreater Newtown development companyIndustrial development Zonethe Innovation Hub

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KWAZULU-NATAL CLEAN AUDITS 2011-12

dePARtmeNtArts and culturekwaZulu-Natal Provincial treasury

PuBlIc eNtItYAmafa akwazulu-NatalikZN Political Parties’ FundNatal joint municipal Pension Fund (Provident)Natal joint municipal Pension Fund (Retirement)Natal joint municipal Pension Fund (Superannuation)

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LIMPOPO CLEAN AUDITS 2011-12

PuBlIc eNtItY

centennial trading company 145limpopo Housing Boardmukumbani tea estatemutale Agric estate

MPUMALANGA CLEAN AUDITS 2011-12

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dePARtmeNtFinanceoffice of the Premier

PuBlIc eNtItYmpumalanga Gambling Board

NORTH WEST CLEAN AUDIT 2011-12

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PuBlIc eNtItY

North West Gambling Board

WESTERN CAPE CLEAN AUDITS 2011-12

dePARtmeNtcommunity Safetyenvironmental Affairs and development PlanningWestern cape Provincial legislatureWestern cape Provincial treasury

PuBlIc eNtItYcape medical depotdestination marketing organisation (t/a cape town Routes unlimited)the Heritage Western capeWestern cape cultural commissionWestern cape Gambling and Racing BoardWestern cape language committee

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FOREWORD

FoReWoRd

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CONSOLIDATED GENERAL REPORT ON NATIONAL AND PROVINCIAL AUDIT OUTCOMES OF 2011-12

5 risk areas

Key controls

Pervasive root causes

Slow progress towards clean audits with slightly more regressions than improvements

6% (31) 3% (16) 2% (12)

3% (17) 5% (24) 6% (27)

14% (74) 14% (72) 14% (66)

55% (297) 53% (279) 47% (226)

22% (117) 25% (132) 31% (152)

2011-12 (536) 2010-11 (523) 2009-10 (483)

Financially unqualified with no

findings

Financially unqualified with

findings

Qualified with findings

Adverse, disclaimer with findings Audits outstanding

Limited progress made in addressing five key risk areas and regression in overall status of key controls

IT controls

Unchanged

HR

Unchanged

Supply chain management

Minimal improvement

Material mistakes in AFS submitted

for audit

Unchanged

Predetermined objectives

Improvement

Leadership Financial and performance management Governance

16% 21%

12%

35%

38%

27%

49% 41%

61%

No significant control weaknesses Control weaknesses are being addressed Control weaknesses are not being addressed

Regression Unchanged

Vacancies in key positions, leadership instability and ineffective performance management

Internal controls not effective – checks and balances not performed

Not all role players are providing the level of assurance required

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CONSOLIDATED gENErAL rEpOrT ON NATIONAL AND prOVINCIAL AUDIT OUTCOmES Of 2011-12

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FoReWoRd

It is a pleasure to present to Parliament my 2011-12 general report on audit outcomes of departments, legislatures, public entities and other entities in the national and provincial spheres of government.

In response to the 2010-11 audit outcomes, commitments were made by the executive and oversight bodies to intensify their efforts in bringing positive change within the administration.

Despite my expectation that these commitments would drive improvements towards clean audits, the audit outcomes for the year show a general stagnant trend, with less than a quarter of auditees obtaining clean audit opinions and 52 not able to sustain their prior year clean audit opinion. My report shows that many leaders did not own and drive these commitments, so the commitments are left to flounder until the next audit starts. In this regard, I single out two significant commitments made a year ago:

• The executive committed to meet with my office quarterly for at least an hour. About 78% of them have made time at least three times in the past year to meet and share the results of our assessment of the risks and controls and to consider the status of commitments made and make new commitments. Although the engagements were well received, only small movements in audit outcomes can be seen. This was due to frequent leadership changes resulting in disruption in the implementation of commitments, our message being ignored, or our conversation not being compelling and persuasive enough. We therefore undertake to continue with the quarterly engagements, but with greater emphasis on quality conversations leading to increased impact.

• Parliament and legislatures committed to improve the collaboration between their respective public accounts committees and portfolio committees. We have yet to see more concentrated efforts in this regard as an uncoordinated approach will continue to weaken the effectiveness of oversight.

Of special concern is the increase in auditees with material findings on non-compliance with legislation, bringing it to 74%. Even though I have stressed for the past three years the urgent need to address the quality of the financial statements submitted for audit and weaknesses in supply chain management, human resource management and information technology controls, there has been minimal improvement.

The usefulness and reliability of the annual performance reports continue to improve, which is gratifying. I am now able to make a clearer assessment of service delivery risks but not to the full extent necessary (as some key departments responsible for national outcomes, such as those in the health, education and human settlement sectors, continue to have material shortcomings). Based on the annual performance reports, about 42% of auditees achieved 80% or fewer of their planned service delivery targets, while some departments had significantly underspent their conditional grants and capital budgets. My report further highlights risks to the financial health of national and provincial government flowing from poor budget management, cash and debtors management of departments and the financial management of some public entities. These indicators reflect that the fiscus could be placed under further pressure if such risks are not addressed.

In this general report, I raise three areas that require corrective steps by those charged with governance to achieve improvements in the audit outcomes:

• Vacancies in key positions and instability in leadership positions affect the pace of sustainable improvements. Ineffective performance management is evident at some auditees, which means that officials who perform poorly are not dealt with decisively. A concerted effort is required to address the challenges in human resource capacity and productivity.

CONSOLIDATED gENErAL rEpOrT ON NATIONAL AND prOVINCIAL AUDIT OUTCOmES Of 2011-12

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• Effective internal controls to prevent, detect and correct non-compliance with legislation and mistakes in the financial and performance reports are lacking. Overall the effectiveness of key controls has regressed, as they were not designed and implemented in a sustainable manner. Checks and balances for all key processes, monthly reporting and validation processes to ensure the credibility of all management information are basic controls which skilled professional should be able to implement.

• Government should be monitored in a thorough, diligent and collaborative manner. My office only provides independent assurance on the credibility of financial and performance information and compliance with selected legislation. We are not the only provider of assurance to the citizens that government is delivering services in a responsible and accountable manner. The monitoring functions vested in senior management, accounting officers, internal audit, audit committees and executive authorities should be better exercised so that audit outcomes and service delivery issues are dealt with through self-monitoring, while audit provides an external validation. The treasuries, offices of the premiers, public service administration and other coordinating/monitoring institutions should fulfil their role envisaged in legislation to guide, support, coordinate and monitor government. The legislatures and Parliament should be scrupulous and courageous in performing their oversight function in order to make an impact on clean administration. My assessment (detailed in this report) is that not all of these role players are providing the level of assurance required to create the momentum towards improve audit outcomes.

A common reaction to the audit outcomes is the question posed by many about the need for officials to be accountable, and for there to be consequences for poor performance, misappropriation of state resources and fraud. In response, we have highlighted in a separate booklet, the range of legislation at the government’s disposal that enables remedies to be applied where there has been transgression. These must be used where necessary to reverse the culture of “business-as-usual”. It is my assessment that the full power of the law is yet to be activated, leading to commentators asking “What can be done?” or saying “There are no consequences”.

Highlighting these remedies provides a starting point for our responsible leaders and the relevant legislatures and departments to take action. All parties have to play their part.

Although progress towards clean audits is slow, I am encouraged by examples of commitments by leaders and officials which translated into improved audit outcomes and I am confident similar results can be achieved by all auditees. In conjunction with various key role players, my office has provided input towards the development of solutions to the challenges highlighted in this report, and will in future share assessments of progress in joint sessions with the Head of Government Business and Parliament and through similar engagements in the provinces.

It is through all our efforts and the work of auditors that we will contribute towards strengthening our democracy through auditing.

Auditor-GeneralPretoriaMarch 2013

RP07/2013 ISBN: 978-0-621-41523-0