Briefing to the Energy Portfolio Committee on Energy on the audit outcomes of the Energy portfolio for the 2014-15 financial year Presented by: Zolisa Zwakala, Carl Wessel and Lufuno Mmbadi 13 October 2015

Reputation promise/mission The Auditor-General of South Africa 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. Need to consider the following All information to be included needs to have been audited and is accurate and correct If information included is not audited then it needs to be specified as such or specified that this was based on a sample tested

Contents Slide nr. Purpose of the presentation 4 The scope of the AGSA audits 5 2. Overall audit outcomes for Energy portfolio 6 3. Auditor-General six key focus areas 7 4. Financial health 11 4. Unauthorised/ Irregular / Fruitless & Wasteful expenditure 12 5. Assessment of assurance providers 16 6. Drivers of key controls for portfolio 17 7. Root causes and recommendations 18 Minister commitments to address root causes 20

Purpose of the presentation Annually oversight committees set aside time to focus on assessing the performance of departments. On completion of the process, portfolio committees are required to develop department-specific reports, namely budgetary review and recommendations reports (BRRR) which express the committee`s view on the department’s budget for recommendation to the National Treasury ahead of the following year`s budget period. Our role as the AGSA is to reflect on the audit work performed to assist the portfolio committee in its oversight role in assessing the performance of the departments taking into consideration the objective of the committee to produce a BRRR.

 X The scope of AGSA audits Provide assurance that AFS are free from misstatements that will affect users Do not provide assurance on the appropriateness of the departmental budgets Report on usefulness and reliability of the information in the annual performance report Do not provide assurance that service delivery has been achieved. Report on material non-compliance with relevant key legislations Do not report on ALL legislations – only key selected requirements from relevant legislations are audited Identifying the key internal control deficiencies to be addressed We assess the risk of fraud, but we are not responsible for – Fraud identification Fraud prevention

1. Overall audit outcomes for Energy portfolio 2014-15 PFMA 2014-15 2013-14 2012-13 Unqualified no findings Unqualified with findings Qualified with findings Adverse with findings Disclaimer with findings Not yet finalised Outstanding 9 auditees 8 auditees 8 auditees

2. Auditor-General six key focus areas for six auditee’s that were audited 2014-15 PFMA Quality of submitted financial statements Quality of submitted performance reports Compliance with legislation Good Concerning Intervention required Human resource and consequence management Information technology Financial health Improvement Stagnant or limited progress Regressed

2.1 Quality of submitted financial statements 2014-15 PFMA Outcome if NOT corrected Outcome after corrections 3 auditees Financially unqualified with findings Financially qualified (qualified/ disclaimed with findings) 2014-15 Avoided qualifications by correcting material misstatements during audit process Outcome if NOT corrected Outcome after corrections 4 auditees 2013-14 8

2.2 Quality of annual performance reports 2014-15 PFMA Annual performance reports of six entities audited were reliable and useful compared with 57% in the previous year 67% With no findings With findings Improved Usefulness Reliability Stagnant or little progress Regressed EQF did not prepare annual performance report All auditees that submitted information, did so in time for audit 1 1 SANEDI obtained a disclaimer on one programme and an adverse on another 9

2.3 Auditees did not comply with legislation in the following areas 2014-15 PFMA Quality of annual financial statements submitted Prevention of unauthorised, irregular and/ or fruitless and wasteful expenditure Management of procurement and or contracts Good Concerning Intervention required Management of strategic planning and performance Human resource & consequence management Internal audit & Audit committee Improvement Stagnant or limited progress Regressed

3. Financial health of the portfolio Good Concerning Intervention required 2014-15 PFMA Focus areas for financial health Status Comment Significant uncertainties CEF (Petro SA) The requirements to fully close or decommission redundant exploration wells are being researched. PetroSA has an obligation to rehabilitate and abandon its offshore and onshore operations valued at R9,3 billion which are currently not fully funded. In terms of the recently promulgated National Environmental Management Act, 1998 (Act No. 107 of 1998) (NEMA), PetroSA is required to have a fully funded rehabilitation liability within the next 12 months from year-end. Only to be included if going concern or accruals/payables or commitments have been included in the audit report. 11

4. UIFW expenditure definitions 2014-15 PFMA Unauthorised expenditure Expenditure not in accordance with the budget vote Irregular expenditure Expenditure incurred in contravention of key legislation Fruitless and wasteful expenditure Expenditure that should not have been incurred (incurred in vain that could have been avoided and no value for money) 12

4.1 Irregular expenditure for portfolio 2014-15 PFMA Identified by auditees Identified by auditors 13

4.2 Fruitless and wasteful expenditure for portfolio 2014-15 PFMA Identified by auditors: R1.3 million Identified by auditee: R3.4 million Identified by auditees Identified by auditors 14

4.3 Irregular Expenditure- Reconciliation 2014-15 PFMA Entity DOE R’000 CEF Group NERSA SANEDI Opening Balance 379 19 198 0.00 19 102 Incurred in current year 55 4 731 -1 704 426 Less prior year condoned -379 Less current year condoned -55 2 268 -19 102 Closing balance 21 172 15

5.1 Assessment of assurance providers for portfolio 2014-15 PFMA First level Improvement Stagnant or little progress Second level Regressed Please note that no assessment for PC. This can however be discussed with chair one-on-one to start preparing them for next year when this will be included Provides assurance Provides some assurance Provides limited/ no assurance Vacancy Not Evaluated 16

Drivers of internal control 6. Driver of key controls for portfolio 2014-15 PFMA Drivers of internal control Department & Entities Leadership Financial & performance management Governance Effective leadership culture Oversight responsibility HR management Policies and procedures Action plans IT governance Proper record keeping Processing and reconciling controls Reporting Compliance IT systems controls Risk management Internal audit Audit committee DOE   CEF NERSA NNR SANEDI Equalisation Fund Good Concerning Intervention required Improvement Stagnant or little progress Regressed

7. Root causes should be addressed 2014-15 PFMA Slow response by management in addressing the root causes of poor audit outcomes 2014-15 2013-14 Slow response by management was not one of the top three root causes in the prior year, however this year it is the main root cause of audit findings. This is due to action plans still being inadequate and implementation thereof not monitored. There is also no improvement in assurance provided by management and no improvement in the basic internal controls. Leadership relies heavily on consultants to assist with financial reporting as well as on the external audit process to identify and correct material misstatements in the financial statements. Lack of consequences for poor performance and transgressions Improved Stagnant or little progress The leadership did not always hold staff accountable for poor performance and transgressions and this creates the perception that these results are acceptable and tolerated. Furthermore, performance of staff is not monitored due to lack of adequate performance management systems. There was however an improvement since the prior year as certain auditees started implemented consequence management. Regressed

7.1 Root causes & Recommendations (top three) 2014-15 PFMA Root causes Recommendation Lack of consequences for poor performance and transgressions Consequences management should be prioritised within the portfolio to ensure that the same transgressions are not repeated Slow response by management The entities should implement controls timeously as and when deficiencies are identified. Compliance with legislation not reviewed and monitored Entities should ensure that compliance is continuously monitored and reviewed. 19

8. Minister commitments to address root causes 2014-15 PFMA Status of key commitments by minister There were no commitments from the minister Not implemented In progress Implemented New

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