BRIEFING ON AUDIT REPORT Justice Portfolio Committee Department of Justice and Constitutional Development and National Prosecuting Authority 2010/11 Justice Portfolio Committee 19 October 2011 Parliament

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.

Agenda Legislative requirements Opinions Audit report structure Summary of audit outcomes Audit outcomes achieved 2010-11 Basis for qualified opinion Emphasis of matters Predetermined objectives Compliance Internal controls Other reports Recommendations Audit outcomes of entities/funds in the Justice portfolio

1. Legislative requirements 1. Public Finance Management Act (Act No.1 of 1999) Accounting Officer: Section 40(1)(a) & (b) – Record keeping responsibilities by accounting officer and preparing financial statements for audit Section 40(1)(c) – Submission of financial statements to Auditor-General for audit Auditor-General: Section 40(2) – Audit financial statements and submit report to accounting officer 2. Constitution of the Republic of South Africa (1996) Section 188 – must audit and report on accounts, financial statements and financial management of government institutions 3. Public Audit Act (Act No.25 of 2004) Sections 20 – Auditor-General must prepare audit report containing opinion/conclusion on: Financial statements and financial position Compliance and financial management Predetermined objectives

2. Opinions Different audit opinions: Unqualified (unmodified) Disclaimer Adverse

2. Opinions (continued) Overall summary description per opinion: Audit Opinion Description Unqualified (unmodified) An unqualified opinion is expressed when the auditor concludes that the financial statements give a true and fair view (or are presented fairly, in all material respects) in accordance with the applicable financial reporting framework. Unqualified/ Unmodified (with emphasis of matter) The addition of such an emphasis of matter paragraph(s) does not affect the auditor’s opinion on whether the financial statements are fairly presented. Qualified (Modified) A qualified opinion is expressed when the auditor concludes that an unqualified opinion cannot be expressed but that the effect of any disagreement with management regarding departures from financial reporting framework, or limitation on scope is not so material and pervasive as to require an adverse opinion or a disclaimer of opinion.

2. Opinions (continued) Overall summary description per opinion: Audit Opinion Description Disclaimer A disclaimer of opinion is expressed when the possible effect of a limitation on scope is so material and pervasive that the auditor has not been able to obtain sufficient appropriate audit evidence to form an opinion and accordingly is unable to express an opinion on the financial statements. Adverse An adverse opinion is expressed when the effect of a disagreement with management regarding departures from the financial reporting framework is so material and pervasive to the financial statements that the auditor concludes that a qualification of the report is not adequate to disclose the misleading or incomplete nature of the financial statements.

3. Audit report structure Now please refer to actual audit reports (annual report page 115 for DOJCD and 62 for NPA) Report on the financial statements Introduction Accounting officer’s responsibility Auditor-General’s responsibility Opinion Emphasis of matters Additional matters Report on other legal and regulatory requirements Predetermined objectives Compliance with laws and regulations Internal control Leadership Financial and performance management Governance Other reports Investigations Performance audits Agreed upon procedures

3. Audit report structure (continued) Emphasis of matter/Additional matter Why? To draw the users of financial statements’ attention to a matter HIGHLIGHT! Difference? Opinion? “My opinion is not modified in respect of these matter(s)” Emphasis of matter Additional matter to draw users’ attention to a matter presented or disclosed in the financial statements which is of such importance that it is fundamental to their understanding of the financial statements to draw users’ attention to any matter other than those presented or disclosed in the financial statements which is relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report

3. Audit report structure (continued) Matters highlighted Emphasis of matter: Financial reporting framework Significant uncertainties Revision of previously issued AFS Restatements of corresponding figures Material underspending Accruals (possible overspending of budget) Going concern/funding/financial sustainability Irregular and fruitless and wasteful expenditure Additional matter: Prior year audited by predecessor auditor Material inconsistencies included in annual report Unaudited supplementary schedules

History of audit opinions: 4. Summary of audit outcomes History of audit opinions: Opinion 2010-11 2009-10 2008-9 2007-8 Department of Justice and Constitutional Development Qualified with other Matters matters National Prosecuting Authority Unqualified Goal: Unqualified opinion with no emphasis of matter, no non compliance with laws and regulations and no findings on predetermined objectives!!!!

5. Audit outcomes achieved 2010-11 1. Opinions: Other matters highlighted: Department of Justice National Prosecuting Authority Qualified audit opinion: Departmental revenue, receivables for departmental revenue, contingent liabilities and provisions relating to Third Party Funds Completeness of irregular expenditure Unqualified audit opinion

5. Audit outcomes achieved 2010-11 (continued) 2. Other matters highlighted: Department of Justice National Prosecuting Authority Emphasis of matters: Restatement of corresponding figures Irregular and fruitless and wasteful expenditure Accruals Other matter: Unaudited supplementary schedules Irregular expenditure

5. Audit outcomes achieved 2010-11 (continued) 3. Predetermined objectives (DoJCD only) Usefulness of information Reliability of information 4. Compliance (DoJCD and NPA) PFMA Public Service Act and Regulations National Treasury Regulations & Practise notes Preferential Procurement Policy Framework Act and its regulations Internal control (DoJCD and NPA) Summary of control deficiencies: Leadership Financial and performance management

6. Basis for qualified opinion Department of Justice and Constitutional Development Departmental revenue, receivables for departmental revenue, contingent liability Inadequate financial and control system relating to Third Party Funds (TPF) resulted that we could not determine if: departmental revenue had been properly collected and recorded by TPF and surrendered to DoJCD. the potential claims against TPF as a result of fraud, theft and loss, to be paid by DoJCD are complete. the money collected on behalf of the state and not yet paid to DoJCD as at 31 March 2011 had been properly collected and recorded by TPF. Irregular expenditure No proper system in place for the identification and recording of irregular expenditure resulting that the completeness of the irregular expenditure disclosure note could not be confirmed.

7. Emphasis of matters (DoJCD) NB! Audit only highlight if matter is disclosed in the financial statements of the entity Restatement of corresponding figures Prior year figures corrected in current year financial statements. Irregular expenditure Expenditure in contravention of the Preferential Procurement Policy Framework Act, supply chain management policies and procedures and finance leases outside the Transversal State Tender Board contract. 3. Accruals Accruals exceeded the payment term of 30 days. This amount, in turn, exceeds the voted funds to be surrendered. If amounts due had been paid in time, it would have constituted in unauthorised expenditure.

7. Emphasis of matters (NPA) NB! Audit only highlight if matter is disclosed in the financial statements of the entity Restatement of corresponding figures Prior year figures corrected in current year financial statements. Irregular expenditure Expenditure incurred in contravention of the PFMA and Treasury Regulations relating to supply chain management, Public Service Regulations and the National Prosecuting Authority Act.

8. Predetermined Objectives (DoJCD) Usefulness of information Measurability: 21% of the planned and reported targets were not and time bound. 26% of the planned and reported indications were not clear, as unambiguous data definitions were not available to allow for data to be collected consistently. Reliability of information Validity, Accuracy and Completeness: The following matters were noted: Sufficient appropriate evidence to support the reasons for major variances between the planned and the actual reported targets could not be obtained. Source information or evidence could not be obtained. Therefore validity, accuracy and completeness of certain of reported performance against predetermined objectives could not be verified.

9. Compliance Summary of compliance findings Act Description DoJ NPA Strategic planning PFMA: 38(1)(a)(i) and (b) No effective, efficient and transparent system of internal control regarding performance management. X TR 5.3.1 The accounting officer did not establish procedures for quarterly reporting to the executive authority TR 5.1.1. The executive authority did not approve the strategic plan submitted by the accounting officer before submission to Parliament Annual financial statements 40(1)(a) and (b); 40(3)(a) Financial statements not prepared in all material aspects in accordance with generally recognised accounting practice. Material misstatements identified by the auditors were not subsequently corrected adequately Material misstatements identified by the auditors were subsequently corrected adequately

9. Compliance (continue) Act Description DoJ NPA Human Resource Management PSR 4/III/B Not all senior managers entered into performance agreements. X TR 8.3.4 Persons in charge at pay points did not certify on the date of payment that all employees listed on the payroll report were entitled to the payment. PSR 1/V/F(c) Sufficient appropriate audit evidence could not be obtained that the accounting officer ensured that employees did not abuse sick leave. PSR 1/III/B.2(a) The executive authority did not determine, based on the strategic plan, the department's organisational structure. NPA act section 18 The cost of living adjustment to prosecutors were not approved and gazetted. PSR 1/VII/C.1A.2 Funded vacant posts were not filled within 12 months after becoming vacant.

9. Compliance (continued) Act Description DOJ NPA Expenditure management Section 38(1)(c)(ii) of the PFMA The accounting officer did not take effective and appropriate steps to prevent and detect irregular expenditure. X PFMA: 38(1)(f) and TR 8.2.3. Payments due to creditors were not always settled within 30 days from receipt of an invoice. PFMA: 38(1)(g) The accounting officer did not immediately upon the discovery of irregular as well as fruitless and wasteful expenditure report it to the relevant treasury. PFMA: 44, TR 8.2.1 and TR 8.2.2. Expenditure incurred without the approval of a delegated official.

9. Compliance (continued) Act Description DoJ NPA Procurement and contract management TR16A6.1 and NT Practice Note 8 of 2007/2008 Goods and services with a transaction value of between R10 000 and R500 000 were procured without inviting at least three written price quotations from prospective suppliers. X TR16A.6.3 (c) Not all invitations for competitive bidding were advertised for a minimum period of 21 days. PPPF Awards were made to suppliers based on preference points that were not correctly calculated. TR 16A9.1 (d) Awards were made to suppliers who failed to provide written proof from the South African Revenue Service that their tax matters are in order. TR 16A3.2 A contract was modified to the extend that the competitive bidding processes were being circumvented contrary to the requirement of a fair supply chain management system .

9. Compliance (continued) Act Description DoJ NPA Procurement and contract management PSA 30 Employees performed remunerative work outside their employment in the department without written permission from the relevant authority X National Treasury Practice Note 8 of 2007/08 The prospective suppliers list for procuring goods and services through quotations was not updated at least quarterly NT16A8.3 and Practice Note 7 of 2009/10. Awards were made to suppliers who did not submit a declaration on whether they are employed by the state, or connected to any person employed by the state

9. Compliance (continued) Act Description DoJ NPA Revenue management PFMA 38(1)(c) (i) The accounting officer did not take effective and appropriate steps to collect all money due to the department. x Asset management TR 10.1 Proper control system didn’t exist for assets to eliminate theft, losses, wastage and misuse not prevented by the department. Financial misconduct TR 4.1.2 The accounting officer did not always institute an investigation within 30 days from the date of discovery of alleged financial misconduct.

Internal control deficiency 10. Internal controls Internal control deficiency DoJ NPA Leadership The accounting officer did not exercise oversight responsibility regarding financial and performance reporting and compliance with laws and regulations and related internal controls X The internal policies and procedures of the department pertaining to the planning and monitoring of performance information were not sufficient to ensure reliable reporting Financial and performance management Management did not prepare regular, accurate and complete financial and performance reports that are supported and evidenced by reliable information. Management have sufficient monitoring controls to ensure compliance laws and regulations.

11. Other reports - Investigations DoJCD An investigation is being conducted by an independent consulting firm on a request of the department. The investigation was initiated based on an allegation of possible irregularities by employees in the supply chain management unit and is aimed at establishing procurement irregularities and possible fruitless and wasteful expenditure. The investigation is still ongoing. NPA An investigation was conducted during the year regarding the irregular procurement of equipment and services. The investigation has been finalised at the date of this report. The report recommended that the NPA consider further action against certain officials.

12. Recommendations (continued) Finalise the accounting framework and proposed governance structures that will influence the format and structure of financial reporting relating to TPF. Enhance the current financial and internal controls systems relating to TPF. The strengthen controls to: Prevent; Detect; and Adequately disclose irregular expenditure Policies/procedures/systems to be put in place for all material types of transactions and performance information. Above to be communicated to all staff, monitored and action to be taken against transgressors. Review the strategic plan to ensure that the targets are in terms of the “SMART” principles and that the indicators are clear, to allow for data to be collected consistently.

12. Recommendations (continued) Implement a review process to ensure compliance with all laws and regulations in preparation of financial statements. Decisive and immediate action must be taken in respect of non-compliance with laws and regulations. The risk assessment must include compliance with required laws and regulations. Develop an audit action plan with realistic targets with deadlines and parties responsible for implementation must be held accountable. Progress on implementation of action plan must consistently be monitored and immediate action must be taken when targets/deadlines are not met. Focus on key control feedback by AGSA. Implementation of a adequate review process of financial statements prior to submission for audit. All senior managers must enter into performance contracts and action taken against poor performers.

13. Audit outcomes of entities/funds in the Justice portfolio Name of entity Audit outcome Audit opinion Findings on Predetermined objectives Findings on Compliance Areas in which there were significant deficiencies in internal control Leadership Financial and performance management Governance Special Investigation Unit Financially unqualified Presentation of information Usefulness of information Annual financial statements Expenditure management Procurement management X None Legal Aid South Africa No findings No Findings Guardian’s Fund N/A as part of DoJCD

13. Audit outcomes of entities/funds in the Justice portfolio (continued) Name of entity Audit outcome Audit opinion Findings on Predetermined objectives Findings on Compliance Areas in which there were significant deficiencies in internal control Leadership Financial and performance management Governance Criminal Asset Recovery Account Financially unqualified No findings Annual financial statements None X Third Party Funds No AFS submitted since 2007/08 President’s Fund No Findings

QUESTIONS???