1. BRIEFING ON AUDIT REPORTS National Department of Public Works (DPW) and the Property Management Trading Entity (PMTE) 2010/11 Public Works Portfolio Committee 12 October 2011 Parliament

2. 2 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.

3. 3 Agenda 1.Legislative requirements 2.Opinions 3.Audit report structure 4.Audit outcomes achieved 2010/11 5.Basis for disclaimer of opinions 6.Emphasis of matters 7.Predetermined objectives 8.Compliance 9.Internal controls 10.Other reports 11.Recommendations 12.Audit outcomes of public entities in the Public Works portfolio

4. 4 1. Legislative requirements 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

5. 5 2. Opinions Different audit opinions: –Unqualified (unmodified) –Qualified –Disclaimer –Adverse

6. 6 2. Opinions (continued) Overall summary description per opinion: Audit OpinionDescription 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. 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. Modified (Qualified) 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.

7. 7 2. Opinions (continued) Overall summary description per opinion: Audit OpinionDescription 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.

8. 8 History of audit opinions: 2. Opinions (continued) Opinion2010-112009-102008-092007-08 DPW PMTE DPW PMTE DPW PMTE DPW PMTE Disclaimer xx Adverse x Qualified xxx Unqualified with other mattersxx Unqualified with no other matters Goal: Unqualified opinion with no findings on predetermined objectives or compliance with laws and regulations

9. 9 3. Audit report structure Now please refer to actual audit reports Report on the financial statements  Introduction  Accounting officer/authority’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

10. 10 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 matterAdditional 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

11. 11 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  Going concern/funding/financial sustainability Additional matter:  Prior year audited by predecessor auditor  Material inconsistencies included in annual report  Unaudited supplementary schedules  Revision of previously issued AFS  Financial reporting framework

12. 12 4. Audit outcomes achieved 2010/11 1.Opinions: 2.Other matters highlighted: Department of Public WorksProperty Management Trading Entity Disclaimer of audit opinion Department of Public WorksProperty Management Trading Entity Emphasis of matters:  Material underspending of the vote and conditional grants  Restatement of corresponding figures  Material losses Other matter:  Unaudited supplementary schedules No other matters highlighted

13. 13 4. Audit outcomes achieved 2010/11 (continued) 3.Predetermined objectives Performance on predetermined objectives reported in DPW  Usefulness of information  Reliability of information 4.Compliance Material non-compliance were reported in DPW and PMTE  PFMA  National Treasury Regulations  Other legislation 5.Internal control Summary of control deficiencies in 3 Fundamentals:  Leadership  Financial and performance management  Governance

14. 14 5. Basis for disclaimer of opinions Department of Public Works  Immovable tangible capital assets The department did not complete the necessary processes in line with requirements of immovable asset sector guidance. Immovable asset register not accurate and complete.  Irregular expenditure No proper system in place for the identification and recording of irregular expenditure.  Other expenditure Scope limitation with respect to goods and services and expenditure for capital assets (supporting documentation not available).  Lease commitments No supporting documentation available to determine the validity of the restated prior year balances for both operating and finance leases.  Contingent liabilities The department did not estimate the likelihood of claims against the department succeeding. Balance not complete.  Public-private partnership (PPP) Not disclosed in accordance with the Departmental Financial Reporting Framework Guide.

15. 15 5. Basis for disclaimer of opinions (continued) Property Management Trading Entity  Irregular expenditure No proper system in place for the identification and recording of irregular expenditure.  Fruitless and wasteful expenditure No proper system in place for the identification and recording of fruitless and wasteful expenditure.  Trade and other receivables Trade receivables balance in financial statements does not agree to the total per the individual debtors accounts. No reconciliation in respect of this difference. Balances not calculated/disclosed in accordance with the provisions of SA GAAP. No supporting documentation available to verify prior year restated balances.  Revenue Planned maintenance of R2 billion offset against revenue figure contrary to provisions of SA GAAP. Limitation of scope in respect of Revenue: Accommodation Charges (supporting documentation and calculations not available).

16. 16 5. Basis for disclaimer of opinions (continued) Property Management Trading Entity (continued)  Trade and other payables Balances not calculated/disclosed in accordance with the provisions of SA GAAP. No supporting documentation available for amount of R461 million (Advance account). Misclassification of R150 million received from DPW as payables and not revenue – payables thus overstated.  Operating expenses Limitation of scope: No supporting documentation submitted for transactions amounting to R166 million.  Bank overdraft Bank overdraft balance not calculated/disclosed in accordance with the provisions of SA GAAP.  Other commitments Limitation of scope – supporting documentation not available for R1,3 billion.  Contingent liabilities Legal counsel did not assess the probability of the outflow of future economic benefits (SA GAAP requirement). Prior period error not disclosed in accordance with SA GAAP. No supporting documentation submitted for prior period restatement.

17. 17 5. Basis for disclaimer of opinions (continued) Property Management Trading Entity (continued)  Operating lease commitments Balances not calculated/disclosed in accordance with the provisions of SA GAAP.  Related parties No proper accounting system in place for trade receivables and unreconciled individual trade receivable balances at year-end, which had an impact on the completeness of related party disclosure.  Restatement of comparative amounts Not disclosed in accordance with SA GAAP.

18. 18 6. Emphasis of matters (DPW) NB! Audit only highlight if matter is disclosed in the financial statements of the entity 1.Material underspending of the vote and conditional grants Immovable asset management programme: R235,202 million (5%), as a result did not achieve objectives fast-tracking of construction of selected schools and the energy-efficiency intervention. Expanded public works programme: R500,843 million (35%) mainly due to under reporting and poor performance of reporting bodies eligible for incentive grant. 2.Restatement of corresponding figures Prior year figures for commitments and accruals corrected in current year. 3.Material losses R54,836 million worth of irrecoverable debtors were written off.

19. 19 7. Predetermined Objectives (DPW) Usefulness of information Consistency: Reported performance against predetermined indicators and targets was not consistent with the approved strategic plan. Measurability: For the selected programmes (programme 2 to 4), 26% of the planned and reported targets (all pertaining to programme 2) were not: specific in clearly identifying the nature and the required level of performance; measurable in identifying the required performance. Reliability of information Validity, accuracy and completeness: Sufficient appropriate evidence in relation to programme 2: immovable asset management and programme 3: EPWP could not be obtained. Therefore validity, accuracy and completeness of the reported performance against predetermined objectives for the aforementioned programmes could not be verified.

20. 20 8. Compliance ActDescriptionDPWPMTE Strategic planning PFMA: 38(1)(a)(i) and (b) No effective, efficient and transparent system of internal control regarding performance management. X TR 19.3.1 The accounting officer of the Department of Public Works did not finalise and approve the business case for running the trading entity and consequently did not formulate a policy and reporting framework for the head of the trading entity. X Annual financial statements PFMA: 40(1)(a) and (b); 40(3)(a) Financial statements not prepared in all material aspects in accordance with generally recognised accounting practice. Financial statements not supported by full and proper records. Material misstatements identified by the auditors were not subsequently corrected adequately which resulted in the financial statements receiving a disclaimed audit opinion. XX Internal audit TR 3.2.8 The internal audit function did not assess the operational procedures and monitoring mechanisms over all transfers made, including transfers in terms of DoRA. X Summary of compliance findings

21. 21 8. Compliance (continued) ActDescriptionDPWPMTE 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 NT Practice Note 6 of 2007/2008 The accounting officer did not in all instances report within 10 working days to the Auditor-General all cases where goods and services above the value of R1 million (VAT included) had been procured in terms of Treasury Regulation 16A6.4. XX TR 16A6.1, TR 16A6.4 and NT Practice Notes 6 and 8 of 2007/08 Sufficient appropriate audit evidence could not be obtained that goods and services with a transaction value of over R500 000 had been procured by means of a competitive bidding process. X TR 16A6.3(c) All invitations for competitive bidding were not advertised for a minimum period of 21 days. X

22. 22 8. Compliance (continued) ActDescriptionDPWPMTE Procurement and contract management (continued) Preferential Procurement Regulation 16 and TR 16A9.1(d) Sufficient appropriate audit evidence could not be obtained that awards had been made to suppliers who provided written proof from the South African Revenue Service that their tax matters were in order. X TR16A8.3 and NT Practice Note 7 of 2009/10 Awards were made to suppliers who did not submit a declaration on whether they were employed by the state or connected to any person employed by the state. X TR 8.2.1 and TR 8.2.2 All extensions or modifications to contracts were not approved by a delegated official. X TR16A6.3(a) Construction contracts were awarded to contractors that were not registered and did not qualify for the contract in accordance with the prescripts of the Construction Industry Development Board. X

23. 23 8. Compliance (continued) ActDescriptionDPWPMTE Expenditure management Section 38(1)(c)(ii) of the PFMA and Treasury Regulation 9.1.1. The accounting officer did not take effective and appropriate steps to prevent and detect irregular expenditure. XX The accounting officer did not take effective and appropriate steps to prevent and detect fruitless and wasteful expenditure. X 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. X PFMA: 44, TR 8.2.1 and TR 8.2.2. Expenditure was incurred without the approval of a delegated official. 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. XX

24. 24 8. Compliance (continued) ActDescriptionDPWPMTE Transfer of funds and conditional grants Section10(1)(d) of the DoRA The transferring national officer deposited funds into a bank account which was not designated as the primary bank account of a province or municipality. X Revenue management Treasury Regulation 11.2.1 The accounting officer did not take effective and appropriate steps to timeously collect all money due to the institution (in PMTE’s case sufficient appropriate audit evidence could not be obtained to verify compliance). XX Section 38(1)(c)(ii) of the PFMA and TR 7.2.1 The accounting officer did not develop and implement appropriate processes that provide for the identification, collection, recording, reconciliation and safeguarding of information about revenue to ensure that all money due to the trading entity was collected. X TR 11.4 Sufficient appropriate audit evidence could not be obtained that the accounting officer had complied with the applicable requirements when writing off debts. X

25. 25 8. Compliance (continued) ActDescriptionDPWPMTE Asset management TR 10.1 The accounting officer did not implement proper control systems for the safeguarding and maintenance of assets to prevent theft, losses, wastage and misuse. X Banking and cash management TR 19.2.3 The entity’s main bank account was overdrawn throughout the reporting period. X Financial misconduct TR 4.1.2 The accounting officer did not ensure that investigations were conducted into all allegations of financial misconduct made against officials within 30 days from the date of discovery of the allegation. X

26. 26 9. Internal controls Leadership The accounting officer did not exercise oversight responsibility regarding financial and performance reporting and compliance as well as related internal controls. The accounting officer did not in all instances establish and communicate policies and procedures to enable and support the understanding and execution of internal objectives, processes and responsibilities. Although an audit action plan to address internal control deficiencies had been compiled by the department, the progress indicated in the plans was not effectively managed and timeous feedback on the progress was not provided. The accounting officer did not implement effective human resource management to ensure that adequate and sufficiently skilled resources were in place and that performance was monitored. In the case of PMTE there were no documented policies and procedures, yearend closure plans or initiatives to ensure compliance with SA Statements of GAAP throughout the reporting period.

27. 27 9. Internal controls (continued) Financial and performance management Proper record keeping was not always implemented in a timely manner to ensure that complete, relevant and accurate information was accessible and available to support financial and performance reporting. Implemented controls over daily and monthly processing and reconciling of transactions were ineffective. The accounting officer did not prepare regular, accurate and complete financial and performance reports that were supported and evidenced by reliable information. The reviewing and monitoring of compliance with applicable laws and regulations were ineffective.

28. 28 9. Internal controls (continued) Governance Regular risk assessments, including the consideration of IT risks and fraud prevention, were not effectively conducted. A risk strategy to address identified risks was not developed and monitored. The accounting officer did not ensure that the internal audit unit was adequately resourced to ensure that the unit could effectively assist in identifying internal control deficiencies and develop recommendations in respect of corrective action to be taken to address the internal control deficiencies identified.

29. 29 10. Other reports Investigations Ongoing investigation into alleged abuse of urgent and emergency procurement as well the utilisation of sole suppliers. Ongoing investigation to probe irregular expenditure in respect of the leasing of properties as well as an alleged irregular award of a tender and the incapacity of a contractor to fulfil his duties. Investigations were conducted into complaints and allegations of maladministration and improper and unlawful conduct by the DPW and the SAPS relating to the leasing of office accommodation in Pretoria and Durban. Performance audit Readiness of government to report on its performance.

30. 30 11. Recommendations Adequate planning and project management to ensure that allocated funds are spent appropriately and timely in order to achieve objective. 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. Record keeping must be improved. Audit action plan must be updated to include 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.

31. 31 11. Recommendations (continued) A proper risk assessment must be conducted and this must inform internal audit’s scope of work. Internal audit to be fully capacitated. Decisive and immediate action must be taken in respect of non- compliance with laws and regulations. Focus on key control feedback by AGSA. Appointment of permanent staff in the finance department of the trading entity, must have the required skills to enable compliance with SA GAAP. Discretion to be applied regarding usage of consultants, skills transfer must be a prerequisite.

32. 32 12. Audit outcomes of public entities in the Public Works portfolio Name of entity Audit outcome Audit opinionFindings on Predetermined objectives Findings on Compliance Areas in which there were significant deficiencies in internal control LeadershipFinancial and performance management Governance Independent Development Trust (IDT) Financially unqualified Reliability of information Annual financial statements Expenditure management XX Construction Industry Development Board (CIDB) Financially unqualified with emphasis of matters on fruitless and wasteful and irregular expenditure Usefulness of information Reliability of information Annual financial statements Procurement and contract management Expenditure management XX Council for the Built Environment (CBE) Financially unqualified with emphasis of matters on significant uncertainties and restatement of corresponding figures Usefulness of information Strategic planning and performance management Annual Financial Statements, Performance and Annual Report XX

33. QUESTIONS???