Department of Labour Audit 2011/2012: Auditor-General comments continued

Meeting report

Opening remarks
The Chairperson clarified the meeting was with the Auditor-General, and the Department was only invited to respond to matters arising but that was not mandatory to comment. Now that all officials were present, the meeting could delve into issues raised in the report delivered the day before. He cited the issue of the expenditure that was well over 90%, and yet the achieved targets were only around 50%. The Department indicated yesterday that it disagreed with the Auditor-General on how it monitored and measured its performance. The Director General, Mr Thamsanqa Nhleko, who led the Department of Labour (DoL) delegation, would be welcome to raise questions about this in the course of the meeting.

Auditor-General South Africa (AGSA) presentation on Department of Labour
Ms Meisie Nkau, Business Executive, AGSA, said the Office of the Auditor-General started analysing the behaviour of departments and entities within the control environment five years ago. Government had launched an initiative to achieve clean audit outcomes by 2014.

Clean audit outcomes in the public sector meant there should not be findings on all aspects - pre-determined objectives; compliance and regulations - being audited. If emphasis was placed on these three, it was possible to achieve clean audit outcomes in 2014.

A clean audit opinion in the private sector, entailed an opinion on the annual financial statements only. In the public sector the audit opinion was used on financial statements and on predetermined objectives. However, an opinion on predetermined objectives was only expressed in the management report and in the audit report the Auditor-General indicated the actual findings.

The challenge was to sustain the clean audit outcomes and with effective internal controls. If an entity had effective internal controls, or key controls (leadership; financial management aspect; and governance aspect) it was easy to achieve clean audits.

In the past few years the Auditor-General had focused efforts on identifying key focus areas that were an impediment to clean audit outcomes. The key focus areas were supply chain management, human resources, information systems, service delivery, and quality and credible information. The Auditor-General also looked at the effectiveness of oversight committees and the governance structures.

The Auditor-General was likely to miss the 2014 deadline for clean audits due to the pace at which progress was being made on the internal controls. The progress was slow and disappointing. All parties involved were encouraged to deal with a combined assurance model that indicated where every level within an organisation fit in, and responsibilities. The report would highlight progress made with regards to supply chain, and the key focus areas that had been indicated as requiring improvement.

Ms Daisy Ledwaba, AGSA Senior Manager, said the Office of the Auditor-General existed to strengthen the country's democracy by enabling oversight, governance and accountability in the public sector. The Department of Labour had received a qualified audit opinion on predetermined objectives, and an unqualified audit with findings on its annual financial statements. A lot of work had been done and better results had been expected in the current financial year. The findings on compliance had not changed from 2010.

On compliance, there had been material adjustments that had been corrected by the Department, and those had been troubling throughout the year. The financial statements had material errors identified by the audit. Root causes included inadequate monthly reconciliation of the accounts so as to ensure the information was credible. The Auditor-General had thus recommended that management should prepare financial statements that were reviewed and substantiated by adequate supporting documentation on monthly basis.

On procurement and contract management, supply chain policies had not been complied with. There were deviations by the Department of Labour on supply chain management policies where some contracts were issued without following proper procedures. Some contracts were open ended and that resulted in irregular expenditure. This was caused because there was a lack of proper planning and decision-making by management. DoL needed to ensure actions and decisions regarding the Information Technology (IT) contract, which was significant, were effective and timeous.

Ms Ledwaba said there were positions that had been vacant for more than 12 months at the Department. This was non-compliant with the Public Service Regulations. Management did not implement effective HR management controls to ensure adequate and sufficient skilled resources. Vacancies meant someone was not doing what he/she was supposed to be doing and therefore this had led to non-compliance with laws and regulations.

Around asset management, the Triple T contract in place for the past nine years was coming to an end in November. There had not been proper monitoring in all these years. Management had tried to put in place controls to ensure the exiting supplier did not affect continuity. The contract awarded to the supplier did not comply with supply chain management policy.

Department of Labour Entities
▪ There was regression in the financial statements of the Commission for Conciliation, Mediation and Arbitration (CCMA). Last year the Commission had a clean audit with no findings, and yet this year it got an unqualified opinion with findings due to non-compliance with laws and regulations and supply chain management.

▪ The Compensation Fund had no change with regards to its opinion. It was still an unqualified audit opinion with findings. There had not been any movement with regards to the number of findings of non-compliance with law and regulations. For procurement and contract management, there were still the same matters and concerns as addressed in prior years.

The new finding this year amongst the entities was on asset management where proper systems around management of bank accounts and cash were missing. The Compensation Fund did not perform monthly reconciliation and that resulted in management not being able to address some of the findings or not providing supporting documentation. HR management (HRM) at the Compensation Fund had not prioritised recruitment to fill the position of the HRM chief director position that had been vacant for 12 months.

▪ The National Economic, Development and Labour Council (NEDLAC) received a qualified opinion and this was a regression. The reasons for the qualification included that management could not provide the Auditor-General with supporting documentation relating to expenditure incurred on credit cards. There was also an issue with the ineffective audit committee that was not meeting as regularly as it was meant to. Also the inefectiveness of the internal audit unit was an issue.

▪ Productivity SA had a clean audit report last year. However, material adjustments to its financial statements resulted in an unqualified audit opinion with findings on non-compliance with Treasury regulations. This was a regression in the annual financial statements and with compliance in regulations.

▪ The Sheltered Employment Factories had an improvement as it had a qualified audit opinion for its annual financial statements last year. This year, it got an unqualified opinion, but with findings on compliance with laws and regulations. There had been an improvement on the predetermined objectives. There had been an adverse opinion last year and it had an unqualified audit this year with findings and they expected this improvement to continue. The findings related to material adjustments that were identified by the auditors and corrected by management. Vacancies for over 12 months was also noted. There also were no policies and procedures for overtime management. Expenditure and revenue management related mostly to the adjustments made to the annual financial statement and the SEF inventory. There was currently an accounting policy on how the entity should be valuing inventory. However the accounting for this was still a challenge.

▪ The Unemployment Insurance Fund (UIF) had made a significant improvement and had sustained a clean audit with no findings on anything.

Key controls
Ms Ledwaba said there had not been a change either for the positive or negative at the Department of Labour when it came to key controls over leadership, financial and performance management, and governance. The CCMA had seen an improvement with leadership in financial and performance management but with regards to governance structures, the status stayed the same. With the Compensation Fund, like the DoL, nothing had changed. Talking about Shelter Employment Factories, Productivity SA and UIF, the status quo remained the same. Although with regard to the SEF, it had seen an improvement in financial and performance management and in terms of the effectiveness of the internal audit as well as the internal audit committee.

Progress on prior year commitments
Ms Ledwaba said there was a need for intervention at the Department although an unqualified audit opinion was achieved. This was as the financial statements were not credible because material adjustments were identified by the audit and had to be corrected after the audit intervention. The supply chain management policy was amended as compared to the prior year; however there was still non-compliance with that policy. There were still repeat findings on the commitment to address the Audit of Performance Objectives (AOPO). Management had committed to an improvement by 2013. She also discussed the Compensation Fund and SEF needs for intervention (see Slide 10).

Recommended commitments for clean administration
She said commitments had been obtained – based on the 2011/12 audits – after interactions with the leadership of the department and entities (see Slide 11). The Auditor-General would be tracking the commitments and checking if they had been implemented. It was recommended that when a consultant had been used there needed to be a monthly evaluation of progress reports to see whether skills transfer was happening.

For the Compensation Fund there was a need for a sustainable internal audit. This related to the fact that the Chief Internal Auditor had resigned, but the Department managed to get her back. This should not be an issue going forward. There was a need for a monitoring and compliance unit to ensure compliance to regulations and a decrease in the findings on compliance. Internal audits should be able to evaluate the entities and be able to determine where they were on leadership and financial management, as well as their governance structures.

It was important to copy the strength of those entities that were doing well – as a model to those that were poorly performing. This would help in ensuring that there was sustainability in the portfolio as a whole. There should be no regression in terms of the audit outcomes, and the possibility of reaching a clean administration by 2014 would be real. She said it was important to provide checks and balances in making sure the information provided was credible. This could be done if there was a process and a monitoring system in place.

Pyramid of accountability
Ms Nkau said when the Auditor-General intensified its ability for leadership, the main focus was to enhance accountability. The pyramid contained three layers. At the bottom was the human resources and productivity. This was the first level of defence against malpractices, and it required people with proper skills, competence and with a sense of ethics and integrity.

In an organisation one needed to have effective systems of internal controls that were supported by effective policies and procedures. Such people ought to show greater understanding of the mission and the vision of the Department. If these were in place, the daily, weekly and monthly financial reporting would fit perfectly because there were people providing the necessary support to the organisation.

Ms Nkau said the second layer contained leadership and internal audit. The leadership would set the tone in terms of who occupied the bottom layer. Recruitment, performance and performance management would be a lot more credible, and would drive the outcomes.

The internal audit function would be there to support management to ensure effective internal controls were in place. The work of the audit committee that was meant to provide oversight would be a lot easier. If the two layers were in place, the legislatures, sitting at the top would function easily. Checks and balances would be there and would ensure credibility.

She said the material adjustments identified by the Auditor-General during the audits indicated that the quarterly reports presented by the Department were not credible and were inaccurate. Such a situation would not occur if the system functioned as in the pyramid of accountability. The Auditor-General had recommended that the audit committee and internal auditors needed to be invited to the Committee meetings when the Department presented.

If effective internal controls were in place, everyone would be aware of responsibility. There could not be clean financial audit outcomes if there was no service delivery. The two areas - audit outcomes and service delivery - although complementing one another, were looked at differently. The Auditor-General focussed on whether there was evidence to support the expenditure.

Achieving a clean audit outcome should not be a difficult thing, especially for DoL. There were quick and easy fixes; but then the Department needed to look at sustaining the good practices, and ensure it did not regress if it achieved the clean audit after 2014.

Discussion
Mr A Williams (ANC) sought clarity on whether the predetermined objectives were the same as the achievement of planned targets in the Auditor-General’s annual report. He asked if Auditor-General agreed with the statement that DoL was given R2 billion; and 99% of the money was spent and yet only 41% of the targets were achieved. How could governance oversight be doing well, as the presentation sought to suggest, when achievements were disproportionate to expenditure.

Mr Richmond Ntuli, Acting Chief Director, DoL, said the issue of disagreement needed not be understood as a tension between the Department and the Auditor-General; it was a system thing. The fiscus allocated money to the Department, and in this instance it was R2 billion. This amount was based on a strategic plan presented to National Treasury, on things that DoL had hoped to achieve on the programmes it had.

However, when the Department measured its performance it relied on a system developed by the Department of Performance, Monitoring and Evaluation (DPME). The system was differently interpreted even among government departments. The system was problematic; up to 25% of performance it would indicate nothing achieved; 25-75% it would indicate partial achievement; and then from 75-100% would indicate achieved.

Mr Ntuli said, in respect of the R2 billion budget, an impression had been created that DoL had wasted money whilst it had spent money and had achieved a certain amount of goals. The Auditor-General SA scorecard discounted the scores on ‘partially achieved’, and only gave the ‘achieved’. This meant that while the budget spend would be over 90%, the achieved goals would only be 41%.

The system should be looked at and reviewed, and that when reporting partially achieved, it should be reflected as an achievement. If not, this would cause confusion on financial and non-financial information. An indication had to be given to the DPME because it gave the impression that wasteful expenditure had occurred at all departments.

Ms Nkau said she heard what the Department was saying. The Auditor-General took the view that partially achieved was not achieved. The audit report had been discussed with the Minister, the management and the audit committee; this argument was never raised. The Auditor-General and National Treasury would have to come to an agreement as to where the cut-off for ‘partially achieved’ should be. This was a new process and would be perfected along the way. The Auditor-General had insisted on reporting no finding on partially achieved performance information, yet departments did not achieve targets that they set themselves.

Mr S Motau (DA) commented that he was not surprised that the Department could only achieve what it had. The DoL’s Annual Report was a serious indictment for what the Auditor-General was saying. It was time that the Director General at DoL started firing people, on accountability grounds. To be a good leader one needed to make unpopular decisions; one could not be nice to everyone. If that was not done, people would not do what they had to do. Departments and the entities were not scared when an audit was done as there were no consequences.

Ms Nkau commented that the general sense was that internal audits were not taken seriously in the Public Service. In the last few months there was an improvement, and audit committees were taking their work seriously in making sure that internal audit findings were addressed. If internal audit findings were not addressed, they impacted on the effectiveness of the audit committees. When AGSA raised a finding, it was critical for the department to go back and evaluate the internal controls.

Mr A Van der Westhuizen (DA) sought clarity on the improvements in the Department. He said most staff were frustrated by auditors because they thought they were looking for new findings. Could the Auditor-General indicate those findings that were new, and those that had been identified in the past? He requested an indication of how conflict of interest was administered at the Department.

Ms Nkau replied there were improvements but these were not enough to record a change. Corrective measures were put in place but were not effective enough to take the Department into the category of an unqualified report. Reliability of information was a challenge, and reliability was audited based on what the Department had reported on in the Annual Report. Verification was done on what the Department claimed to have achieved. What DoL had reported was reliable, but it had under achieved.

The Chairperson wanted to know if the Auditor-General looked at the reasons for the under-achievement.

Ms Nkau replied that during the audit, reasons for underachievement were looked at, and had to be reasonable. The process was subjective and dependent on the evidence that the Department provided. She said in the last couple of years the Auditor-General had also introduced a system of looking at the root cause. When one corrected a finding, this did not fix the internal control. The point was when a finding had been evaluated, it was critical that departments and entities went back and evaluated the internal control processes that they had. There were findings previously and there were repeat findings that indicated nothing had been done to correct the internal controls.

Ms Nkau said if entities had appropriate and effective policies, procedures and internal controls in all areas of the organisation, the outcome should not be different from year to year. New findings were “not a matter of auditors shifting the goal posts”, but whether management had proper policies in place to ensure sufficient processes to produce information that was reliable. This was the bottom line. The focus areas had been looked at for a number of years now.

Ms Ledwaba commented that the repeat findings were mainly in the supply chain management, where bids were not done properly. Within human resources, there had always been findings on vacancies. There had been an improvement on expenditure and asset management for the portfolio as a whole and this had contributed to the Department of Labour getting an unqualified audit opinion. However, as a result of the IT processes that were centralised, there was a need to assess the impact that would have on entities.

There would have been issues with revenue management at the Compensation Fund, where it had to generate revenue to sustain itself. There had been repeat findings in this area, and any noticeable improvement was slow. The Auditor-General had reservations about the sustainability of the Sheltered Employment Factories.

Ms Nkau said there were no new findings when it came to DoL, and even at those departments where there were new findings, it was a case of the management being complacent.

Mr Van der Westhuizen commented that he failed to understand how departments failed to achieve on targets that they had set. This was problematic. He said he refused to accept the excuse that some of the targets were “partially achieved”.

Ms Nkau agreed that targets were set by the departments. Not meeting the targets indicated a lack of proper planning. At the time when the budget was appropriated, the cost of services was cheaper. If proper planning was done, proper procurement would be entered into and would ensure the right prices for the service, in line with the Department's budget for this.

Mr Williams commented that information about achievements needed to be detailed with a breakdown of the priority projects. The Committee was not getting a sense of the actual performance of the Department, and it could not perform its oversight role thoroughly if it did not get the proper information.

The Chairperson said he was worried about the recurring transgressions; why should these keep coming up in the audit reports. The Department need not have one issue all the time; there was something wrong. What was special about the same problems such that they could not be solved? Why would the UIF score clean audits with no findings in all focus areas, whilst other entities struggled? He asked if entities shared information on good practice. Was there such a forum where entities shared their experiences?

The Director General, Mr Thamsanqa Nhleko, commented that the statement that the internal audit in the public service was not taken seriously was dangerous and concerning, especially given how the unit at DoL was regarded. The comments about the “recurring transgressions” were noted. The Department would need to strengthen management exercise and management oversight. National Treasury and the Auditor-General would be engaged on the matter of targets, in terms of what had been raised. There appeared to be confusion around calculating targets and how they ought to be reviewed.

The Chairperson said the Committee would sit with the Department and engage with all outstanding audit matters.

The meeting was adjourned.