Briefing to the portfolio committee on trade and industry on the audit outcomes of their portfolio for the 2014-15 financial year 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, exists to strengthen our country’s democracy by enabling oversight, accountability and governance in the public sector through auditing, thereby building public confidence.

Purpose of the presentation To provide the portfolio committee with applicable information and guidance on the trade and industry portfolio’s 2014-15 audit outcomes so that they can ensure effective oversight.

Content Department budget vs expenditure 5 2. Overall audit outcomes for the trade and industry portfolio 6 3. Auditor-general’s six key focus areas 7 4. Unauthorised/irregular/fruitless and wasteful expenditure 13 5. Combined assurance and assessment of assurance providers 16 6. Drivers of key controls for the portfolio 20 7. Root causes and recommendations 23 Minister’s commitments to address root causes 27 Role of the accounting officer 28 Remedies to address transgressions and poor performance 29

1. Department budget vs expenditure 2014-15 Actual expenditure Underspending Variance % Programme 1: Administration 790 876  727 080  63 796  8,0  Programme 2: International trade and economic development 146 462   142 792 3 670   2,5 Programme 3: Broadening participation 946 330   937 622 7 708   0,8 Programme 4: Industrial development 1 795 004   1 787 719 7 285   0,4 Programme 5: Consumer and corporate regulation 283 075   281 122 1 953   0,6 Programme 6: Incentive development and administration 5 591 858   5 551 358 40 500   0,7 Programme 7: Trade and investment South Africa 365 124 356 606 8 518 2,3

2. Overall audit outcomes for the trade and industry portfolio Unqualified without findings Unqualified with findings Qualified with findings Adverse with findings Disclaimed with findings 11 auditees 11 auditees 11 auditees

3. Auditor-general’s six key focus areas Quality of submitted financial statements Quality of submitted performance reports Compliance with legislation Good Concerning Intervention required Human resource management Information technology Financial health Improvement Stagnant or limited progress Regressed

3.1 Quality of submitted financial statements Outcome if NOT corrected Outcome after corrections 4 auditees 2014-15 Avoided qualifications by correcting material misstatements during the auditing process Outcome if NOT corrected Outcome after corrections Financially unqualified with findings Financially qualified (qualified/ disclaimed with findings) 36% (4) 6 auditees 2013-14 64% (7)

3.2 Quality of annual performance reports 73% of reports were reliable and useful compared with 45% in previous year. of auditees that submitted information, did so in time for auditing. 100% 2014-15 2014-15 2013-14 With no findings With findings 2013-14 Usefulness Reliability 73% (8) 73% (8) 27% (3) 27% (3) Improvement Stagnant or limited progress Regressed

3.3 Quality of submitted annual performance reports Outcome if NOT corrected Outcome after corrections 0 auditees 2014-15 Avoided findings by correcting material misstatements during the auditing process Annual performance report not materially misstated Annual performance report contained material misstatements Outcome if NOT corrected Outcome after corrections 2013-14 2 auditees

3.4 Most auditees did not comply with legislation in the following areas Quality of annual financial statements submitted Prevention of unauthorised, irregular and fruitless and wasteful expenditure Management of procurement and 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

3.5 Information technology IT governance Security management IT controls embedded and functioning effectively IT controls to be implemented IT controls to be designed User access management IT Security continuity Improvement Stagnant or limited progress Regressed

4. UIFW expenditure definitions Unauthorised expenditure Expenditure not aligned to the budget vote Irregular expenditure Expenditure in contravention of key legislation Fruitless and wasteful expenditure Expenditure that should not have been incurred (incurred in vain, could have been avoided or was not value for money)

4.1 Irregular expenditure of the portfolio Identified by auditees Identified by auditors

4.2 Fruitless and wasteful expenditure for portfolio Identified by auditees Identified by auditors

5. Combined assurance – complementary mandate First level of assurance: Management Senior management Accounting officers/authority Executive authority Extensive assurance Senior management –immediately address recommendations and adherence to financial management and internal control systems Accounting officers/authority – hold officials accountable for implementing internal controls and quarterly and annual reporting Executive authority – monitor progress of performance and enforce accountability and consequences

5. Combined assurance – complementary mandate Second level of assurance: Oversight Coordinating/monitoring institutions Internal audit Audit committee Extensive assurance National Treasury/ DPSA – monitor compliance with legislation and enforce appropriate action Internal audit – follow up on management’s actions to address recommendations, conduct own audits on the key focus areas in internal control environment and report quarterly on progress Audit committee – monitor risks and implement commitments on management’s corrective action as well as quarterly progress on action plans

5. Combined assurance – complementary mandate Third level of assurance: Independent Oversight (portfolio committees/councils) Public accounts committee National assembly Extensive assurance Oversight (portfolio committees) – review and monitor quarterly progress on implementing action plans to address deficiencies Public accounts committee – exercise regular oversight on any report which it may deem necessary Audit committee – monitor risks and implement commitments on management’s corrective action as well as quarterly progress on action plans

5.1. Assessment of assurance providers for the portfolio Improvement Stagnant or limited progress Regressed Provides assurance Provides some assurance Provides limited/ no assurance Vacancy Not established/ evaluated

6. Drivers of key controls for the portfolio Drivers of internal control: Leadership Department and entities Effective leadership culture Oversight responsibility HR management Policies and procedures Action plans IT governance Department of Trade and Industry Companies Intellectual Property Commission (CIPC) Companies Tribunal (CT) National Consumer Commission (NCC) National Credit Regulator (NCR) National Consumer Tribunal (NCT) National Gambling Board (NGB) National Lotteries Board (NLB) and National Lottery Distribution Trust Fund (NLDTF) National Regulator for Compulsory specification (NRCS) South African Bureau of Standards (SABS) Small Enterprise Development Agency (SEDA)

6. Drivers of key controls for the portfolio (continued) Drivers of internal control: Financial and performance management Departments and entities Proper record keeping Processing and reconciling controls Reporting Compliance IT systems controls Department of Trade and Industry Companies Intellectual Property Commission (CIPC) Companies Tribunal (CT) National Consumer Commission (NCC) National Credit Regulator (NCR) National Consumer Tribunal (NCT) National Gambling Board (NGB) National Lotteries Board (NLB) and National Lottery Distribution Trust Fund (NLDTF) National Regulator for Compulsory specification (NRCS) South African Bureau of Standards (SABS) Small Enterprise Development Agency (SEDA)

6. Drivers of key controls for the portfolio (continued) Drivers of internal control: Governance Departments and entities Risk management Internal audit Audit committee Department of Trade and Industry Companies Intellectual Property Commission (CIPC) Companies Tribunal (CT) National Consumer Commission (NCC) National Credit Regulator (NCR) National Consumer Tribunal (NCT) National Gambling Board (NGB) National Lotteries Board (NLB) and National Lottery Distribution Trust Fund (NLDTF) National Regulator for Compulsory specification (NRCS) South African Bureau of Standards (SABS) Small Enterprise Development Agency (SEDA)

7. Top three root causes that should be addressed 1. Management slow to address root causes of poor audit outcomes This year: Main cause Last year: Main cause Reasons: Action plans are inadequate and implementation is not monitored adequately Controls and processes to address previously identified deficiencies are not implemented Heavy reliance on external audit process to identify and correct material misstatements 2014-15 2013-14 Improvement Stagnant or limited progress Regressed

7. Top three root causes that should be addressed 2. Vacancies in key positions A problem is that appointments are made in jobs with no job descriptions. Therefore it becomes increasingly difficult to determine the level of competence needed to perform the job. Also, auditees do not always assess the competencies of the finance and SCM staff, which means that they would not be aware of any shortcomings. This year: Second cause Last year: Third cause Reasons: Vacancies in key positions are not filled in good time 2014-15 2013-14 Improvement Stagnant or limited progress Regressed

7. Top three root causes that should be addressed 3. Lack of consequences for poor performance and transgressions 2014-15 2013-14 This year: Third cause Last year: Not a main cause Reasons: Staff not always held accountable by leadership for poor performance and transgressions – creates a perception that these are accepted and tolerated. Improvement Stagnant or limited progress Regressed

7.1. Top three root causes and recommendations Slow response by management Adequate action plans must be implemented within strict timelines. Action plans should be implemented and reviewed at least quarterly by the audit committee. Internal audit should assess whether the implementation has achieved the required outcome. Vacancies in key positions Vacancies in key positions should be filled as soon as possible with individuals who possess the necessary competencies . Lack of consequences for poor performance and transgressions Performance assessments should be conducted more frequently and staff must be reprimanded if there are no improvements in performance. Leadership must ensure that staff who transgress internal control policies and procedures face consequences.

8. Status of minister’s commitments to address root causes Develop and implement an action plan to address all identified audit findings which will be monitored by the accounting officer, internal audit and audit committee, and escalated to the executive authority when necessary. NRCS will be assisted in addressing the revenue recognition problem. The DTI and NRCS has established a joint team working towards establishing an appropriate revenue model for the NRCS to ensure an improved audit outcome. To follow up quarterly on key control assessments and the reports from the audit committees on audit related matters. NGB would be assisted by the DTI to address the audit findings. Obtain action plans for CIPC, NLB, NGB, and the Companies Tribunal to address the audit findings on predetermined objectives, and from NRCS to address the qualified audit opinion. Progress on the action plans will be tracked on a quarterly basis by the chairpersons of the audit committees. The process of compiling quarterly financial statements for all Trade and Industry entities will be re-enforced. This will assist in having the discipline of accurate capturing/reporting addressing the number of material corrections to financial statements. Implemented In progress Not implemented New

Role of accounting officer Robust financial and performance management 9. Understanding and monitoring the accounting officer’s mandate is key to improving internal controls Role of accounting officer Robust financial and performance management systems Oversight and accountability Commitment and ethical behaviour Ensure effective, efficient and transparent systems for financial and risk management internal controls (under control of audit committee) procurement and evaluation Ensure effective, efficient, economical and transparent use of resources Prevent unauthorised, irregular and fruitless and wasteful expenditure and, if discovered, report to Treasury Manage available working capital efficiently and economically Manage and safeguard assets and liabilities Take appropriate disciplinary steps against any official contravening the PFMA Role of the accounting officer is critical to: timely, credible information + accountability + transparency + service delivery Chapter 5 of Public Finance Management Act, 1999 (PFMA)

10. Accountability and remedies to address transgressions and poor performance Questions raised on … The need for accountability and consequences and how they can be enforced. Legislation provides the answers… Legislation clearly defines accountability and the remedies. Details available on pages 44 to 65 of our booklet: In Brief: The Auditor-General of South Africa

10.1. AGSA booklet gives overview of legislation In Brief: The Auditor-General of South Africa Highlights legislation that enables remedies for transgressions and poor performance within national and provincial departments Addresses typical matters as reported in general reports: Failure to comply with legislated obligations and responsibilities Unauthorised, irregular and fruitless and wasteful expenditure Possible fraud and corruption Poor work performance – officials and suppliers Other non-compliance with legislation

Questions