Department of Environmental Affairs: Disagreement Environmental Affairs Portfolio Committee briefing 21 November 2017

Reputation promise The Auditor-General of South Africa (AGSA) 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.

1 Background

Background The department obtained exemptions from National Treasury for the 2013-14 and the 2014-15 financial years as they were unable to comply with the requirements of the Chapter 16 of the modified cash standard (MCS) - Accounting for Principle Agent Arrangements   The exemptions were provided with the proviso that the department will develop systems and processes to account for the arrangements in accordance with the MCS. In the 2014-15 financial year, a dispute process was undertaken regarding exemptions issued by National Treasury to various departments.  The result of this dispute was that exemptions from adherence to the MCS do not result in fair presentation and that it will be effective on all audits from 2015-16. The AGSA accordingly took a decision not to accept exemptions that did not result in fair presentation of the financial statements. In the 2015-16 financial year, following various engagements between the AGSA and DEA management, management adjusted the financial statements to account for principle agent arrangements. As a result, the annual report was tabled late.

2 2016-17 Audit

Department of Environmental Affairs: Disagreement During the 2016/17 financial year, the department the department took a decision, based on their interpretation, to account for all payments made under principle agent arrangements as transfer payments. The AGSA did not agree with the accounting treatment adopted by management resulting in an adverse audit opinion. Adverse opinion Errors /limitations identified during the audit were the result of a disagreement Material to the financial statements Pervasive – affecting a number of items in the financial statements

Department of Environmental Affairs: Disagreement Details of the dispute in relation to the EPWP and Green Fund projects transactions: During the 2016/17 financial year the department accounted for payments made in respect of the expanded public works programme (EPWP) and the Green Fund as transfer payments as they considered the transactions to be non-exchange transactions. The AGSA did not accept the view of management for the following reasons: The AGSA disagreed with the view of management that the implementing agent contracts result in non-exchange transactions. The department controls and directs the implementing agents appointed even though the goods and services may be acquired for an entity that is not a party to the contract with the implementing agent. Where assets are acquired or created, these assets belong to the department in terms of the contractual arrangements with implementing agents and therefore must be recorded in the financial statements of the department. The AGSA had assessed the criteria of principal agent arrangements in terms of Chapter 16 of the MCS of which the department was noted to be the principal when entering into these arrangements and hence would be required to account accordingly of which the department had disagreed.

Modified Cash Standard Comparison - Transfer Payments vs Goods and Services Modified Cash Standard Transfer Payments Accounting treatment Expensed as a transfer when payment is made Goods and Services (implementing agents) Correct classification of expenditure Property Plant and Equipment Pre-payments and Advances Principal Agent disclosures Appropriation Statement Compliance PMFA – S38(1)(j) Treasury Regulation 8.4.1 and 8.4.2 Compliance SCM legislation - relevant sections of the PFMA as applicable to the department Treasury Regulation 16A (possible effect of irregular expenditure)

Tabling of the annual report 3 Tabling of the annual report

Tabling of the annual report The AGSA completed the audit in compliance with S40(2) of the PFMA - the audit report was signed and provided to the department on 31 July 2017. S65(1)(a) of the PFMA requires the executive authority to table the annual report, including the audit report and financial statements within one month after receiving the signed audit report. S65(2)(a) requires the executive authority to table written explanation in the legislature setting out the reasons why they were not tabled within 6 months after the end of the financial year. Reasons for the late tabling were highlighted in the ministers letter to the speaker of the National Assembly dated 26 September 2017.

Status of discussions with the Office of the Accountant-General 3

Status of discussions with the Office of the Accountant-General Discussions were held with the Office of the Accountant General (OAG), the department and the AGSA during the 2016/17 financial year. The OAG appointed a consultant at the end of August 2017 in order to obtain an OAG view. Numerous engagements were subsequently held between the parties. An unsigned discussion paper was provided by the OAG relating to the EPWP projects only (Green Fund is outstanding) On receipt of the unsigned discussion papers, the OAG was requested to provide a formal position for consideration by the AGSA On receipt, the position of the OAG will be assessed to determine the areas where there is agreement / disagreement, the impact thereof and the way forward.

Stay in touch with the AGSA 13