Briefing to the Portfolio Committee on Public Enterprise Audit outcomes of the Public Enterprise 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, it exists to strengthen our country’s democracy by enabling oversight, accountability and governance in the public sector through auditing, thereby building public confidence. Need to consider the following All information to be included needs to have been audited and is accurate and correct If information included is not audited then it needs to be specified as such or specified that this was based on a sample tested

Purpose of the presentation Annually oversight committees set aside time to focus on assessing the performance of departments. On completion of the process, portfolio committees are required to develop department-specific reports, namely budgetary review and recommendations reports (BRRR) which express the committee`s view on the department’s budget for recommendation to the National Treasury ahead of the following year`s budget period. Our role as the AGSA is to reflect on the audit work performed to assist the portfolio committee in its oversight role in assessing the performance of the departments taking into consideration the objective of the committee to produce a BRRR.

Combined assurance – complimentary mandate Senior management Accounting officers/ authority Executive Required assurance levels Extensive Management’s assurance role Senior management – take immediate action to address specific recommendations and adhere to financial management and internal control systems Accounting officers/ authority – hold officials accountable on implementation of internal controls and report progress quarterly and annually Executive authority – monitor the progress of performance and enforce accountability and consequences Management assurance First level of assurance Oversight assurance Second level of assurance Coordinating / Monitoring institutions Internal audit Audit committee Extensive Required assurance levels Oversight’s assurance role National Treasury/ DPSA – monitor compliance with laws and regulations and enforce appropriate action Internal audit – follow up on management’s actions to address specific recommendations and conduct own audits on the key focus areas in the internal control environment and report on quarterly progress Audit committee – monitor risks and the implementation of commitments on corrective action made by management as well as quarterly progress on the action plans Independent assurance Third level of assurance Oversight (portfolio committees / councils) Public accounts committee National Assembly Extensive Required assurance levels Role of independent assurance Oversight (portfolio committees) – review and monitor quarterly progress on the implementation of action plans to address deficiencies Public accounts committee – exercise specific oversight on a regular basis on any report which it may deem necessary National Assembly – provide independent oversight on the reliability, accuracy and credibility of National and provincial government

Contents Slide nr 1. Overall audit outcomes for Public Enterprise portfolio 6 2. Auditor-General six key focus areas 7 - 10 3. Unauthorised/ Irregular / Fruitless & Wasteful expenditure 11 4. Drivers of key controls for portfolio 12 5. Assessment of assurance providers 13 6. Root causes and recommendations 14 – 15 Entities included in the portfolio not audited by the AGSA 16 – 18 Minister commitments to address root causes 19

1. Overall audit outcomes for Public Enterprise portfolio 2014-15 PFMA Unqualified no findings Unqualified with findings Qualified with findings Adverse with findings Disclaimer with findings 3 auditees 3 auditees 3 auditees

2. Auditor-General six key focus areas 2014-15 PFMA Quality of submitted financial statements Quality of submitted performance reports Compliance with legislation 1 2 3 Good Concerning Intervention required Human resource and consequence management Information technology Financial health Improvement 4 5 6 Stagnant or limited progress Regressed

2.1 Quality of annual performance reports 67% 2014-15 PFMA Annual performance reports of were reliable and useful compared with 33% in the previous year With no findings With findings Improved Usefulness Reliability Stagnant or little progress 1 2 Regressed Auditee did not submit performance report on time Auditees that submitted information, did so in time for audit 1 2 8

2.2 Most auditees did not comply with legislation in the following areas 2014-15 PFMA Quality of annual financial statements submitted Prevention of irregular and/ or fruitless and wasteful expenditure Management of procurement and or contracts 1 2 3 Good Concerning Intervention required Management of strategic planning and performance Human resource & consequence management Internal audit & Audit committee Improvement 4 5 6 Stagnant or limited progress Regressed

2.3 Financial health of the portfolio Good Concerning Intervention required 2014-15 PFMA Focus areas for financial health Status Comment Going concern South African Express Airways SOC Limited Working capital should be monitored and managed closely in order to plan ahead for possible shortfalls in cash. Implementation of its SAX 20/20 vision objectives which aligns with the overall state aviation turnaround strategy. Only to be included if going concern or accruals/payables or commitments have been included in the audit report. 10

3. UIFW expenditure definitions Unauthorised expenditure Irregular expenditure Fruitless and wasteful expenditure Legends: Decrease in incurred expenditure No change Increase in incurred expenditure Finding not repeated New finding Repeat finding Expenditure not in accordance with the budget vote/ overspending of budget or programme Expenditure incurred in contravention of key legislation; goods delivered but prescribed processes not followed Expenditure incurred in vain and could have been avoided if reasonable steps had been taken. No value for money! Definitions DPE - R10 983 000 R260 000 SAFCOL Not applicable R72 183 000 R366 000 SA Express R20 035 813 R23 703 000 Totals R103 201 813 R24 329 000

Intervention required 4. Driver of key controls for portfolio 2014-15 PFMA Good Concerning Intervention required Improvement Stagnant or little progress Regressed Good Concerning Intervention required

5. Assessment of assurance providers for portfolio 2014-15 PFMA First level Improvement Stagnant or little progress Second level Regressed Please note that no assessment for PC. This can however be discussed with chair one-on-one to start preparing them for next year when this will be included Provides assurance Provides some assurance Provides limited/ no assurance Vacancy Not Established/ Evaluated 13

6. Root causes should be addressed (top three) 2014-15 PFMA Slow response by management in addressing the root causes of poor audit outcomes Slow response by management has been one of the top three root causes for the portfolio in the past two years in audit findings. This is due to action plans still being inadequate and implementation thereof not monitored. There is also no improvement in assurance provided by management and no improvement in the basic internal controls. Senior management did not take immediate action and hold officials accountable for not adhering to the implemented internal controls. 2014-15 2013-14 Instability or vacancies in key positions Improved Stagnant or little progress The vacancies that exist should be filled with appropriately qualified individuals who are held accountable for their responsibilities Regressed Lack of consequences for poor performance and transgressions The leadership did not always hold staff accountable for poor performance and transgressions and this creates the perception that these results are acceptable and tolerated. There was an overall lack of concessive consequences for poor performance and transgressions experienced at the entities

6.1 Root causes & Recommendations (top three) 2014-15 PFMA Root causes Recommendation Slow response by management in addressing the root causes of poor audit outcomes The leadership within the entities must fully enforce the requirements of their Supply Chain Management (SCM) policies and procedures which should be continuously aligned to all applicable legislation while maintaining the ability of the entities to be profitable businesses. DPE should monitor on a quarterly basis the status of implementation of action plans by SOCs. Instability or vacancies in key positions Key finance and procurement divisions need to be filled with staff members with required skills in order to ensure all legislation are adhered to at all times. Lack of consequences for poor performance and transgressions Officials who contravene the relevant legislation and policies should be subjected to the appropriate consequences. Daily and monthly oversight processes and sign offs by senior management should also include key monitoring and evaluation of compliance with legislation with specific focus on SCM which tends to be a weakness within the portfolio 15

2014-15 PFMA 7. Entities included in the portfolio not audited by the Auditor-General of South Africa

7.1 Audit outcomes per section 4(3) entity in the portfolio 2014-15 PFMA Entity Financial statement opinion Predetermined objectives Compliance with legislation Movement from 2013-14 Alexkor Unqualified With no findings - Fruitless and wasteful expenditure Denel Eskom - Irregular expenditure Transnet With findings on usefulness - Irregular and fruitless and wasteful expenditure Improved Stagnant or little progress Regressed

7.2 UIFW expenditure definitions per section 4(3) entity in the portfolio Unauthorised expenditure Irregular expenditure Fruitless and wasteful expenditure Legends: Decrease in incurred expenditure No change Increase in incurred expenditure Finding not repeated New finding Repeat finding Expenditure not in accordance with the budget vote/ overspending of budget or programme Expenditure incurred in contravention of key legislation; goods delivered but prescribed processes not followed Expenditure incurred in vain and could have been avoided if reasonable steps had been taken. No value for money! Definitions Eskom Not applicable R713 000 000 R51 000 000 Transnet R32 200 000 R23 000 000 Denel - Alexkor R1 431 000 Totals R745 200 000 R75 431 000

8. Minister commitments to address root causes 2014-15 PFMA Status of key commitments by minister All SOCs in the portfolio must provide the DPE with action plans and progress made to address audit findings and achieve clean audits. Focus on sustainability of the clean audit and clean administration in order to lead by example for the SOCs. The engagements between the audit committee and board chairpersons of SOC and the executive as per the DPE calendar. Internal audit must implement processes to review actions taken by SOCs to improve audit outcomes. DPE portfolio managers to attend audit committee and board meetings to pick up and identify issues earlier to avoid surprises. Support measures for SOCs to conduct business in a sustainable manner with no financial support from the state. DPE and SOCs must prepare interim financial statements subject to an interim audit Conclude the Government Shareholder Management Act. Not implemented In progress Implemented New

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