Budgetary review and recommendations...

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Budgetary review and recommendations reportAdd subtitle here

XX Month XXXX

Briefing to Portfolio Committee on Telecommunications and Postal Services

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Reputation promise

The Auditor-General of South Africa (AGSA) has a constitutionalmandate 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.

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Role of the AGSA in the reporting process

Our role as the AGSA is to reflect on the audit work performed to assist the portfolio committee in its oversight role of assessing the performance of the entities taking into consideration the objective of the committee to produce a Budgetary Review and Recommendations Report (BRRR).

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Our focus1

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Our annual audit examines three areas

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The AGSA expresses the following different audit opinionsUnqualified opinion

with no findings

(clean audit)

Financially unqualified

opinion with findingsQualified opinion Adverse opinion Disclaimed opinion

Auditee:

• produced credible and

reliable financial

statements that are free

of material

misstatements

• reported in a useful and

reliable manner on

performance as

measured against

predetermined

objectives in the annual

performance plan (APP)

• complied with key

legislation in conducting

their day-to-day

operations to achieve

their mandate

Auditee produced

financial statements

without material

misstatements or could

correct the material

misstatements, but

struggled in one or more

area to:

• align performance reportsto the predeterminedobjectives they committedto in APPs

• set clear performanceindicators and targets tomeasure theirperformance against theirpredetermined objectives

• report reliably on whetherthey achieved theirperformance targets

• determine the legislationthat they should complywith and implement therequired policies,procedures and controlsto ensure compliance

Auditee:

• had the same

challenges as those with

unqualified opinions

with findings but, in

addition, they could not

produce credible and

reliable financial

statements

• had material

misstatements on

specific areas in their

financial statements,

which could not be

corrected before the


were published.

Auditee:

• had the same

challenges as those

with qualified opinions

but, in addition, they

could not provide us

with evidence for most

of the amounts and

disclosures reported in

the financial

statements, and we

were unable to

conclude or express an

opinion on the

credibility of their


Auditee:

• had the same

challenges as those with

qualified opinions but, in

addition, they had so

many material

misstatements in their

financial statements that

we disagreed with

almost all the amounts

and disclosures in the


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The overall audit outcomes are indicated as follows:

Unqualified with no findings

Unqualified with findings

Qualified with findings

Adverse with findings

Disclaimed with findings

Audits outstanding

Movement over the previous year is depicted as follows:

Improved

Unchanged Movement of 5% or less: slight improvement slight regression

Regressed

The percentages in this presentation are calculated based on the completed audits of 8 auditees, unless indicated otherwise

DTPS - Department of Telecommunication and Postal Service

SAPO – South African Post Office SOC Limited

BBI – Broadband Infraco SOC Limited [Section 4(3)]

USAASA – Universal Service and Access Agency of South Africa

USAF – Universal Service Access Fund

NEMISA – National Electronic Media Institute of South Africa

SITA - State Information Technology Agency

Sentech [Section 4(3)]

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The 2017-18 audit outcomes2

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DO

PLAN

CHECKACT

ACCOUNTABILITY = PLAN + DO + CHECK + ACT

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No improvement in plan-do-check-act cycle

Status of audit action plans slightly improved

Usefulness of performance indicators and targets slightly improved

PLAN

DOOverall internal controls slightly regressed

Basic financial and performance management controls regressed

ICT controls slightly improved

Vacancies in CFO [SAPO & NEMISA] positions slightly regressed

CHECKAssurance provided by:

• Senior management and accounting officer/ authority slightly regressed

• Executive authority remained unchanged (provides assurance)

• Internal audit units and audit committees slightly regressed(provides assurance)

• Portfolio committee remained unchanged (provides assurance)

ACTCompliance with consequence management legislation unchanged

Investigation of previous year UIFW unchanged

Investigations into SCM findings we reported in previous year unchanged

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Telecomms Portfolio snapshot (2017-18)

Quality financial

statements: 25%

(2016-17: 25%)

Clean audits: 13%

(2016-17: 13%)

Quality performance

reports: 63%

(2016-17: 50%)

No findings on compliance

with legislation: 13%

(2016-17: 13%)

Irregular expenditure:

R706m

(2016-17: R1 723m)

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Audit outcomes of the portfolio over five years

8 auditees

(6)BBI

DTPSSITA

USAASANEMISASAPO

2017-18 2016-17 2015-16 2014-15 2013-14

(5)

DTPS

BBI

SITA

USAASA

USAF

(5)

DTPS

NEMISA

SITA

USAASA

USAF

(6)

BBI

DTPS

NEMISA

SITA

USAASA

USAF

(7)

BBI

DTPS

NEMISA

SAPO

SITA

USAASA

USAF

(1)

Sentech(1)

Sentech(1)

Sentech

BBI

(1)

Sentech

(1)

Sentech

(1)

SAPO

(1)

USAF

(2)

SAPO

NEMISA

8 auditees 8 auditees 8 auditees8 auditees

To improve/maintain the overall audit outcomes, financial statements processes,1

The overall audit outcomes of the Telecommunications and Postal Services portfolio for the 2017-18 shows an improvement at SAPO, NEMISA and BBI

when compared to the prior financial year 2016-17. USAF has regressed [Poor controls over bulk STB distribution resulting in qualification of inventory

balance] , Sentech maintained its clean audit opinion and DTPS, USAASA, and SITA remained were stagnant.

The overall 5 year picture has not improved as a majority of the entities are still having material finings on the audit of performance information and

compliance with applicable legislation.

The audit report of SAPO was signed late on 19 September 2018 due to outstanding supporting evidence on the going concern assumption.

(1)

SAPO

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Movement table (2017-18 over 2016-17)

Audit outcome

MOVEMENT

Improved Unchanged Regressed New auditee

+

Outstanding audits

Unqualified

with

no findings = 1

Sentech

Unqualified

with findings =

6

NEMISA

SAPO

SITA

DTPS

USAASA

BBI

Qualified with

findings = 1USAF

Adverse with

findings = 0

Disclaimed

with findings =

0

2 5 0

Colour of the number indicates the audit opinion from which the auditee has moved.

1 0 0

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compliance with key legislation and…

32 …. performance planning and reporting

Regression in audit outcomes in the current year

Financial statement preparation remains a concerns as material

adjustments are effected to AFS submitted for audit for a majority of

the entities except SITA and Sentech for the 2017/18 financial year.

Inadequate monitoring of SCM legislation resulted in non-compliance

with SCM legislation especially due to poorly motivated deviations

and procurement without obtaining the required price quotations.

Although internal controls detect U.I.FW expenditure, controls are

not mature yet to prevent incurring U.I.FW expenditure.

• Some of the entities within the portfolio management submitted APP’s for interim review and implemented

recommendations made by the AGSA on the interim audits on the APP’s by crafting clearer and unambiguous

indicators and targets that conform to the smart principles.

• Lack of standard operating procedures for performance reporting.

• The APR’s contained items that could not be traced to supporting listings and documentation.

• Certain indicators and targets where material and significant findings were reported related to key service

delivery objectives and / or key operations of the entities

Five year trend –

Compliance with key legislation

2017-18 2016-17 2015-16 2014-15 2013-14

1

Sentech

7

DTPS

SAPO

USAASA

USAF

BBI

NEMISA

SITA

7

DTPS

SAPO

USAASA

USAF

BBI

NEMISA

SITA

7

DTPS

SAPO

USAASA

USAF

BBI

NEMISA

SITA

6

DTPS

SAPO

USAASA

USAF

NEMISA

SITA

7

DTPS

SAPO

USAASA

USAF

BBI

NEMISA

SITA

1

Sentech

1

Sentech

1

Sentech

2

Sentech

BBI

Five year trend –

Quality of annual

performance plans

Five year trend –

Quality of submitted

annual performance reports

2017-18 2016-17 2015-16 2014-15 2013-14

8

DTPS

SAPO

USAASA

USAF

BBI

NEMISA

SITA

Sentech

7

DTPS

USAASA

USAF

BBI

NEMISA

SITA

Sentech

1

SAPO

5

DTPS

USAF

BBI

SITA

Sentech

4

SAPO

USAF

BBI

NEMISA

3

SAPO

USAF

NEMISA

5

DTPS

Sentech

USAASA

SITA

BBI

4

DTPS

Sentech

USAASA

SITA

2017-18 2016-17 2015-16 2014-15 2013-14

8

DTPS

SAPO

USAASA

USAF

BBI

NEMISA

SITA

Sentech

7

DTPS

USAASA

USAF

BBI

NEMISA

SITA

Sentech

1

SAPO

4

SAPO

USAF

BBI

NEMISA

2

SAPO

NEMISA

5

DTPS

Sentech

USAASA

SITA

BBI

4

DTPS

Sentech

USAASA

SITA

6

DTPS

USAASA

USAF

BBI

SITA

Sentech

--------------------------------------------------

With no material findings

With material findings

Outstanding audits

No APR/late submission

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3

SAPO

USAASA

NEMISA

3

SAPO

USAF

NEMISA

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Status of internal control

Good Of concern Intervention required

First

le

ve

l

Sentech

DTPS

SITA

SAPO

BBI

SAPO

Sentech

DTPS

SAPO

BBI

SITA

Sentech

DTPS

BBI

SAPO

SITA

SAPODTPS

Sentech

BBI & SITA

Senior management

Accounting officer/authority

Executive authority

Internal audit unit

Audit committee

Portfolio committee

Third

le

ve

l Se

co

nd

le

ve

l

--------------------------------------------------

-------------------------------------------------

-------------------------------------------------

Assurance provided

Provides assurance

Provides some assurance

Provides limited/ no assurance

Not established

Governance

Financial andPerformanceManagement

LeadershipDTPS

Sentech

BBI

SAPO

SITA

DTPS

Sentech

BBI

SITA

SAPO

SAPO

DTPS

Sentech

BBI

SITA

Sentech

DTPS

BBI

SITA

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Status of key focus areas

Oversight and monitoring

Financial management

Performance management

Procurement and contract management

Compliancemanagement

HR management

IT management

Financial health

Status of

records review

Pro-active

follow up procedures

Financial and non – financial information (internal and external

reports/documents & discussions with senior managers)

Feedback linked to Audit Outcomes

AGSA Status of records review - DTPS:Engaging accounting officers in conversations that are insightful, relevant and have an

impact

Key matters for attention:

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Procurement and contract management

SCM policies and procedures not revised timeously to be in

line with the new regulations.

Compliance management

Slow progress on investigations pertaining to irregular

expenditure which impacts on implementation of

consequence management for transgressions.

Human resource management

Vacant posts were not filled within 12 months and leave

taken not captured timeously.

IT management

Weaknesses identified in general controls such as change

control, service continuity, security management, user access

management and environmental controls

Financial health

Significant underspending on programme 5 –broadband roll

out target.


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Management and delivery of key programmes3

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Management and delivery on key programmes – spending, performance and reporting


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Auditee:

Material

adjustments

to annual

performance

report

%

achievementProgramme/Strategic goals scoped in for testing

DTPS No 82%

Programme 3 - ICT policy, research and capacity

development.

Programme 4 - ICT enterprise development and SOC

oversight.

Programme 5 - ICT infrastructure support.

Sentech No 80%SG 1 - Sustainable business growth.

SG 2 - Achieve high levels of customer satisfaction.

SITA No 57%

Programme 1 – Service delivery.

Programme 2 – Infrastructure.

Programme 3 – Procurement.

BBI No 64%

Objective 1 – Develop an integrated packet transport

network that encompasses growth/expansion, technology

evolution.

Objective 2 – Ensure long term financial sustainability.

Objective 3 – Drive socio-economic transformation.

Objective 4 – Build high performance organisation.

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Management and delivery on key programmes – spending, performance and reporting [cont..]


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Auditee:

Material adjustments

To annualperformance

report

% achievement

Programme/Strategic goals scoped in for testing

SAPO Yes 48%

Theme 01 – Revenue growth. The theme has 13 indicators all focused on

revenue growth and only 5 have been achieved in the current financial

year. A R1.9 billion variance noted on baseline revenue and a R1 billion in

the prior financial year.

Theme 03 – Operational efficiency.

Theme 04 – Be a performance driven organisation.

NEMISA No 67%

Programme 2 – Multi-stakeholder collaboration.

Programme 3 – e-Astuteness development.

Programme 4 – Knowledge for innovation.

USAASA Yes 42%

Strategic objective no 1.3 - Improved organisational efficacy (Efficiency

and effectiveness) Through integrated business processes and

automated systems.

Strategic objective no 1.6 - Improved brand and reputation of USAASA.

Strategic objective no 1.7 – Increased support to SMME and BBBEE

development.

USAF Yes 30%

Strategic objective no 1.1 – Increased digital literacy through

establishment of smart villages.

Strategic objective no 1.2 – Increased roll out of communication

infrastructure in underserviced areas.

Strategic objective no 1.3 – Increased access to digital broadcasting

services.

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Financial health and financial management4

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2016-17

2017-18SAPO

BBI

SAPO

BBI

DTPS

SITA

DTPS

SITA

USAASA

USAF

USAASA

USAF

NEMISA

Sentech

NEMISA

Sentech

Material uncertainty exists whether of auditees can continue to operate in future 25%

Two or less unfavourable indicators

More than two unfavourable

indicators

Significant doubt that operations can

continue in future and/or auditee

received an emphasis of matter

paragraph has been included in the

audit report.

The following entities prepared financial statements on going concern, however a

number of events and conditions have been identified that cast significant doubt on the

public to continue as a going concern:

SAPO [Material uncertainty on going concern has been reported in audit report for the

past financial 5 years]

• Adverse key financial ratios [Poor liquidity ratio and recurring operating losses];

• Inability to pay creditors on due dates;

• Fixed-term borrowings approaching maturity without prospects of renewal or

repayment [There is a R400 million loan coming to term in December 2018];

• Inability to obtain financing for essential operational and strategic initiatives in the

absence of shareholder support in the form of a guarantee; and

• Decline of a major market [Mail revenue].

• Pending legal or regulatory proceedings against the entity that may, if successful,

result in claims that the entity is unlikely to be able to satisfy. Contingent liabilities as

at 31 March 2018 are R328 million.

BBI[Material uncertainty on going concern has been reported in audit report for the

past financial 4 years]

• Recurring operating losses; and

• Total liabilities exceed total assets by R1 192 995.

Key concerns identified

Financial health

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SAPO is currently facing serious liquidity challenges with limited

cash resources to support operations. Its inability to pay creditors

as and when they fall due adversely affected the creditors

payment days, currently at 147 days as at 31 March 2018. Trade

and other payables amounted to R989 million as at 31 March

2018.

Although the entity is showing a positive cash balance as at

31 March 2018, a significant portion of the cash relates to

Postbank cash reserves (R1.8billion) and funds collected on

behalf of third parties. Postbank cash reserves consist of

depositors funds and other cash reserves which Postbank is

required to maintain for capital adequacy requirements.

Collections were 39 days (2018) deteriorating from 26 days in the

prior financial year. The total debt to assets ratio improvement

was mainly due to the revaluation its properties.

The entity has a high cost base with employee costs accounting

to 75% of their revenue which contributes to the constant

operating losses. Despite cost containment initiatives, Revenue

generation plans have also not yielded the desired outcomes

resulting in the entity constantly not being able to generate more

Revenue than what it expenses.

These conditions, along of with other matters set forth in note 45,

indicate that a material uncertainty exists on the Sapo group

and company’s ability to continue as a going concern. The

following mitigating factors have been noted by the entity in

response to the material uncertainty:

• New contract signed on distribution of social grants.

• Continuing distribution of set up boxes.

• Group restructuring.

• Public service mandate funding.

• Guarantee and support obtained from shareholder.

Figure 1: Going concern considerations [Key ratios]

Financial health - SAPO

2013/14 2014/15 2015/16 2016/17 2017/18

FY FY FY FY FY

Total revenue 5 576 812 5 058 045 4 718 921 4 486 412 4 401 564

Loss for the year -429 080 -1 394 143 -1 082 075 -955 866 -913 712

Total expenditure 6 190 284 6 036 781 5 664 629 5 472 683 5 127 760

-2 000 000

-1 000 000

-

1 000 000

2 000 000

3 000 000

4 000 000

5 000 000

6 000 000

7 000 000

Revenue and expenditure 5 year analysis

FY FY FY FY FY

2013/14 2014/15 2015/16 2016/17 2017/18

Liquidity [2:1] 1.20 1.04 0.96 1.4 1.19

Acid test ratio [2:1] 1.20 1.04 0.95 1.4 1.19

Total assets to total debt [2:1] 1.26 1.1 0.99 1.09 1.36

Employee cost to revenue ratio 64% 76% 74% 81% 75%

Trade and other payables 723 575 1 407 293 1 438 400 772 787 1 349 246

Creditors days ** 154 days 165 days 64 days 147 days

Cash and cash equivalents 4 013 868 3 347 218 2 871 479 4 211 932 4 275 334

Cash and cash equivalents net

of depositors or third parties350 350 64 698 -154 063 1 082 009 290 292

Debtors impariment - 4 385 128 527 113 079 113 908

Total revenue 5 576 812 5 058 045 4 718 921 4 486 412 4 401 564

Total expenditure 6 190 284 6 036 781 5 664 629 5 472 683 5 127 760

** Information not available

Key numbers and ratios

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Figure 1: Going concern considerations [BBI]

Material uncertainty related togoing concern/financialsustainability included in theaudit report:

The company incurred a netloss R113 471 000 during theyear ended 31 March 2018.Further, as at that date, thecompany’s total liabilitiesexceeded its total assets by R1192 995 000 (2017: R 1 079 524000), and its total currentliabilities exceeded totalcurrent assets by R153 930 000(2017: 127 860 000). As statedin note 28, these conditions,along with the other mattersas set forth in the note,indicate that a materialuncertainty exists that maycast significant doubt on thecompany’s ability to continueas a going concern.

Financial health

-

50 000

100 000

150 000

200 000

250 000

300 000

2013/14 FY 2014/15 FY 2015/16 FY 2016/17 FY 2017/18 FY

5 year reported results R’000

Loss for the year

-

50 000

100 000

150 000

200 000

250 000

300 000

2013/14 FY 2014/15 FY 2015/16 FY 2016/17 FY 2017/18 FY

Loss for the year after discounted interest charge

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Irregular as well as fruitless and wasteful expenditure increase over 5 years

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!

Definition

R 208 million

R9 million

R 189 million

R9 million

R 434 million

R9 million

R1 723 million

R205 million

R 706 million

R19 million

Irregularexpenditure

(IE)

Fruitless andwasteful

expenditure(FW)

2017-18 2016-17 2015-16 2014-15 2013-14

UIFW amounts incurred by entities in portfolio Nature of UIFW expenditure R’million

SAPO - Interest, fines and legal fees due

to creditors not being paid as a result of

SAPO’s financial constraints during the

financial year. [77% - R15 million]

SITA - Interest and litigation costs. [15% -

R2.8 million]NEMISA - Double payment for rental was

paid for the months of June to August,

NEMISA could not access the building as

the certificate of occupancy was not yet

available from the landlord. [8% - R1.5

million]

SAPO - Procuring goods or services by

means other than through competitive

bids and where reasons for deviating

from inviting competitive bids have not

been recorded and approved by the

accounting authority. [15% - R109 million]

USAF - Bidding process not complied with

in relation to Broadcasting Digital

Migration tender. [29% - R208 million]

SITA - Procurement process not followed

i.e. continuing with contracts after expiry

thereof/no valid contracts. [54% - R380

million]

Audit report

impact

No modification of

audit report based

on fruitless and

wasteful

expenditure in

2017/18.

No modification of

audit report

based on irregular

expenditure in

2017/18.

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Irregular expenditure and supply chain management

Improvement in SCM

compliance

(2017-18: 62% with no

findings)

With no findings With findings With material findings

Irregular expenditure decreased from R1.7 billion to R706 million (60% decrease)

Main contributor:Uncompetitive and unfair procurement processes at

37% of entities

35% (R249 million) of the irregular expenditure was

payments/ expenses in previous years only uncoveredand disclosed for the first time in 2017-18 for SITA.

The irregular expenditure includes payments made oncontracts irregularly awarded in a previous year - if thenon-compliance is not investigated and condoned, thepayments on multi-year contracts continue to beviewed and disclosed as irregular expenditure.

How much of the R 706 million then represents non-compliance in 2017-18?

Three entities had non-compliance findings reported onprocurement and contract management. It should benoted that where management has identified the non-compliance and reported the irregular expenditure thiswould have not been reported by the auditors. 99% ofthe R677 million was incurred at SAPO, USAF and SITA.Please note the irregular expenditure incurred for USAF ofR208 million in the current year has been condoned by

the high court after the entity made an application.

DTPSSAPOSITA

DTPSSAPOSITA

USAASA

SentechNEMISA

BBIUSAASA

USAF

SentechNEMISA

BBIUSAF

2017-18 2016-17

Preference pointsystem not

applied or incorrectlyapplied

Competitive bidding not invited

Local contentminimum threasholdfor local production

not adhered to

SAPO/ DTPS/ SITA

SITA

SAPO

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Allegations of financial and/or fraud and SCM misconduct (2 auditees)

DTPS

DTPSSAPO

SAPO

Allegations not investigated

Investigationstook longer than three months

Disciplinary stepsnot taken against

official whoincurred UIFexpenditure

Previous year unauthorised, irregular and fruitless and wasteful expenditure reported by the AGSA

for investigation

DTPSSAPO

2016-17 2015-16Not investigatedInvestigated

Fraud and consequence management

DTPS

SAPO

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Root causes and recommendations5

Slow response by management (Accounting

officer and senior management)

Lack of consequences for poor performance and

transgressions

Instability or vacancies

in key positions

SAPO NEMISA SITA

DTPS SAPO

DTPS SAPO

SAPO NEMISA SITA

DTPS SAPO NEMISA BBI SITA USAF

2016-17 2017-18

2016-17 PFMA

Top four root causes, commitments and proposed recommendations

PC must:

1. request management to provide feedback on the implementation and progress and of the action plans to address poor audit outcomes during quarterly reporting.

2. request management to

provide quarterly feedback on status of key controls, especially around project management/ payments on key projects implemented by implementing agents for entities where the review is performed.

3. request quarterly feedback on the progress of filling vacancies.

4. Obtain a list of action taken against transgressors must be provided quarterly to PC for follow up for all irregular and fruitless and wasteful expenditure incurred.

5. request feedback on actions implemented to improve the financial health, budget management and control and turnaround plans/ interventions [BBI and SAPO].

28

Ineffective contract management and lack of

capacity within the SCM unit leading to

numerous deviations.

SAPO SITA

Root Causes

28

RecommendationsStatus of key commitments

In progress

Filling key vacancies in the portfolio.

Implementing consequence

management within the portfolio.

Tracking of irregular and fruitless and

wasteful expenditure in the portfolio.

Tracking of Sapo and BBI going

concern.

Tracking of DTT project.

SAPO NEMISA SITA

Not Implemented

Mechanisms to ensure that financial

and performance reporting internal

controls are implemented.

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Corruption

Service Delivery

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