1
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
5
Our annual audit examines three areas
6
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
financial statements
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
financial statements
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
financial statements
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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)]
8
The 2017-18 audit outcomes2
9
DO
PLAN
CHECKACT
ACCOUNTABILITY = PLAN + DO + CHECK + ACT
10
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:
16
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.
Good Of concern Intervention required
17
Management and delivery of key programmes3
18
Management and delivery on key programmes – spending, performance and reporting
Good Of concern Intervention required
18
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.
19
Management and delivery on key programmes – spending, performance and reporting [cont..]
Good Of concern Intervention required
19
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.
20
Financial health and financial management4
21
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
22
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
24
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
26
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
27
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.
29
Corruption
Service Delivery
30
Stay in touch with the AGSA
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