FINANCIAL MANAGEMENT OF GOVERNMENT’S COVID-19 INITIATIVES

INFRASTRUCTURE

Government responded to the outbreak of covid-19 by redirecting resources to fund a R500 billion package for the health response and the relief of social and economic distress caused by the drastic measures that had to be taken to contain the spread of the virus. 

In May 2020, we began a real-time audit of 16 of the key covid-19 initiatives introduced by government and of the management of the funds made available for these initiatives. We tabled two special reports on the outcomes of these audits in national and provincial government (on 2 September and 9 December 2020) and one on the outcomes in local government (30 June 2021).

As committed in these reports, we continued to audit the covid-19 funding and follow up on the progress made in addressing our findings as part of our normal annual audit. Some of these matters also had an impact on the 2020-21 audit outcomes as well as the disclosure of irregular and fruitless and wasteful expenditure of the affected auditees, as detailed in this report.

We also undertook to identify material irregularities from this process and to share our findings, risk indicators and data analyses with the Fusion Centre, which was established to deal with investigations into fraud and corruption relating to covid-19.

This chapter provides a final update on the status of the 15 covid-19 initiatives we audited in national and provincial government and the use of the R500 billion relief package. The local government initiatives are not included and we will report on them in the local government general report planned for mid-2022.
The chapter summarises how the auditees reacted to and implemented our recommendations, as well as the matters that remain unresolved and continue to need attention. A detailed report on each of the covid-19 initiatives is available on our website (www.agsa.co.za).

 

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Overall, R218,54 billion (44%) of the R500 billion fiscal relief package had been used by 31 March 2021*, as detailed in the table below. We obtained the information on the initiatives that we audited from the accounting records of the auditees included in the covid-19 audit, and the remainder from external sources.

* The amount used for the initiative on credit guarantee schemes is as at 18 May 2021.

Spending of R500 billion relief package

Recap on audit approach and findings from special reports

 

This audit was unique in its approach. We audited payments, procurement and delivery as they occurred, and reported any audit findings and observations to the accounting officer or authority so that they could deal with any shortcomings in real time and tighten controls to prevent the findings from reoccurring. A key component of the audit was the focus on preventative controls, which are, by their nature, a deterrent to abuse. We engaged up front with accounting officers and authorities on the importance of preventative controls to counteract the increased risks and to direct significant changes in their operations. We also assessed the preventative controls implemented by the auditees and recommended additional controls to strengthen the processes and prevent any accountability failures.

The audit was performed by multidisciplinary teams made up of fraud, information technology and sector-specific experts, who supported the financial auditors to dig deeper and provide relevant insights on auditees’ risks and operations.

The reporting approach was also unique because we used special reports to report on our findings and recommendations throughout the audit and not only at the end of an audit, as is our normal approach. The response to this approach was very positive, as portfolio and standing committees in Parliament and the legislatures could also play a more proactive oversight role, supported by the reports and our briefings to them.
Unsurprisingly, the findings from these real-time audits bore a striking resemblance to what we have reported on in the past.

In these special reports, we again highlighted the significant deficiencies in the procurement and contract management processes, and reported on the inadequate controls meant to ensure that payments are only made for goods and services that are delivered at the right time, price and quality. During a pandemic, the consequences of a supplier not delivering items such as personal protective equipment (PPE) are severe. We expressed concern about unfairness in the awarding of government business and that sufficient care was not taken to protect against overpricing, financial loss, fraud and abuse of the system.

The bulk of the government’s PPE procurement took place in the health and education sectors, where the pre-existing weaknesses in the control environments were further compounded by the covid-19 interventions.

In addition, we reported that the information technology systems, processes and controls used in government were not agile enough to respond to the changes required. We identified that the lack of validation, integration and sharing of data across government platforms resulted in people (including government officials) receiving benefits and grants to which they were not entitled.

Some of the initiatives, such as planned facilities that were earmarked for use as quarantine sites and the provision of temporary residential units, did not achieve the desired results, and some were even abandoned because of failed coordination, monitoring and relationships across the three spheres of government. Where implementing agents were involved, we found weaknesses in coordination and monitoring that compromised delivery, transparency and accountability. Even though command centres and other oversight structures were put in place, we often found that the information provided to them and to executive authorities on the performance of the initiatives was flawed.

We further highlighted irregularities, poor controls and indicators of potential fraud, which was noted in the context of the already compromised control environment. In previous years, we have reported on poor control environments where the basics of financial management and record keeping are not in place. We have highlighted the impact of instability in leadership, a lack of consequences for transgressions and non-compliance with legislation, and opportunities for abuse in the supply chain management processes.

The reports also included our recommendations to accounting officers and authorities for addressing our findings, as well as the responses we received to these recommendations.

We called on oversight structures to use the special reports to direct their oversight actions – to call accounting officers and authorities and executive authorities to account for how they implemented the covid-19 initiatives and managed the funds entrusted to them.

We also urged all role-players to shift their thinking towards prevention, which is a far better approach than having to deal with lengthy and costly investigations that result in loss of resources and diminished public confidence. Shortly after we tabled these reports, we launched a preventative control guide to help oversight and accounting officers in this regard.

 

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As we continued to audit these initiatives, we noted that six initiatives had been completed, two had been discontinued and seven were still ongoing. In this chapter, we include the status of the implementation of our recommendations by the auditees for each initiative.

Completed initiatives

 

 

For all completed initiatives, our recommendations were still in the process of being implemented. As a result, we noted the efforts relating to consequence management and loss recovery with the following matters still needing attention:

 

Wage protection

 

In line with the commitments made by its leadership, the Unemployment Insurance Fund improved the validation processes for the information submitted by applicants for the temporary employee/ employer relief scheme (Ters). We engaged the Fusion Centre on the exceptions contained in our special reports, and it is encouraging to note that the fund also referred numerous suspicious payments to the centre and that the Special Investigating Unit, the South African Police Service and the Directorate for Priority Crime Investigation (the Hawks) are currently investigating these payments.

The President issued a proclamation for the Special Investigating Unit to investigate all Ters payments suspected to be fraudulent. The Unemployment Insurance Fund procured the services of seven consulting firms to supplement its own resources before starting the post-validation processes. This process is currently in its second phase, but we are concerned that it is progressing slower than expected and needs to be accelerated.

Ineligible Ters claims are still being paid, albeit to a lesser extent, because of a lack of integrated government systems and databases against which applications can be validated.

 

Discontinued initiatives

 

 

Our recommendations for the discontinued initiatives were fully implemented, except for those relating to the temporary residential units initiative. The following matters remain:

 

Ongoing initiatives

 

 

Our recommendations for the ongoing initiatives are still in the process of being implemented, except for those relating to the loans through the Industrial Development Corporation initiative. While we note some improvements stemming from our recommendations, the following matters still require attention:

Basic education – personal protective equipment

The president issued a proclamation for the Special Investigating Unit to investigate all allegations of PPE-related fraud. The outcomes of these investigations will enable the relevant authorities to effectively and timeously implement the consequence management process so that accounting officers can recover any lost state funds.

Support to vulnerable households

The issue of paying ineligible persons continued, as there was an increase in the number of ineligible beneficiaries receiving grants after the second special report. We also noted the lack of integrated systems against which applications could be validated as a root cause requiring intervention, as the department had limited sources available for validation purposes. All payments to ineligible recipients must therefore be recovered and the responsible individuals should be prosecuted.

Compensation for occupationally incurred covid-19

Processing covid-19 claims falls within the normal processes of the Compensation Fund, and we noted that the pre-existing control weaknesses have not been addressed. The fund did not implement sound preventative and detective controls within and around its information technology systems.

Healthcare services

Accounting officers implemented a number of controls in response to previously reported findings to prevent the non-compliance with procurement regulations from reoccurring. The risk that remains in the process relates to the lack of consequence management implemented by management in instances where both the Special Investigating Unit and internal investigations identified fraud           and/or non-compliance. The current challenge in the sector is to finalise the consequence management processes so that appropriate and decisive action can be taken against transgressors. Effective and timeous implementation of consequences will enable accounting officers to recover any lost state funds.

Sport, arts and culture social relief fund

Although the initial criteria for evaluating applications were later clarified, we still identified some ineligible applicants who were approved and received payments. This was because some applicants who were receiving income from other sources were not detected during the approval processes due to the lack of integrated systems against which applications could be validated. Consequence management was also not enforced, as the accounting officer had not yet recovered funds paid to ineligible beneficiaries and no investigations were conducted into the root causes for the issues raised.

Support to small businesses – spaza shop support

The issues we identified for this initiative are identical to those that apply to the debt relief finance scheme and for which details are included in the discontinued initiatives section of this chapter.

 

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Our real-time covid-19 audits had a number of positive impacts. Some of the highlights include:

 

• Controls were improved – in some cases, the swift implementation of improved controls helped to prevent findings from reoccurring. This was evident particularly at the Unemployment Insurance Fund, where the Ters system was enhanced to improve the information validation processes. This included configuring the system to verify the employee salaries declared on the Ters applications against those declared as part of normal employers’ submissions before covid-19. The enhanced processes also included using data from the Department of Home Affairs to verify applicants’ identity numbers, which significantly reduced the number of suspicious payments.We also noted particular improvement in supply chain management controls for PPE procurement in response to our findings on overpricing and non-compliance with supply chain management requirements. In the health sector, compliance-monitoring controls in some provinces led to a provincial contract being established specifically to procure covid-19 PPE to ensure that the PPE was ordered at market-related prices and within the thresholds prescribed by the National Treasury.
• Planning, monitoring and managing of initiatives was strengthened – in response to the findings we raised in the second special report, monitoring controls for managing the quarantine sites initiative were increased with a noticeable impact. We also outlined the lack of demand for quarantine sites, which resulted in a ministerial directive being issued to cease funding for this initiative from 1 October 2020 to prevent any further unnecessary spending.
• Financial losses and irregularities were identified and auditees are taking steps to investigate irregularities, recover losses and implement consequences – one example is the Talana project, which was part of the initiative on temporary residential units, where several Housing Development Agency officials have been arrested based on matters reported in the special reports and subsequent investigations performed by the Special Investigating Unit.In the health sector, we identified financial losses from findings raised in the special reports, resulting in two material irregularities, of which the respective accounting officers have been notified, and a number of potential material irregularities are also being considered. Similarly, for the defence frontline services initiative, we notified the accounting officer of material irregularities relating to the procurement of PPE and Heberon because of the financial losses incurred.In the education sector, in some cases where PPE was under-delivered, suppliers were contacted and the matter was rectified. Funds were also recovered in some instances where the prices charged for PPE exceeded the limits set by the National Treasury, and possible cover-quoting was being investigated.
• Fraud red flags in procurement processes were shared with the Fusion Centre, enabling investigations that are currently ongoing – for both the first and second special reports, we used data analytics and computer-assisted audit techniques to identify anomalies and red flags, or high-risk indicators, within the payment, grants and data. We shared the following information with the Fusion Centre:
  • South African Social Security Agency: anomalies identified, including grant payments made to non-qualifying applicants, such as incarcerated individuals or government employees
  • Unemployment Insurance Fund: anomalies identified, including Ters payments to non-qualifying individuals, such as those who are imprisoned, deceased, below legal working age, receiving relief from other initiatives or government programmes (double-dipping), etc.
  • Supply chain management: covid-19-related purchases and services in the health and education sectors, water portfolio, Free State Provincial Treasury, etc. We included red flags such as large round amounts, conflict of interest matters identified, bank account details that differed from those included on the central supplier database, suppliers not registered for VAT, etc.The way forward on matters referred to the Fusion Centre is as follows:
• Supply chain management issues: The Fusion Centre will further enhance the investigation of anomalies and red flags shared with them using sources of information that only the Financial Intelligence Centre can access, for example section 27 requests in terms of the Financial Intelligence Centre Act. We noted that 131 companies included in the information we shared with the Fusion Centre were also flagged by the Special Investigating Unit, which:
  • has confirmed irregularities, amounting to R1,05 billion, at 31 of these entities
  • has found no irregularities at 23 entities
  • is still investigating at 77 entities.We will continue to liaise with the Fusion Centre regarding the anomalies raised and the further steps taken by the public bodies that form part of the Fusion Centre.
• Special Investigating Unit: initiated a number of investigations, brought these matters to the Special Tribunal and obtained freezing orders. We will follow up on the recovery of money and ensure consequence management.
• Directorate for Priority Crime Investigation (the Hawks): has various investigations in progress. For example, the Financial Intelligence Centre registered an umbrella case for individuals who benefitted unduly through grant payments from the South African Social Security Agency.
• Department of Public Service and Administration: the Fusion Centre analysed data from the South African Social Security Agency and the Unemployment Insurance Fund using Persal, and identified additional public servants who may have unduly benefitted from the social relief of distress grant and Ters payments:
  • The Fusion Centre held numerous discussions with the department and provided it with the list of identified officials.
  • The department indicated that it would coordinate with all affected departments to:
    • launch internal investigation processes
    • trigger disciplinary action against the suspected employees
    • recoup misappropriated funds by garnishing the employees’ monthly salaries.

 

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While the response to our special reports was positive and the actions taken in response to our findings and observations were commendable, more could have been achieved if the funds and related initiatives had been better managed. The information and insights presented in these special reports were intended to empower oversight structures and enable executive leaders to focus on implementing and strengthening controls that support the call for transparency and accountability. The outbreak of covid-19 and the impact on the wider economy is placing unprecedented pressures on not only the lives of ordinary South African citizens, but also their livelihoods. It is more important than ever for all government institutions to have an ethical, effective and efficient focus to overcome the impact of covid-19 on the citizens of South Africa.

In delivering the covid-19 initiatives, government had to respond at a pace and on a scale not previously envisaged. Government should learn from the successes and failures in the financial management of these initiatives.

A shift in thinking and behaviour is necessary, and the following lessons should be applied:

• Fraud risks remain but can be managed
  if a more ethical culture is encouraged and embraced transversally, and if leadership demonstrates this by setting the tone at
  the top.
• Greater investment is required in integrating government information technology systems to ensure that they are intersecting, agile and responsive to changes in the environment. Proper validation, integration and sharing of data across government platforms is also essential.
• Coordination, monitoring and intergovernmental relationships across spheres of government must be strengthened to enable key projects and programmes to be successfully implemented and monitored.
• Sustainable solutions are required to ensure that control environments are mature so that the risks are minimised when these environments are exposed to abnormal and disruptive circumstances. Designing and implementing controls that prevent and/or detect fraud, errors and abuse is an investment that pays off when an institution is called upon to deal with a crisis. It is a far better approach than having to deal with lengthy and costly investigations and a loss of resources and public confidence.

For any endeavour to succeed, everyone involved should share a common goal as well as embrace and commit to the role they play in achieving that goal. We will continue to audit the covid-19 funding and follow up on the progress made in addressing the audit findings and observations as part of our normal annual audits.

We call on the accounting officers to address the remaining risks and ensure that swift action is taken to recover losses and implement consequences. We also recognise the specific and important role played by executive authorities and oversight structures, and we encourage them to continue to support and oversee this process.

 

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