MATERIAL IRREGULARITIES

The amendments to the Public Audit Act became effective on 1 April 2019. These amendments provide us with an expanded mandate to go beyond auditing and reporting in an effort to strengthen the accountability mechanisms across government, mainly through the material irregularity (MI) process.

Our expanded mandate

The amendments to the Public Audit Act became effective on 1 April 2019. These amendments provide us with an expanded mandate to go beyond auditing and reporting in an effort to strengthen the accountability mechanisms across government, mainly through the material irregularity (MI) process.

We are in the third year of implementing the amendments in national and provincial government. In this chapter, we share insights from, and outcomes of, the MI implementation journey. We also include examples of some of the identified MIs. More details on the MIs we have identified thus far are available on our website (www.agsa.co.za).

At the end of this chapter you can see how the MI process works – in particular how we identify, follow up and report on MIs as part of our audit process.

Our expanded mandate and implementation

The responsibilities and duties of accounting officers and authorities are well defined in the Public Finance Management Act and other enabling legislation, which are all underpinned by the basic values and principles governing public administration as set out in our Constitution. For many years, our audits have highlighted a systemic failure across government to establish the systems, processes and controls required to make the constitutional and legislative requirements the norm. Not only are irregularities and the resultant losses, misuse and harm not prevented from happening, such instances are also not appropriately dealt with when they are identified.

Our mandate has always been to audit and report on these matters so that they can be corrected, but a lack of progress in preventing and dealing with the accountability failures we report prompted the need for an expansion of our mandate. Rather than being a punitive measure, the amendments are intended to act as a complementary mechanism in the broader public sector accountability value chain by strengthening financial and performance management and instilling the right behaviour in order to prevent MIs and ensure they are appropriately dealt with if they do occur.

The aim of our expanded mandate is thus to:

  • promote better accountability
  • result in the protection of resources
  • enhance public sector performance and encourage an ethical culture
  • ultimately strengthen public sector institutions to better serve citizens and improve their lived experiences.

 

According to the MI definition, there are two main gates that a matter must pass for it to be classified as an MI – there needs to be an irregularity (which is the non-compliance, fraud, theft or breach), and that irregularity must have an impact (which is the loss, misuse or harm).

The amendments to the Public Audit Act and the Material Irregularity Regulations have been shaped to support the process of fair, transparent and legally sound administrative justice, by giving the accounting officer or authority an opportunity to take the actions required to deal with the MIs we identify. We use our additional powers only when the accounting officer or authority is not dealing appropriately with the MIs of which we notify them.

Our expanded mandate did not change the role and responsibilities of the accounting officers and authorities or the oversight and monitoring roles of oversight bodies and executive authorities, as shown below.

 

We are fully committed to implementing the enhanced powers given to our office – without fear, favour or prejudice.

If accounting officers and authorities, supported by their political leadership, fulfil their legislated responsibilities and commit to taking swift action when we notify them of an MI, there is no need for us to use our remedial and referral powers. Yet, we will not hesitate to use these powers when accounting officers or authorities do not deal with MIs with the required seriousness – as we clearly illustrate in this chapter.

The impact of the expanded mandate on our audit process and organisation, as well as the profound implications thereof, requires us to implement the changes in a careful but progressive manner.
We have phased in the implementation of different elements of the MI definition over the past three years, with 2020-21 being the first year we implemented the full definition. We also incrementally increased the number of auditees where we implemented the MI process – and plan a further increase in 2021-22.

We are focusing on those auditees where the greatest impact is likely, without spreading our resources too thin or compromising on the quality of our processes. A list of the selected auditees is included at the end of this chapter.

When we identify irregularities or indicators of irregularities, the MI process is not the only route we can take to ensure that the matter receives the required attention. We can also directly refer it to public bodies for further investigation – we used this avenue to enable swift action in dealing with the indicators of fraud and the abuse of funds we identified during the real-time audit of government’s covid-19 initiatives. We shared the information with the Fusion Centre, which brings together key law-enforcement agencies to share information and resources. Chapter 5 includes more information
on this.

 

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The status of identified material irregularities
In the previous general report, we reported that we had identified and notified accounting officers and authorities of 75 MIs and that three of these MIs had been resolved in 2019-20. Since then, we have closed another four of these MIs, based on information provided by the accounting officer; and split one of the MIs into three separate MIs.

A total of 70 active MIs was thus carried over from previous years. By 15 October 2021, we had notified accounting officers and authorities of a further 61 MIs.

The 131 MIs all relate to non-compliance with legislation or suspected fraud that resulted in a material financial loss.

We only recently notified accounting officers and authorities of 32 of these MIs, and by 15 October 2021 (which was the cut-off date for inclusion in this report), their responses were not yet due. At that date, we were also still evaluating the responses of accounting officers and authorities to 14 of the newly identified MIs and assessing the appropriateness of the actions taken to address 12 previously reported MIs.

 

 

How have accounting officers and authorities responded?

We have already seen great value from the implementation of the MI process. As is evident from the status of the MIs on the previous page, most accounting officers and authorities are taking appropriate action to address the MIs identified. In following up on the progress of MIs reported in previous years, we also found that most accounting officers and authorities were actively working to resolve the MIs. This signals a behavioural change towards responding in a decisive and timely manner to our findings.

We have seen success stories of financial losses being recovered, internal controls being improved and consequences being effected. But we also became aware of stumbling blocks that accounting officers and authorities encounter in resolving MIs – some of these matters are within their control, causing internal delays; but there are also external factors that hamper the process.

The examples that follow demonstrate both the success stories and the stumbling blocks.

 

The Free State Department of Education awarded a contract for training teachers on information and communication technology.

The department did not evaluate a bidder that achieved the minimum qualifying score for functionality criteria, as required by the Preferential Procurement Regulations. Consequently, the contract was awarded to another bidder at a higher price of R27,6 million, compared to the R19,4 million quoted by the disqualified bidder.

The accounting officer took the following actions to resolve the MI:

  • The contract was terminated in July 2020 before any services were received or any payments were made, therefore preventing any losses.
  • In September 2020, the accounting officer implemented an additional internal control measure, instructing the internal audit unit to verify all bid evaluation reports and bid documents before their approval. We confirmed during the 2020-21 audit that the unit did review tenders before confirming the awards.
  • The internal audit unit investigated the matter and recommended consequence management as guided by the Public Finance Management Act.
  • Sanctions were instituted against the members of the bid evaluation committee, in the form of written warning letters.

 

We raised an MI at the National Student Financial Aid Scheme on a likely financial loss as a result of money owed by tertiary institutions not being collected. The scheme appointed an external service provider to determine the extent of the debt through reconciliations. The board would have started recovering the funds from the institutions from September 2021.

From 2015 to 2020, the Pietersburg Hospital leased radiology equipment that it did not use due to safety concerns, resulting in an estimated loss of R3,7 million. After we issued the MI, the equipment was relicensed and is now in use. To recover part of the financial loss, the accounting officer of the Limpopo Department of Health renegotiated an extension of the contract, which will allow the equipment to be used for 12 months at no cost.

A municipal grant payment of R103 million incorrectly made in 2018 to a supplier by the Department of Cooperative Governance was dealt with swiftly and the money is currently being recovered through court processes (supported by the Special Investigating Unit, the Directorate for Priority Crime Investigation (the Hawks) and the State Attorney).

 

In 2016-17, the Eastern Cape Department of Transport paid for a fire truck that was not received. After we issued the MI notification, a letter of demand and summons were served on the supplier in November 2020, but the supplier had gone into business rescue in 2017.

The financial losses suffered by the Passenger Rail Agency of South Africa as a result of the purchase of locomotives that were not fit for purpose are unlikely to be recovered in full, as the supplier applied for liquidation in 2018.

Unfair procurement processes for information technology infrastructure in March 2015 by the Gauteng Department of Health resulted in an estimated financial loss of R149 million. An investigation identified the implicated officials and the matter was referred to the State Attorney in July 2019 to consider possible civil claims, but this is still in underway.

In October 2015, the North West Department of Community Safety and Transport Management irregularly appointed a supplier for learner driver training, who received a prepayment of R21,3 million and then did not deliver the service. A civil claim process for recovery from the supplier was started in 2017, but a summons was only issued following the establishment of the supplier’s whereabouts in August 2021.

 

The Gauteng Department of Human Settlements made a payment of R2,5 million to an incorrect contractor; the payment is partially in the process of being recovered from the supplier through a legal process with the National Prosecuting Authority. The four officials responsible were identified through an investigation in April 2021. By August 2021, only one of the disciplinary hearings had been held due to covid-19-related postponements.

Expenditure on state funerals incurred by the Department of Public Works and Infrastructure between May 2018 and December 2018 exceeded the contract amount, while the services paid for differed from those provided for in the contracts. The accounting officer’s investigation was finalised on

29 March 2019. The department’s executive authority, together with the acting accounting officer and the executive authority in the Office of the Presidency, is proceeding with disciplinary action against the officials responsible. This process has been prolonged by court litigation levelled by the implicated officials against the department.

The Department of Cooperative Governance made payments in advance to implementing agents without evidence of goods and services having been received. In response to the MI notification, some agents that were not complying with the requirements of the programme were referred to the internal audit unit for investigation and some contracts were subsequently terminated.

As detailed earlier, the Free State Department of Education awarded a R27,6 million contract to a specific supplier, but another supplier with a lower bid was unfairly disqualified. We notified the accounting officer of the MI on 7 July 2020, who then terminated the contract on 22 July 2020 before any services were received or any payments were made, preventing any losses.

 

In September 2018, the Limpopo Department of Public Works, Roads and Infrastructure awarded a three-year road maintenance contract to a bidder that did not score the highest points in the evaluation process. This resulted in higher prices being paid, as the contract value of the appointed bidder was higher than the bid amount of the bidder that scored the highest points. In June 2021, in response to being notified of the MI, the accounting officer requested a forensic investigation into this matter by the Special Investigating Unit. A secondment agreement was signed with the Special Investigating Unit in August 2021 and the investigation commenced in September 2021.

The North West Department of Health entered into a contract for the maintenance of medical equipment from November 2016 to October 2020, with a provision that the department was to confirm if prices are market related with each transaction and then allowing the department to engage another service provider irrespective of the contract if it was found that the prices were not market related. However, the department did not follow this process and paid            R3,3 million instead of the market-related cost of R144 562 for the same service. An internal investigation into the MI was completed in May 2021. In light of the seriousness of the findings, and as recommended by the internal investigation, the accounting officer handed the matter to law-enforcement agencies for criminal investigation and recovery in June 2021.

 

The Department of Basic Education distributed learner materials to volunteer educators for learners who did not qualify for the Kha Ri Gude literacy programme. After a departmental investigation, the matter was referred to the Hawks in 2017-18 – the investigation is still ongoing.

The investigation by the Special Investigating Unit into scholar transport contracts awarded by the North West Department of Community Safety and Transport Management has been ongoing since 2019. Two of the MIs we raised at the department are dependent on the completion of this investigation for resolution.

 

In June 2019, we notified the accounting officer of the KwaZulu-Natal Department of Health of an irregularity in awarding contracts to bidders that did not score the highest points in the evaluation process. Based on a preliminary investigation that confirmed the non-compliance, the accounting officer referred the matter to the provincial treasury in August 2019 for a forensic investigation, which was only concluded in June 2020 and did not find any non-compliance. Through our engagements with the National Treasury, the non-compliance was confirmed. The accounting officer was informed of the outcome of the consultation with the National Treasury and the expectation that further actions need to be taken to resolve the MI. We are currently awaiting feedback from the accounting officer on the further actions to be taken.

The Limpopo Department of Education received goods and services from a supplier of information technology services but did not pay the invoices, as the contract was cancelled when the department was placed under administration. This resulted in litigation and an order for the department to pay the outstanding amount plus interest

(R85,2 million). The accounting officer’s preliminary investigation determined that different public sector institutions played a role in the MI and the premier’s office advised that the matter be referred to the intergovernmental relations forum. In December 2019, the former accounting officer requested the national Department of Cooperative Governance to assist in this regard. The new accounting officer followed up the matter and in September 2020 the department committed to facilitate a mediation process to identify the responsible parties. To date, this matter has not been finalised. We did, however, conclude that the accounting officer had taken all possible actions to resolve the matter.

We often need to reissue notifications when there is a change in accounting officer or authority, and there is rarely a good handover from the preceding accounting officers and authorities to the new ones. MI processes are thus halted or do not proceed as planned.

The Northern Cape Department of Health entered into a radiology services contract from 1 November 2013, which was subsequently extended multiple times. The contract contained a mathematical error that resulted in overpayments to the service provider. Payments were also made for mammogram services even though the hospital where the services were supposedly rendered did not have a mammogram machine. The incumbent accounting officer performed a preliminary investigation, which resulted in a full-scale investigation being instituted in August 2019. The investigation was only concluded in October 2020 due to a change in the accounting officer and the covid-19 lockdown.

We notified the board of the Passenger Rail Agency of South Africa of nine MIs in July 2019. The MIs have not been resolved or adequately attended to because of the multiple changes at board level since then.

What did we do when accounting officers and authorities did not respond adequately?

Where accounting officers and authorities did not appropriately address the MIs we reported to them, we used our expanded mandate by including recommendations in the audit reports, or the auditor-general invoked her additional powers of referral and remedial action.

 

We identified five MIs at the department, and concluded that the accounting officer had not taken appropriate action to resolve three of these as at 15 October 2021.

Remedial action: inventory and asset management contract not awarded to only the bidder that scored the highest points in the evaluation process

In February 2017, the department awarded the contract for inventory and asset management for a period of five years, starting on 1 March 2017. The department did not comply with the requirements of the Preferential Procurement Policy Framework Act in awarding this contract because it did not award the entire contract to the bidder that scored the highest points in the evaluation process. The non-compliance is likely to result in a material financial loss, as the contract was awarded to two bidders on a fifty-fifty basis at an increased price of R922 million for the same scope of work. This resulted in an increase of R250,56 million to the project cost.

The accounting officer disagreed with the notification and stated that there was no non-compliance in awarding the contract. The National Treasury then further investigated the matter and confirmed on 28 February 2020 that legislation had been contravened in awarding this contract.

We included recommendations in the department’s 2019-20 audit report, which the accounting officer was required to implement by 30 November 2020.

Based on our assessment of the written response and supporting evidence submitted by the accounting officer, we concluded that the recommendations had not been adequately implemented and gave an extension until 30 April 2021 to implement those recommendations. Although the accounting officer did conduct an investigation, they cited limitations in terms of the Defence Act as it relates to taking disciplinary action against military command members. We concluded that the recommendations had not been implemented adequately, particularly those relating to determining the amount of the financial loss and taking disciplinary action against non-military personnel, as the accounting officer can take this type of action.

On 18 August 2021, the auditor-general issued a directive to the accounting officer to determine the amount of the financial loss and to recover such loss or make progress with recovering the loss from the responsible person(s) by 18 November 2021. She also notified the accounting officer of the following remedial actions to address the MI, which should be implemented by the same date:

Effective and appropriate disciplinary steps must be taken against any civilian official that the investigation finds to be responsible, and appropriate action must be taken to determine whether any such person is liable for the losses suffered by the department for the purpose of recovery.

Steps must be taken to ensure that the chief of the South African National Defence Force takes the same actions against any military command officials that the investigation finds to be responsible. If the required action is not taken, the accounting officer must promptly notify the executive authority of such failure.

Recommendations: lease payments made for unoccupied office buildings

From 2015-16 to 2019-20, the department made lease payments for unoccupied office buildings, in contravention of the Public Finance Management Act, which requires the effective, efficient, economical and transparent use of the department’s financial resources. The non-compliance resulted in a financial loss of R108,3 million.

We notified the accounting officer of the MI on 11 August 2020. The accounting officer responded with planned actions to resolve the MI, which we considered appropriate. On 20 April 2021, we submitted a request for information on the progress made in addressing the MI, but did not receive a response. We therefore concluded that appropriate action is not being taken.

We included a recommendation in the
2020-21 audit report, which the accounting officer was required to implement by
11 November 2021:

  • The amount of the financial loss should be determined and the officials responsible for the financial loss should be identified.
  • Effective and appropriate disciplinary steps should be taken against any civilian official and military command official whom the investigation found to be responsible.
  • Appropriate action must be taken to determine whether the responsible official(s) is/are liable by law for the losses suffered by the department for the purpose of recovery.

Referral: unfair award for the supply of fuel

In July 2019, the department awarded a contract worth R13,9 million for the supply and delivery of fuel to a supplier using evaluation criteria that differed from those stipulated in the original request for quotations, which stipulated that the award would be made to a bidder with a lower price. However, the department indicated that it used the rotation of suppliers and an average price as the evaluation criteria to award this contract. The mode of transport was also changed after the award, which resulted in a further price increase. Awarding the contract using different criteria resulted in non-compliance with the Treasury Regulations, which require the supply chain management process to be fair, transparent, competitive and cost-effective. The non-compliance caused a material financial loss of R2,57 million due to
a higher price being paid for the fuel.

We notified the accounting officer of the MI on 11 August 2020. On 27 November 2020, the accounting officer completed the investigation and disagreed that there was any non-compliance with legislation in awarding this contract.

In September 2021, the auditor-general approved the referral of the MI to the Hawks for further investigation.

 

Recommendations and referral: long-outstanding electricity receivables not collected

The entity appointed a service provider to provide electricity billing and collection services to tenants for a contract period of 60 months. The service provider collected R37,5 million in the 2019-20 financial year but only paid over R4,8 million to the entity. In contravention of the Public Finance Management Act, effective and appropriate steps were not taken to collect the outstanding amounts due from the service provider, as the debt-collection process only started in May 2020. The service provider was placed under voluntary liquidation from 26 May 2020. The non-compliance is likely to result in a material financial loss if the outstanding amount is not recovered from the service provider, which owed the entity a total of R109 million by 31 March 2021.

We notified the accounting authority of the MI on 23 October 2020. An external legal firm was instructed to take legal steps against the service provider, but this process has not resulted in the recovery of the outstanding amount. The accounting authority could not provide sufficient and appropriate evidence of other actions that had been taken in response to being notified of the MI.

We included the following recommendations in the 2020-21 audit report that the accounting authority should take by
15 January 2022:

  • Appropriate action should be taken to investigate the non-compliance to determine if any official should be held responsible.
  • Effective and appropriate disciplinary steps should be taken against any official that the investigation finds to be responsible.

In addition, the auditor-general approved the referral of the MI to the Hawks for further investigation.

The accounting officer did not appropriately implement the recommendations in our   2019-20 audit report relating to two of the MIs we identified during our 2018-19 audit.

Remedial action: development of community residential units, block G – Thabong extension 3, Welkom

A new contractor had to be appointed in May 2018 to complete the construction of community residential units, as the previous contractor’s contract was terminated in March 2017 due to consistent breach of contract. Consulting engineers confirmed that the value of the work done by the previous contractor by the termination date was only R12,8 million, despite the contractor receiving payments of R33 million from 2014 to 2017, in contravention of the Treasury Regulations. The overpayment was likely to result in a material financial loss of R20,2 million, if not recovered.

We notified the accounting officer of the MI on 12 July 2019. The accounting officer responded with planned actions, but has not taken any of these. The 2019-20 audit report included recommendations that should have been implemented by 28 July 2021, but the accounting officer did not adequately implement the recommendations.

On 28 October 2021, the auditor-general notified the accounting officer of the following remedial action, which should be implemented by 28 February 2022:

Effective and appropriate steps must be taken to ensure that the financial loss is recovered as soon as possible.

Appropriate action must be taken to investigate the non-compliance to determine if any official should be held responsible.

Effective and appropriate disciplinary steps must be taken against any official found to be responsible.

Remedial action: overpayments on housing project – F10110004 Kroonstad 350

During 2018-19, the department made payments on duplicate claims submitted by a supplier because it did not have effective internal controls in place for approving and processing payments, contrary to the Treasury Regulations. The overpayment was likely to result in a material financial loss of R6,6 million, if not recovered.

We notified the accounting officer of the MI on 12 July 2019. The accounting officer instituted a process to recover the duplicate payments from the supplier through the State Attorney on 8 August 2019, but did not take any further action. We therefore included recommendations in the 2019-20 audit report that should have been implemented by 28 July 2021, but the accounting officer did not adequately implement the recommendations.

On 28 October 2021, the auditor-general notified the accounting officer of the following remedial action, which should be implemented by 27 January 2022:

Appropriate action must be taken to investigate the non-compliance to determine if any official should be held liable for the losses suffered by the department.

If it is determined that the department suffered the financial loss through criminal acts, possible criminal acts or omission, this must be reported to the South African Police Service.

Effective and appropriate disciplinary steps must be taken against any official found to be responsible.

Effective and appropriate steps must be taken to monitor the recovery process of the financial loss through the State Attorney.

Remedial action: unfair procurement process in the purchase of locomotives

In July 2012, the entity awarded a R3,5 billion contract to purchase locomotives. Multiple non-compliance matters were identified in the bidding and evaluation process. A prepayment of R2,6 billion was made to the supplier for which the entity has derived no value, as it assessed the supplier’s locomotives as not fit for purpose. The amount has not been recovered from the supplier. A material financial loss is likely, as the supplier applied for liquidation in December 2018.

In 2015, the accounting authority at that time began the initial phase of the investigation into the matter, resulting in an application to the courts to set aside the contract, which was finalised in May 2019. The Hawks has also been investigating this matter since 2015. The second phase of the investigation into implicated employees is still in progress.

We notified the accounting authority of the MI on 17 July 2019. Because little action had been taken to address the MI, the 2018-19 audit report included recommendations
that should have been implemented by
31 March 2020.

There were delays in implementing the recommendations because of changes at the accounting authority level and the lockdown measures implemented in response to covid-19. As a result, we granted the new accounting authority an extension for implementing the recommendations.

To implement the recommendations, the entity asked the Special Investigating Unit to assist with finalising the investigation into the MI by seconding resources for six months. The recommendations were not implemented appropriately because the Special Investigating Unit’s report did not address the purpose of the investigation, namely to identify the responsible officials for disciplinary action. In addition, the accounting authority’s response did not indicate what specific actions would be taken and by when, based on the Special Investigating Unit’s report.

On 15 September 2021, the auditor-general notified the accounting authority of the following remedial action that must be implemented by 15 December 2021:

  • Appropriate action must be taken to determine the role of the individual bid evaluation and bid adjudication committee members in appointing the supplier.
  • Appropriate action must be taken to identify any other employees that were either actively or passively involved in appointing the supplier.
  • Effective and appropriate disciplinary steps must be taken against the individual bid evaluation and bid adjudication committee members and any other employees found to be responsible.

Recommendations: Community Work Programme payments to non-qualifying government employees

In 2018-19, payments were made through this programme to non-qualifying government employees because there were no effective internal controls in place for approving and processing payments. The non-compliance is likely to result in a material financial loss, if not recovered.

We notified the accounting officer of the MI on 13 August 2019.

A new accounting officer was appointed in April 2020 and we allowed the new incumbent time to implement the planned actions to resolve the MI, keeping in mind the challenges brought about by the nationwide lockdown restrictions.

An investigation commissioned by the preceding accounting officer was concluded in October 2020, but did not determine the amount of the financial loss because the scope was too broad and not specific to the MI. The officials who were found to be responsible for the non-compliance were suspended pending disciplinary proceedings, but no evidence was provided to confirm that the financial loss was recovered. Controls were also not implemented to prevent the non-compliance from reoccurring, which resulted in further losses due to continuing payments being made to some of the government employees.

We included the following recommendations in the 2020-21 audit report, which should be implemented by 31 January 2022:

  • The amount of the financial loss relating to non-qualifying participants should be appropriately and accurately determined.
  • Appropriate actions should be taken to recover the financial losses suffered by the department.
  • If it is determined that the department suffered the financial losses through criminal acts, possible criminal acts or omission, this should be reported to the South African Police Service.
  • Appropriate and proactive internal controls should be implemented to prevent payments to non-qualifying government employees by validating participants and removing non-qualifying government employees from the database.
  • Government employees confirmed to have unduly benefitted from the programme should be reported to their employer and the Department of Public Service and Administration.
  • Effective and appropriate disciplinary steps should be taken against any official whom the investigation finds to be responsible.

Recommendations: expenditure on state events exceeded contract amount

The prices charged on the invoices for three state events from July 2018 to November 2018 differed from the prices quoted on the pricing schedule submitted by the supplier during the tender process. The non-compliance resulted in a material financial loss of R0,8 million.

We notified the accounting officer of the MI on 3 September 2020, but he did not implement the actions he committed to in his response within a reasonable time.

We included the following recommendations in the 2020-21 audit report, which should be implemented by 3 February 2022:

  • The irregular expenditure should be investigated and the amount of the financial loss incurred should be determined.
  • Appropriate action should be taken to recover the financial loss suffered by the department from the supplier.
  • Effective and appropriate disciplinary steps should be taken against any official whom the investigation finds to be responsible.

Referral: evaluation criteria applied in medical waste award differed from original bidding invitation

In November 2018, the department awarded a three-year contract for medical waste collection at R4,3 million per month to a supplier based on criteria applied in the evaluation process that differed from those included in the original bidding invitation, in contravention of the Treasury Regulations. The non-compliance is likely to result in a material financial loss because the fixed monthly pricing awarded to the supplier differed significantly from the variable cost pricing included in the original bidding invitation.

We notified the accounting officer of the MI on 18 July 2019. The accounting officer disagreed that there was any non-compliance with legislation in awarding the contract.

The auditor-general referred the MI to the National Treasury on 6 October 2019 for further investigation. The National Treasury accepted the referral on 13 March 2020. The holdup in accepting the referral was caused by a delay in engagements on the memorandum of understanding to facilitate the referral.

The National Treasury provided feedback on 30 June 2021 that it is investigating the matter but that the progress of the investigation has been delayed by covid-19 lockdown restrictions.

Referral: inadequate system controls, resulting in data breaches and fraud

In 2018, the South African Post Office was awarded the contract to administer and process the payment of South African Social Security Agency grants through its then Postbank division. The entity was required to procure and implement an integrated grants payment system for this purpose. The system was not properly implemented and secured, however, resulting in the issuer master key for the bank cards of grant beneficiaries being compromised and fraudulent transactions taking place, which are likely to result in material financial losses.

Postbank became a separate public entity in April 2019, which resulted in a disagreement between Postbank and the South African Post Office about who was responsible for resolving the MI and for the limited actions that had been taken.

The auditor-general approved the referral of the MI to the Hawks in September 2021 for further investigation.

We have not issued any certificates of debt to date. However, if the MIs involving financial loss currently in the remedial process are not appropriately dealt with, the auditor-general can invoke the certificate-of-debt process.

Nature of identified material irregularities

We now turn our attention to the nature of the

121 MIs that had not been resolved by

15 October 2021. These MIs emerged in the areas of procurement, expenditure management (payments), revenue management, resource management, suspected fraud, and non-compliance resulting in penalties.

We estimate the financial loss associated with these MIs to be R11,9 billion. Such huge losses can be ill afforded at a time when limited funds are available and the demand for service delivery is high.

We have highlighted all of the areas of vulnerability in the figure above for a number of years, including in this report and the special reports we tabled on the management of government’s covid-19 initiatives. Six of the MIs identified on uneconomical procurement related to the covid-19 initiatives, mostly to the procurement of personal protective equipment.

These are not complex matters, but the basic disciplines and processes that should be in place at auditees:

  • to procure at the best price
  • to pay only for what was received
  • to make payments on time
  • to recover revenue owed to the state
  • to safeguard assets
  • to effectively and efficiently use the resources of the state to derive value from the money spent
  • to prevent fraud
  • to comply with legislation.

Financial losses mean that there is less money available to deliver much-needed services to citizens and for government to achieve it strategic priorities. Some of the MIs had a direct impact on the ability of auditees to deliver on projects and services in addition to reducing the funds available for such delivery. For example, the late payment of contractors or the appointment of contractors that cannot deliver led to delays in the completion of infrastructure projects, as detailed in chapter 4.

Below we look at further MI examples. A full list of all the MIs we have identified and to which the accounting officers or authorities have responded is available on our website (www.agsa.co.za).

Payment not in line with contract

From 2017-18, the scheme paid tuition fees and allowances to students that were above the maximum amounts set in the written agreements with the students due to ineffective controls. In some cases, the amounts in the agreements were incorrect, while in other cases the amounts paid were more than the total cost of study for the students. The non-compliance is likely to result in a material financial loss if the overpayments are not recovered from the students and tertiary institutions.

Debt not recovered

The scheme is owed money by tertiary institutions (universities as well as technical and vocational education and training colleges) due to students deregistering or being awarded bursaries from other donors and thus not using the scheme’s funding, or due to pay-outs exceeding the student’s total cost of study. As most of the institutions have not been following the processes for declaring amounts owing to the scheme since 2017, the scheme did not record and collect these amounts. The non-compliance is likely to result in a material financial loss if the debt is not recovered from the institutions.

Unbilled revenue

In terms of the scheme’s policy, interest on student loans is supposed to be charged one year after students graduate or leave the tertiary institution. The scheme did not have up-to-date information on the status of students, resulting in loan recipients no longer studying continuing to be recognised as students for many years without interest being charged on their loans. The non-compliance is likely to result in a material financial loss of just over R1 billion if the interest is not recovered.

Status: The accounting authority is taking appropriate action to resolve these MIs.

Payment for goods or services not received

An advance payment was made to a contractor appointed to renovate the Mmabatho Nursing College. As this prepayment was not provided for in the contract between the department and the contractor, it contravened the Treasury Regulations. An investigation confirmed that R9,4 million was paid without services being rendered and that this should be recovered from the supplier.

Unfair procurement process resulting in overpricing

During the tender evaluation process for a R10,3 million maintenance contract, a bidder was disqualified at the functionality stage even though they met all the requirements. If the bidder had not been incorrectly disqualified, they could have won the contract at a cost of R3,3 million less than the winning bidder.

No benefit from cost

The construction of the Jouberton Community Health Centre was significantly delayed. The contractor was paid additional extension-of-time payments of R4 million above the total amount approved for such extensions. This will be a material financial loss if not recovered from the contractor.

Status: The accounting officer is taking appropriate action to resolve these MIs.

No benefit from cost

The department imported 970 895 vials of the unregistered drug Heberon® Alfa R (Heberon) at an estimated cost of R260,6 million from a Cuban supplier without approval from the South African Health Products Regulatory Authority. Only R34,86 million has been paid to the supplier to date.

The South African Health Products Regulatory Authority authorised the use of only 10 vials of Heberon on a single patient on 5 October 2020 and rejected the department’s bulk stock application on        21 October 2020. The outstanding approval, together with the approaching expiry dates, will most likely result in the department not administering some or all of the remaining drugs. Therefore, the non-compliance has resulted in a likely material financial loss of R260 million to the department.

Status: The accounting officer responded to the notification and we are assessing the response.

 

No benefit from cost

From April 2016 to March 2020, the National Treasury paid R336 million for technical support and maintenance on the Integrated Financial Management System that is not yet in operation, resulting in no value being derived from the expenditure.

Status: The accounting officer disagrees with the MI and we are considering what further action should be taken.

Suspected fraud

An employee at Coega’s skills development centre created fictitious students and facilitated the transfer of stipends of R7 million into his own bank account. The theft of the funds took place from 2013 to February 2021.

Status: We have notified the accounting authority of the MI and are awaiting the response.

Non-compliance resulting in penalties

Between March 2013 and February 2016, employee taxes on leave gratuities and pro-rata bonuses paid to retiring employees were not withheld and paid to the South African Revenue Service.

The department applied for a tax directive instead and incorrectly stated on the application forms that the payments were in lieu of severance benefits payable upon retirement. The South African Revenue Service concluded the matter based on the final audited assessment. Outstanding taxes and penalties totalling R55,4 million were payable.

Status: The accounting officer is taking appropriate action to resolve the MI.

Conclusion

In continuing on the MI implementation journey, we have substantially increased the number of MIs identified as well as our impact on the accountability mechanisms of national and provincial government. We observed accounting officers and authorities being responsive and swiftly dealing with MIs, which resulted in losses being recovered, controls being improved, and consequences being effected. But we also noted some stumbling blocks – both internal and external to our auditees – delaying the timeous resolution
of MIs.

Where accounting officers and authorities have not done enough to resolve the MIs, our expanded mandate has provided us with the power to take decisive action in the form of recommendations, referrals to public bodies and remedial action.

A culture of responsiveness, consequence management, good governance and accountability is not just our goal, it is a shared vision for all involved, including executive authorities, Parliament and legislatures. We urge them to also play their role in the accountability ecosystem by supporting, monitoring and overseeing the resolution of MIs. When the auditor-general invokes her powers of referral and remedial action (and the issuing of certificates of debt in future), it not only reflects poorly on the accounting officer and authority, but also means that the whole accountability value chain failed, up to executive and oversight level.

Again, we need to highlight that preventing MIs is more effective than having to deal with the consequences – money is lost, costly investigations have to be instituted and officials are subjected to the discomfort and anxieties associated with these processes, which often take a number of years to be concluded.

If we identified an MI, it not only means that the preventative controls have failed, but also that the accounting officer or authority and those in the accountability value chain:

  • were unaware that the irregularity took place, or
  • knew there was an irregularly but did nothing about it, or
  • tried to address the matter but were unsuccessful.

We hope to see a definite move towards preventing MIs to the benefit of the financial management, reputation and service delivery of our auditees – and ultimately the lives of the citizens they serve.

How do we identify, follow up and report on material irregularities?

Having looked in detail at the MIs we have identified so far, we now provide some background on how the MI process works.

How do we identify and report on material irregularities?

Our annual regularity audit process has distinct phases, including planning and execution. As the legislated reporting date comes closer, we finalise and conclude on our audits, allowing for the audit report to be signed on time. After this, we interact with oversight committees and undertake engagements on the overall audit outcomes and the general report.

The MI process is integrated into the audit process, but is not bound to the audit cycle in the same way as our regularity audits. It does not have a distinct start and stop date, which is quite a different approach from what our auditees are used to. We can identify matters that could potentially be MIs at any time of the audit – even right before the audit report is signed. We then do not leave it to the next annual audit, but rather follow our structured MI route to confirm whether the matter meets the definition of an MI and, if it does, we start the process so as not to delay the accountability process.

What do we do to identify material irregularities?

The MI process was applied at selected auditees from 1 April 2019, when the amendments to the Public Audit Act became effective. The auditor-general uses the discretion allowed by the amended act to direct that the audit teams only consider MIs where they continue to have an impact from the effective date. This means, for example, that we do not consider non-compliance that took place before 1 April 2019 unless it continues to financially affect the auditee.We also make sure that we apply the definition of an MI correctly by only reporting it if the non-compliance directly resulted in a financial loss, or is likely to result in a financial loss. We determine whether a financial loss is material by considering its value, nature and impact. The value of the financial loss had often already been determined by the auditee and disclosed in the financial statements, such as fruitless and wasteful expenditure (what we refer to as a known financial loss). But for some MIs, we estimate the potential financial loss to consider if it is material (what we refer to as an estimated financial loss). We follow a similar approach in determining the nature of other irregularities (fraud, theft, and breaches of fiduciary duty) and their impact (the loss or misuse of a material public resource, or significant harm to the general public or a public sector institution).

Are material irregularities and irregular expenditure the same thing?

Our stakeholders often expect that all irregular expenditure will also be MIs. This is not the case, however, as summarised in the figure below.

The main differences are in the nature of irregular expenditure and MIs. An MI needs to pass two gates: there needs to be an irregularity and an impact. For a matter to be irregular expenditure, it only needs to pass the first gate – only the irregularity element is required. The irregularity is also limited to only non-compliance with legislation when incurring expenditure, while the irregularity element of an MI is much broader.

With irregular expenditure, the non-compliance and the resultant value of the expenditure incurred are disclosed. The accounting officer or authority is then required to determine if there was any impact in terms of, for example, a financial loss, and to take appropriate further action.

Sometimes, non-compliance with legislation is classified as irregular expenditure that can result in a financial loss. One such instance is non-compliance with supply chain management legislation in the procurement process resulting in an auditee missing the opportunity to get the best price for goods and then paying too much. Another is the money paid for remedial work when a supplier did not deliver a service at the required level.

BUT if the goods and services were reasonably priced and delivered on time and at the right quality, it is possible that there was no financial loss. So transactions or contracts considered to involve irregular expenditure do not always mean money was lost – this can only be determined by investigating the matter.

There are also some other matters deemed as irregular expenditure that rarely result in financial loss, such as a supplier not submitting an updated tax certificate or an advert not including the specifications for local content.

Another difference between irregular expenditure and MIs has to do with values. The value of the MIs we report on are the estimated financial loss from a procurement process, while the value of irregular expenditure is the total amount expensed.

To illustrate the difference in value, let’s take the example of a lack of a competitive bidding processes in awarding a contract of R20 million. The irregular expenditure would be all the payments made on the contract to date (e.g. R10 million). If the lack of competitive bidding processes resulted in a financial loss as the same service could have been delivered at a lower price of, say, R18 million, the value of the MI would be the financial loss – already lost and that could still be lost – in other words, R2 million.

How does the material irregularity process work?

What do we do when we identify a material irregularity?

When we identify an MI, the accounting officer or authority is notified without delay. We give them     20 working days to respond to the notification by giving us a written submission and evidence on what they have done to address the MI and what their further planned actions are, in line with their legal obligations.

We assess the responses provided and conclude on whether their actions (taken or planned) and the outcomes of those actions are appropriate, in line with their legal obligations. If we find this to be the case, we give the accounting officer or authority space to implement the further planned actions. We follow up on the progress made in resolving the MI in the next audit cycle.

If we conclude that it was not appropriate, we include recommendations in the audit report on what the accounting officer or authority should do to address the MI. We also include a deadline by when these recommendations should be implemented.

Alternatively (or in addition), we refer an MI to a public body if it requires further investigation.

 

What do we do to follow up on the progress made in resolving material irregularities?

 

We write to the accounting officers and authorities to enquire on the progress made in resolving the MI and request evidence of the actions they took and still plan to take.

We assess the responses provided and conclude on whether their actions (taken or planned) and the outcomes thereof are appropriate in line with their legal obligations. If we find these to be appropriate, we give the accounting officer or authority space to implement the further planned actions, with an undertaking to follow up on the progress with resolving the MI in the next audit cycle.

If we conclude that the taken or planned actions are not appropriate, we include recommendations in the audit report on what the accounting officer or authority should do to address the MI, with a deadline by when these recommendations should be implemented. We can also refer the MI to a public body for investigation.

We follow a similar approach to obtain feedback and evidence from the auditee on the implementation of recommendations. If the recommendations have not been implemented by the stipulated date, we go through a rigorous process before concluding on whether the accounting officer or authority should be allowed more time or if remedial action should be implemented.

We appreciate our stakeholders’ frustration regarding the long time it takes from identifying an MI to issuing a certificate of debt. But our MI process allows accounting officers and authorities sufficient time to take action, implement recommendations and remedial steps as well as state their case for not taking the required action.

The timeline below demonstrates the extent and timing of this process in a ‘best-case’ scenario. It is important to note that the certificate-of-debt process only starts after remedial action was issued and then not implemented.

Even when the responses we receive from an accounting officer or authority and the actions they plan to take are appropriate, we sometimes find when following up that they have not honoured the commitments they made. This means that the process as detailed above can take up to another year to conclude, for a total of three years. We are busy reviewing the Material Irregularity Regulations and our internal processes to consider how we can speed up the process while still remaining fair and reasonable.

 

What happens with the identified material irregularities?

 

An MI is only fully resolved if (1) the impact (or further impact) is prevented and/or any losses incurred have been recovered or all possible steps have been taken to recover the losses; and (2) appropriate steps have been taken against the person or party responsible for the MI.

MIs and the progress made in resolving them are reported in the audit report of the auditee and in general reports until they have been fully resolved to enable accountability and oversight. When an audit report is signed, we report based on the status of MIs that are confirmed at that date. We typically include:

  • new MIs identified and the actions the accounting officer or authority is taking to address them – or we include the recommendations or information on referral (as applicable)
  • whether there are other MIs in process (if we have not concluded the notification and response process)
  • progress made in resolving MIs reported in the previous audit report.

The responsibilities for the further steps to be taken by the accounting officer or authority, executive authorities, public bodies and oversight to resolve an identified MI are detailed below.

 

Responsibilities of key role-players to resolve an identified material irregularity