The Department of Economic Development (DED) and its agencies (Gauteng Enterprise Propeller, Gauteng Tourism Authority, Gauteng Economic Development Agency, Gauteng Film Commission, Gauteng Gambling Board, Blue IQ, Dinokeng and Cradle of Humankind), tabled their annual reports to the provincial legislature on 31 August 2009.
Section 65(1) of the Public Finance Management Act (PFMA), which requires the executive authority responsible for a department to table in the provincial legislature, the annual reports; financial statements and audit reports within six months after the end of the financial year.
The Auditor-General’s opinion and the audit outcome are not acceptable as the department and four of its agencies (Blue IQ, GEDA, GTA, and Dinokeng and Cradle of Humankind) have material audit findings. In total there are 11 disclaimers, 10 qualifications, 26 emphasis of matter, and 52 other matters.
Allow me to state upfront that one of this administration’s priorities is to instil a culture of sound financial management and accountability across the Gauteng Provincial Government (GPG) departments and agencies. The Chief Financial Officer (CFO) of the department has been asked to establish a task team, which include the CFOs of all the agencies, to analyse the Auditor-General’s findings and to implement a project to achieve clean audits. The task team is already implementing the project which includes concrete initiatives and target dates. The work of the task team will be monitored through monthly reports to the Head of Department (HOD) and the MEC.
The CFOs have identified immediate successes and are working at issues that require more time to resolve. Target dates have been set in all instances. The department and its agencies have also identified systems which must be addressed in order to achieve clean audits. This includes training, succession planning, risk management and exposure of finance staff to operations. Most officials are keen to do their jobs well and it is my responsibility and that of the HOD to ensure that they have the support they need to do so.
We look forward to build an effective department with high level of technical capacity and with the critical mass of analytical skills required to fulfil our statutory obligations under the PFMA.
Some of the more important issues raised by the Auditor-General which are being addressed by Operation Clean Audit are stated below:
1. Department of Economic Development’s issues
* Investment of R55 million in a private company
This refers to Economic Development’s purchase of preferential shares in Wakegem, a diamond beneficiation company. The PFMA does not allow the department to hold such shares. The department is working with the Industrial Development Corporation (IDC) to find a replacement investor and if successful this initiative will enable Economic Development to recover its investment earlier than provided for in the contract.
We are monitoring the financial performance of the business on monthly basis and there are signs that the business is now generating positive cash flows. To ensure that this company is properly monitored and that public interest is protected, the chief operations officer of GEP is going to be appointed to sit on the board of Wakegem as a representative of the department.
* Foreign currency liabilities
The PFMA stipulates that permission should be obtained from National Treasury before entering into any contract with foreign suppliers. The department did not adhere to this requirement when it entered into contracts on behalf of the Gauteng Motor Sport Company (GMSC). However, the Reserve Bank’s permission was obtained for payments. Subsequently, the contracts have been ceded to GMSC, a subsidiary of Blue IQ.
* Lack of a proper register for refundable deposits
The department manages statutory boards which deal with applications and appeals for land replacement. Deposits are payable for any application to be considered. The audit query on this matter is that the amount is shown as a liability and that it could not be established at what point the deposit becomes non-refundable.
We now have clarity, according to an interpretation of local regulations on the point at which the deposits become non-refundable. Procedures and controls have also been developed and implemented for both staff in financial management and business units to ensure that these funds are properly accounted for. The bulk of this money is revenue and will be recognised as such.
Gauteng Liquor Board
* Completeness of revenue
This refers to the amount paid for licence renewal by operators. Economic Development has been relying on the South African Revenue Services (SARS) for revenue collection and as such our revenue depends on the amount paid over to the department by SARS. With this model, the department cannot be sure of the completeness of the revenue. To this end, an electronic system that integrates licensing and revenue recognition will be purchased during this financial year. In the meantime, manual reconciliations are being performed on a monthly basis.
* Unreliable fixed assets register
The Gauteng Liquor Board (GLB) did not have a reliable fixed asset register and as a result the existence of its assets could not be confirmed. As part of Operation Clean Audit, an electronic fixed assets register will be maintained on a monthly basis and valuations will be performed to determine the residual values and the condition of these assets.
Gauteng Enterprise Propeller (GEP)
*Provision process for doubtful accounts
According to the audit opinion, GEP was unable to provide sufficient and appropriate audit evidence to support the assumptions used in calculating the provisions for bad debts. In line with Operation Clean Audit objectives, compliance with the accounting requirement will be ensured by testing trade debtors’ balances individually. Subsequent to the audit, a credit control function has been established. A firm of lawyers has also being appointed to collect outstanding debts.
* No formal policy on equity investments in private companies
The audit opinion points out that GEP does not have a formal policy on equity investments in private companies. Currently, the policy is being formalised and permission sought to allow GEP to hold equity investments in terms of Section 54(2) of the PFMA.
Dinokeng and Cradle of Humankind
* Accuracy and completeness of payables and expenditure
The current accounting system cannot handle accrual accounting, which is the required reporting framework. A new integrated accounting package which can handle accrual accounting is being implemented and this system will ensure completeness of receivables and payables.
Blue IQ Holdings
* Unauthorised expenditure (B Link to Blue Umbrella)
The expenditure incurred was unauthorised as it was not budgeted for. Services were not procured in accordance with supply chain management policy and procedures. The bulk of the payments made were as a result of expenses relating to consultancy work which was made in foreign currency.
Blue IQ Holdings has obtained delay for these expenses from the Blue IQ Accounting Authority at the board meeting held on 18 June 2009. Management has since ensured that all expenditure follow the required supply chain management processes based on approved budgets. Any deviations from the budget will be addressed in terms of the delegation of authority and strict budget controls based on project allocations has being introduced. A dedicated supply chain manager is employed to ensure strict compliance to supply chain management policy. Action has been taken against senior managers who were responsible for the contraventions.
Blue Catalyst
* Irregular expenses relating to claim from former Blue Catalyst chief executive officer (CEO) and insolvency claims
The expenses incurred by the former Blue Catalyst CEO related to travel and other business expenses incurred. The amount relating to the insolvency claim is in respect of an ongoing section 417 enquiry. This enquiry relates to possible contraventions of the Companies Act at the point at which Cardio Genesis, a company which Blue Catalyst invested was liquidated.
A forensic investigation is underway into these and related matters and once complete, appropriate action will be taken. The section 417 enquiry is an essential action, which is expected to reach conclusion by this year end.
* Unauthorised and irregular expenditure incurred on the formation of Adlevo Private Equity Fund
The fund details were investigated by Blue IQ’s legal department. The investigation revealed that the fund was not in existence and was unregistered as such there was no financial risk or exposure. The expenditure related to pre-incorporation cost of the Equity Fund.
* Financial misconduct relating to the guarantee that was renewed without the accounting authority’s approval
A R5 million guarantee was issued in contravention of the PFMA by the former Blue Catalyst CEO. A forensic investigation is underway and upon completion necessary actions will be taken. Attempts are in hand to recover the monies expended.
In order to address the control deficiencies identified by the Auditor-General, the policies listed in the annexure hereto will be approved and implemented.
Furthermore to avoid the problems that have been identified by the Auditor-General in relation to contracts, the following steps will be implemented:
* All new contracts will be reviewed by the executive committee which going forward will include the CEO’s of the Department of Economic Development Agencies
* Before payments are processed on any contracts, the chief financial officer will ensure that all compliance issues will be addressed.
These steps are being taken because this administration is committed to good governance, accountability, transparency, and sound financial management. All this is necessary to protect the public interest and to foster public trust in the democratic institutions.
For more information contact:
Mandla Radebe
Tel: 011 355 8703 or 8716
Cell: 083 288 8915
E-mail: mandla.radebe@gauteng.gov.za
Issued by: Department of Economic Development, Gauteng Provincial Government
22 September 2009
