department of defence presentation to the portfolio committee for defence 27 october 2010

DEPARTMENT OF DEFENCEPRESENTATION TO THE PORTFOLIO

COMMITTEE FOR DEFENCE27 OCTOBER 2010

FINANCIAL PERFORMANCE AND AUDIT REPORT

For the year ended31 March 2010

Index

1. Expenditure by Programme

2. Report of the Auditor-General and corrective actions taken

3. Special Defence Account

4. National Defence Fund

Expenditure by Programme

No. 2010 2009Programme

Name

Final Appropriation

R’000

Actual Expenditure

R’000

Var

R’000

Final Appropriation

R’000

Actual Expenditure

R’000

Actual

Growth

R’000

1. Administration 2 914 090 2 914 090 - 2 480 152 2 480 152 17.5%

2. Landward Defence 9 042 226 9 042 226 - 6 958 701 6 958 701 29.9%

3 Air Force 8 643 761 8 643 761 - 8018779 8018779 7.8%

4 Maritime Defence 1 997 454 1 997 454 - 1 837 191 1 837 191 8.7%

5 Military Health Support

2 608 189 2 608 129 60 2 177 208 2 176 940 19.8%

6 Defence Intelligence

594 704 594 704 - 506 752 506 752 17.4%

7 General Support 3 637 343 3 637 343 - 4 006 334 4 006 334 -6.9%

8 Force Employment 1 887 489 1 886 540 949 1 913 910 1 913 910 -1.4%

TOTAL 31 325 256 31 324 247 1 009 27 899 027 27 801 286 12.7%

Spending Composition by Programme

9%

29%

28%

6%

8%

2%

12%6% Administration

Landward Defence

Air Defence

Maritime Defence

Military Health Support

Defence Intelligence

General Support

Force Employment

Economic Classification

Final Appropriation

Actual Expenditure

Variance Expenditure as % of final

appropriation

Final Appropriation

Actual Expenditure

R'000 R'000 R'000 % R'000 R'000Current paymentsCompensation of employees 12 705 579 12 705 579 - 100.0% 10 620 019 10 620 019 Goods and services 8 070 281 8 069 332 949 100.0% 7 281 516 7 274 262 Financial transactions in assets and liabilities 49 559 49 559 - 100.0% 75 006 75 006 Transfers and subsidiesProvinces & municipalities - - - 0.0% 13 806 13 806 Departmental agencies & accounts 8 629 128 8 629 128 - 100.0% 8 096 608 8 096 608 Public corporations & private enterprises 603 608 603 608 - 100.0% 565 754 565 754 Non-profit institutions 4 402 4 342 60 98.6% 4 466 4 198 Households 126 350 126 350 - 100.0% 152 754 152 754 Payments for capital assetsBuildings & other fixed structures 599 094 599 094 - 100.0% 566 746 476 527 Machinery & equipment 537 105 537 105 - 100.0% 521 047 521 047 Biological assets 10 10 - 100.0% - - Software & other intangible assets 140 140 - 100.0% 1 305 1 305 Total 31 325 256 31 324 247 1 009 100.0% 27 899 027 27 801 286

Appropriation per Economic classification2009/10 2008/09

DEPARTMENT OF DEFENCE:ACTUAL EXPENDITURE FY 2009/10

Percentage

40%

26%

2% 4%

28%

Personnel Operating Transfers Capital SDA

Catgory Actual Expenditure PercentagePersonnel 12 705 579 227 40.56%Operating 8 118 890 733 25.92%Transfers 744 237 322 2.38%Capital 1 136 349 586 3.63%SDA 8 619 190 283 27.52%Total 31 324 247 150 100.00%

PROGRAMME 1: ADMINISTRATION:ACTUAL EXPENDITURE FY 2009/10

Category Actual Expend PercentagePersonnel 950 001 938 32.60%Operating 1 889 008 392 64.82%Transfers 39 196 900 1.35%Capital 35 882 867 1.23%SDA 0 0.00%TOTAL 2 914 090 097 100.00%

Percentage Expenditure

33%

65%

1% 1%

Personnel Operating Transfers Capital

Percentage Expenditure

60%

14%0%1%

25%


Category Actual Expend PercentagePersonnel 5 331 579 147 58.96%Operating 1 277 395 755 14.13%Transfers 39 210 713 0.43%Capital 107 124 477 1.18%SDA 2 286 916 403 25.29%Total 9 042 226 495 100.00%

PROGRAMME 2: LANDWARD DEFENCE:ACTUAL EXPENDITURE FY 2009/10

Percentage

53%

25%

6% 4% 12%


PROGRAMME 3: AIR DEFENCE :ACTUAL EXPENDITURE FY 2009/10

Category Actual Expend PercentagePersonnel 1 885 077 401 52.44%Operating 1 542 751 822 25.31%Transfers 14 603 908 5.85%Capital 33 747 013 3.91%SDA 5 167 580 814 12.49%Total 8 643 760 958 100.00%

Percentage

53%

25%

6%4% 12%


PROGRAMME 4: MARITIME DEFENCE:ACTUAL EXPENDITURE FY 2009/10

Category Paid PercentagePersonnel 1 047 486 838 52.44%Operating 505 532 928 25.31%Transfers 116 927 739 5.85%Capital 78 008 160 3.91%SDA 249 498 269 12.49%Total 1 997 453 935 100.00%

Percentage

65%

31%

0% 4% 0%


PROGRAMME 5: MILITARY HEALTH SUPPORT:ACTUAL EXPENDITURE FY 2009/10

Category Paid PercentagePersonnel 1 666 774 846 63.91%Operating 817 649 873 31.35%Transfers 8 250 986 0.32%Capital 113 682 753 4.36%SDA 1 770 582 0.07%Total 2 608 129 041 100.00%

Percentage

29%

3%1%0%

67%


PROGRAMME 6: DEFENCE INTELLIGENCE:ACTUAL EXPENDITURE FY 2009/10

Category Paid PercentagePersonnel 173 341 093 29.15%Operating 19 197 420 3.23%Transfers 7 962 953 1.34%Capital 2 662 438 0.45%SDA 391 539 809 65.84%Total 594 703 713 100.00%

Percentage

21%

36%14%

19%

10%


PROGRAMME 7: GENERAL SUPPORT:ACTUAL EXPENDITURE FY 2009/10

Category Paid PercentagePersonnel 769 993 877 21.17%Operating 1 286 422 100 35.37%Transfers 508 687 082 13.99%Capital 707 166 333 19.44%SDA 365 073 387 10.04%TOTAL 3 637 342 779 100.00%

Percentage

48%

41%

0%3%8%


PROGRAMME 8: FORCE EMPLOYMENT:ACTUAL EXPENDITURE FY 2009/10

Category Paid PercentagePersonnel 881 324 087 46.72%Operating 780 932 443 41.39%Transfers 9 397 039 0.50%Capital 58 075 544 3.08%SDA 156 811 019 8.31%Total 1 886 540 133 100.00%

Report of the Auditor-General Other Auditing Matters

Report on other legal and regulatory requirements Predetermined objectives : Reliability of reported

performance objectives using the assessment criteria of testing Validity, Accuracy and Completeness

AG finding was that these could not be validated due to lack of sufficient audit evidence

Compliance with laws and regulations : Non adherence to Defence Act (Section 55) and Public Service Act (Section 2) regarding the changes to conditions of service (remuneration) of uniformed members matters and performance awards.

Compliance with laws and regulations : Non adherence to the Public Finance Management Act requirements for the full operational internal audit function and an approved fraud prevention plan

Report of the Auditor-General Other Auditing Matters

Internal Control issues : noting that the issues have been largely dealt post year-end;Leadership; Close involvement in the management

of the audit issues;Financial and Performance management; Largely

reviews and ensuring understanding of the key controls at the operational levels;

Governance; Internal Audit and Fraud Prevention plan

Most of these are dealt with in the Accounting Officer’s report relating to the financial Statement (pages 143 to 175)

Internal Control and Governance

• Currently Operation Clean Audit project has assisted in developing improved and documented systems, policy changes (or new policies) and processes in all areas identified;

• Training at all levels particularly at the operational levels is undertaken;

• A sustainability plan has been developed to ensure the sustenance of the issues

• The Accountability Management Committee (AMC), Risk Management Committee and the Audit Committee are the Governance structures ceased with close monitoring of these

AG findings and corrective action

GDA 08/09 09/10 Main Finding

Tangible and Intangible Capital Assets

Q Q The DOD did not disclose any financial for both current and prior years in notes 33, 34 and 35 as required by the framework issued by National Treasury. Due to historical inherent problems did not maintain a proper asset register.

LEGEND - OM: Other Matter EOM: Emphasis of Matter Q: Qualification

Challenges and underlying causes

• DOD asset management systems are not accrual accounting compliant not updated since there was a moratorium on development of systems set by National Treasury pending the development of the Integrated Financial Management System.

• Some DOD units are still on manual asset management systems.

• No single asset management system in the DOD.

• Values of assets updated to reflect the latest price and therefore overstating the true value of assets

• Mismatch of classification in regard to the changing SCOA classification.



Action Plans

. Measures and Completion Dates (Tangible Capital Assets – Movable)

• Agreed with national Treasury on the development of an appropriate reporting format and framework that will recognise the unique Defence requirements by 31 December 2010;

• Lifting of the Moratorium on the Development of the Defence unique and NATO compliant logistics systems that will have appropriate interfaces with the IFMS on matters required for financial accounting and reporting by 31 October 2010;

• Develop functional specifications for an integrated asset and inventory management system and review the current asset management policy by 31 Mar 2011.

• Migrate the manual- and multi accounting systems to a single IS platform by 31 Mar 2012.

• Clean up of the integrated data by 31 Mar 2012 and the asset registers by 31 Jul 2014.

• Source and roll out the new compliant integrated asset management system in line with NT requirements by 31 Jan 2015.



Action Plans (Continued)

Measures and Completion Dates (Tangible Capital Assets – Immovable)

• Compile user asset management plan and develop a DOD Asset Management Plan by 31 Oct 2010.

• Migration of the Immovable Asset Management function from DPW to the DOD by 31 Mar 2011.

• Clean up and update all book values of all facilities in the asset management register by 31 Mar 11.

• Develop the functional specifications for an Integrated Immovable Asset Management System, source and roll out of the system by 31 Mar 11.



Action Plans (Continued)

Measures and Completion Dates (Intangible Capital Assets)

• Establish a configuration control process for all DOD IP in consultation with Armscor by 1 Jul 11.

• Ensure the establishment of a DOD IP register by Armscor in the required format by 1 Jul 11.

• Verify the values of the IP on the register with the assistance of Armscor and other qualified service providers by 1 Jul 11.

• Determine historical IP that needs to be included in the register by 31 Dec 12.

• Submit the completed IP register to the AG for auditing purposes by 31 Dec 12.

AG findings and corrective actionGDA 08/09 09/10 Main Finding

Lease Commitments

Q - No Qualification in 2009/10 as the matter was addressed.


Action Taken to Achieve the Non Qualification

Measures and Completion Dates

• An interim lease management instruction was issued on 30 Sep 09.

• A lease management training manual was developed and implemented on 31 Jan 10.

• A lease management office was established at DHQ by on 31 Mar 10.

• Manual lease registers were developed and discussions with DPW on finding the lease agreements and entering into new agreements/renewals.

• Acquire/develop an IT solution for a centralised electronic lease management by 31 Mar 11.

• Road shows to present training to the level 4 incumbents was completed by 31 Mar 10.


Irregular Expenditure




• In 2008/09 - Mainly occurred in at Army Signal Formation procurement , Human Resources in respect of Housing Allowance AMG payments and leases.

(Army Signal Formation) (Rm 0.042)

• AG's findings (qualification) was rectified by SA Army Signal Formation on 30 Sep 09.

• Internal controls were revised and updated SOPs for procurement were promulgated on 31 Oct 09.

• The total population was investigated by 31 Jan 10 to identify similar irregularities – none were found.


Irregular Expenditure




(Housing Allowance) (Rm 28.212)

• Largely this was as a result of implementation of the Bargaining resolution on housing allowance

• The housing allowance implementation instruction was amended on 31 Mar 10.

• The PERSOL system was changed to block future payment of housing allowance for members in voluntary state housing on 31 Mar 10.

• The files of members who received housing allowance incorrectly were audited and incorrectly paid allowances were condoned by the Accounting Officer.

• The policy on housing allowance will be promulgated by 31 Dec 10 to prevent future recurrence.


Irregular Expenditure (Understated)




AMG Contract - (Rm 89.766)

• 2008/09 - Irregular expenditure was under-stated by Rm102.7, amount condoned was not adjusted and limitation of scope of Rm77 on lease commitments.

• See slide on consultant expenditure for the action plan developed.

Measures and Completion Dates (Leases Overstated) (Rm 61.723)

• DOD condoned all finance leases in accordance with the blanket approval received as directed by NT (only regarding RT3 of 2000 and 2003 respectively).

• New Equipment leases are done in terms of the latest transversal tenders as issued by National Treasury.


Consultant Expenditure

Q - 2009/10 – None



2008/09 - AG was unable to verify the accuracy of payments made in terms of the AMG Contract (Rm193.1)


• Board Of Inquiry (BOI) process was completed on 3 Aug 09.

• Findings largely confirmed that control systems were lacking in proper reconciliation of the accounts and there were not enough audit trail.

• Corrective actions recommended by the BOI were implemented on 17 Nov 09 (Control system and audit trail).

• The reconciliations of the payments are being undertaken and monitored.

• Members who work with the contract were provided with training in Nov 09 and further coaching was undertaken during the auditing process of the 2009/10 year end financial reporting.

• The existing contract will be reviewed and a new contract will be negotiated by 31 December 2010.


Accruals – Corresponding Figure



Actions Taken to Achieve the Non Qualification

2008/09 - The corresponding figure (07/08) only included goods and services received for which an invoice had been received but which remained unpaid at year-end.


• No action plan is required for the 08/09 accrual figures as the AG only qualified the corresponding 07/08 figure.

• Accrual nodal points within the Services and Divisions responsible to collate accrual figures received from the level 4 units were established by 31 Mar 10.

• An accruals instruction was develop and promulgate on 31 Mar 10.

• Road shows and training at level 4 units throughout the DOD was completed by 31 Mar 10.

AG findings and corrective action Emphasis of Matter Items

GDA 08/09 09/10 Main FindingIrregular; and Fruitless and Wasteful expenditure

EoM EoM 08/09 - Irregular expenditure of Rm118.47. Fruitless and wasteful expenditure of Rm4.58 was incurred as the procurement processes were not followed.09/10 – Irregular expenditure relating largely to the implementation of the new salary dispensation


ActionsTaken to Achieve the Non Qualification


• Irregular and fruitless and wasteful expenditure are from 1 Apr 09 reported to the nodal point immediately upon discovery thereof.

• Incidents of irregular and fruitless and wasteful expenditure are from 1 Apr 09 properly investigated and dealt with in accordance with PFMA and TR prescripts.

• The Financial Misconduct policy has been revised to include irregular and fruitless and wasteful expenditure and has been promulgated and operationalised.

• Boards of Inquiry processes are being jerked up to ensure speedy conclusion of investigations and inquiries

• Mandating Committee has condoned the expenditure for 2009/10.

AG findings and corrective action Other Matters Items

GDA 08/09 09/10 Main Finding

PFMA Non Compliance - Reporting of Irregular Expenditure

EOM - 2009/10 - None



2008/09 – The Accounting Officer did not report to National Treasury on discovery of Irregular.


• All incidents of irregular expenditure for the 09/10 FY onwards are being reported to NT immediately upon discovery thereof.

• The Financial Misconduct policy has been revised to include the reporting requirements to NT seek stronger sanctions for repeat offenders on irregular expenditure.

• Instruction to speed up the conclusion of the processes of BOIs.

• A decentralized system for the reporting of financial misconduct incidents (including irregular and fruitless and wasteful expenditure) was developed and implemented on 31 Mar 10.

Findings: Special Defence AccountEmphasis of Matter Items

SDA 08/09 09/10 Main FindingContingent liability - SDA

EoM - 2009/10 – None as all Contingent Liabilities were disclosed.



•2008/09 - No provision was made in the financial statements for any liability that may result from lawsuits between the DOD/DOD service providers and third parties.


• Register of Contingent Liabilities is maintained and properly evaluated to determine the extent of the exposure for the State.

• No further action plan required.

Findings: Special Defence AccountEmphasis of Matter Items

SDA 08/09 09/10 Main FindingIrregular expenditure (A400M)

EoM EoM 2008/09 - The DOD deviated from the standard tender process, causing irregular expenditure to the amount of R2,9 billion.2009/10 – Expenditure related to the 2008/09 matter.




• The DOD has submitted a request to NT to condone this deviation from the standard tender process.

• NT did not approve the DOD’s request for condonation, however the DOD has lodged an appeal to NT on their decision.

• The DOD, through Armscor, initiated a process to recover part of this expenditure from the supplier in terms of penalty clauses provided for in the supplier contract.

Findings: Special Defence Account

Other Matter Items

SDA 08/09 09/10 Main Finding

Non-compliance with applicable legislation

OM - 2009/10 – Matter removed based on approval received from NT


Action Plans

2008/09 - The DOD did not comply with section 3 of the SDA Act, namely to invest any moneys to the credit of the account which are not required for immediate use or as a reasonable working balance.


• Not withstanding the requirements of the Defence Special Account Act the National Treasury has requested the DOD not to invest the reserve on the SDA.

• No longer an issue as approvals were obtained.

Special Defence Account• Total Revenue for 2009/10 of R11,6bn (R8,2bn in

2008/09);– Mainly comprised of transfer from DoD R8,6bn (R,1bn

2008/09)– Other Revenue of R3,025 including recognised recovery

expected in respect of the A400 (Capital and interest) of R3bn, R48,8m fines and R16,5m in Sales of equipment;

– Net of R149,9m revenue payable to the National Revenue Fund

• Total expenditure of R5,6bn (R10bn in 2008/09)• Total Assets amounted to R8,5bn (R2,9bn in 2008/09);

– Mainly comprised of Receivables of nearly R3,1bn and Cash and cash equivalents of R5,2bn;

– Represented net Capital Reserve of nearly R8,2bn against;– Commitments for future expenditure already approved of nearly

R16bn (R15,1bn in 2008/09).

National Defence Force Fund• No significant matters occurred in terms of the

NDFF during the year under review:– Assets largely held in cash investments (grew

from R10.6 m to R11.4m from 2008/09);– Performance is affected by the fluctuations in

interest rates (dropped from R1.085m in 2008/09 to R0.782m in 2009/10);

– Surplus for the period therefore fell from R1.063 to R0.747m;

– Administration expenses increased from R23k to nearly R35k

•Thank you

department of defence presentation to the portfolio committee for defence 27 october 2010

Documents

capital assets39

capital assets56

capital assets37

capital assets20

capital assets21

appropriation statementfor

appropriation statementasnotes

year ended31