29 September 2020
In the last two years various reporters, especially Raymond Joseph for GroundUp and Anton van Zyl for the Limpopo Mirror, have uncovered numerous examples of misspending of public money by the National Lotteries Commission (NLC). We have published about 90 stories that you can read here.
But why, we asked, had the Auditor General not uncovered any of this? Why has the public had to depend on reporters, with much more limited access to information, to report dodgy deals that to our minds should have been found by the official state body responsible for ensuring adherence to the Public Finance Management Act (PFMA)?
For example, GroundUp has revealed how the NLC COO’s family benefited from NLC grants, how R8 million was spent on a Facebook page, and how dormant organisations have been hijacked in order to receive tens of millions of rands in NLC grants. NLC projects chronically fail to deliver the essential services they often promise, like toilets.
These stories provide evidence that the NLC is riddled with corruption.
In the past six years, the NLC received five unqualified - or clean - audits from the Auditor General. The NLC received one qualified report in 2017/18 (despite NLC officials claiming otherwise), but this qualification did not relate to problems uncovered by GroundUp. Instead it dealt with a technical oversight about the incorporation of a body within the organisational framework of the NLC.
In its efforts to rebuff GroundUp’s reporting, the NLC has repeatedly brought the Auditor General into the dispute. NLC board members and executives have stated that the Auditor General has repeatedly given their stamp of approval to the NLC, implying that little or no corruption exists in the distribution of lottery grants.
On 1 August 2019 the NLC released a media statement (now deleted on the NLC’s website, but archived here) which makes the following claim: “The NLC has adequate controls in its grant-making processes. This is evidenced by the achievement of a clean audit for the past four years. The clean audit covers the grants specifically and it is important to note that the NLC has achieved 100% performance on all its targets.”
Likewise, in Parliament in November 2019, Professor Alfred Nevhutanda, Chairperson of the NLC Board, claimed (falsely) that the NLC had received five years of clean audits.
When asked by Parliament about the allegations raised by GroundUp’s investigations, Nevhutanda is recorded to have said: “The NLC had conducted an investigation …The Auditor General gave the NLC a clean audit and the investigations confirmed that … The NLC was among the ten best-run government entities in the country and was nominated for an award. The NLC did not protect itself; it acted according to the PFMA. The Board cooperated with the Minister, launched an investigation and compiled a report. The Minister wrote that nothing was found related to a conflict of interest … If a conflict of interest had been detected, the Chairperson and the Commissioner would have acted.”
In fact forensic investigators — appointed by Minister of Trade, Industry and Competition Ebrahim Patel to investigate a questionable R27.5 million NLC grant — have recently handed a dossier of evidence to police.
GroundUp sent questions to the Auditor General. We publish here the questions and the full answers received.
The aim of a regularity audit is to provide reasonable assurance that the financial statements fairly present the financial activities of an entity. Furthermore, work is performed to test the reliability of information provided on their performance for the year as well as testing for non-compliance with identified laws and regulations. Therefore, clean audits are indicative that basic controls and processes set for transactions and performance were adhered to. The main purpose is to provide a picture of the financial health and performance, including recommendations to improve the effectiveness of risk management, control, and governance processes.
To provide reasonable assurance, the audit is planned based on the detailed understanding the auditors have of the auditee, this includes understanding the control environment and assessing the risk profile. Risk is identified through environmental scanning, which includes media articles, investigation reports and interviews with the internal audit unit, the board and other key role players. Therefore, risks specific to the NLC were also established through the investigation report that was provided to the auditors in the 2018-19 financial year, discussion with amongst others internal audit and media articles, including those of Ground up. The risk identified informed the sample selection and the procedures that were performed to ensure appropriate response to the risks identified.
Based on these risks, some projects were selected and visited to verify the existence of the projects and recipients. Weaknesses that were identified through this procedure were communicated to management through the management report. This report is aimed at assisting management to implement corrective action as necessary and it is not a public document. None of the weaknesses identified were found to be material, resulting in the NLC receiving clean audit opinions since 2015-16 with the exception of 2017-18 where the NLC was qualified due to them not consolidating their financial statements as required.
The regularity audit process is not an investigation that employs different types of evidence-gathering techniques designed to focus on reconstructing the past financial transaction(s) for a specific purpose, such as proving the existence of fraud. As a result, the regularity audit does not test 100% of transactions, including projects. Furthermore, conflict of interest is tested to the extent that tests the involvement of management as directors in companies that receive grants. There is a limitation as the process would not enable testing for family and friends involved in companies that have benefited. As much as the audit process focuses on risk and in the event that fraud might be identified, it is difficult to identify fraud in cases where there is collusion.
It remains the responsibility of management and the executives to have systems in place to prevent and detect fraud and corruption. The previous minister requested an investigation into the activities of the COO in 2018-19 and, based on the outcomes of the investigation, no wrong-doing was identified. Subsequently, the Board and the current minister requested investigations into similar allegations in 2019-20. However, these reports are still pending due to the impact of the lockdown.
The amended Public Audit Act (PAA) expands the mandate of the Auditor GeneralSA beyond auditing and reporting to include powers of referral, remedial action and the issuance of certificates of debt to recover material financial losses reported as part of a material irregularity (MI). Although the amendments were effective from 1 April 2019, a phasing in of the requirements of the amended PAA is followed at selected audit engagements and based on the criteria of the selection used, the NLC did not make the current list of those auditees. Once the PAA is implemented and applied to the NLC, there must still be evidence of material non-compliance and a material financial loss before an MI exists. On the identification of an MI, the Auditor GeneralSA will be able, in line with the regulations and the act, to refer the MI to a public body, institute remedial action and issue a certificate of debt if the remedial action was not implemented.