CHIETA CFO confirms that the SETA will contest first unclean audit in five years

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  • October 31, 2019
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CHIETA CFO confirms that the SETA will contest first unclean audit in five years

The CHIETA recently hosted its 2019 Annual General Meeting (AGM) on 23 October 2019, in Johannesburg to report on the oganisation’s performance for the period 2018/2019. Farhad Motala, the CHIETA’s Chief Financial Officer (CFO) was tasked to present and unpack the organisation’s financial performance, as well as to explain why for the first time in five years, the organisation has not received a clean audit from the Auditor General of South Africa (AGSA).

Motala started off by reflecting on the audit outcomes for the period 2018/2019 as well as the CHIETA’s financial performance over the last 5 years, in order to be able to set the context for why the CHIETA would be contesting the unclean audit for the current financial year.

He started off by highlighting the fact that the CHIETA had once again received an unqualified audit for the 18th consecutive year. Then he went on to explain the difference between the audit opinion versus the audit outcome. The audit opinion he said, is legislated by accounting and auditing standards (legislature) while the audit outcome he said is a unique term that is only used by the office of the Auditor-General.

What does it mean to have a clean audit outcome?

In order to achieve a clean audit outcome from the Auditor General’s office, you need to obtain four key aspects as follows:

  1. Your financial statements must be free from any material misstatement
  2. There must be no weaknesses or material weaknesses in your internal controls
  3. There must be no material misstatements in performance information or predetermined objectives
  4. There must be no material non-compliance with laws and regulations.

In this regard, the difference in terms of CHIETA’s performance for the 2018/2019 period versus the last five years is that the CHIETA fell short in one aspect of the above set standards for achieving a clean audit opinion from the Auditor General’s technical team. The technical team found that the CHIETA was non-compliant with laws and regulations because it had exceeded its budget.

But from the point of view of the CHIETA Management, the Accounting Authority and Motala personally, this particular approach has never been the technical view of the AGSA historically over the last 18 years or so.

Why are SETAs’Budgets  Assessed Differently from other Government Entities?

SETAs’ budgets have historically been looked at differently from government departments as an example, because government departments and other constitutional organistions receive voted funds. This means that government departments and other constitutional organisations operate on a cash basis and receive voted (fixed amount from parliament) for a particular financial year. If they exceed that, it would be the exceeding of your allocated budget for that particular period which would then be problematic in terms of the fiscus.

In the SETAs space, the dynamics are very different because they do not receive a fixed allocated budget from parliament. SETAs receive a 1% levy, which is determinable upon 1% of the payroll for every chemical sector company that exists. The fact that the levy sits at 1%, means that this is a variable amount, which can fluctuate from month to month. The levy is therefore not fixed but rather determined by what happens within the sector periodically.

This means that if the sector is flourishing the levies will increase significantly and the converse would be applicable during periods of non -performance in the sector. Therefore, it stands that levies in the sector are not predictable and can vary substantially year on year.

“In the current year we are already sitting at 4% below and we are R 50 m below our budget in the first six months, A trend that could affect the CHIETA negatively.” said Motala.“Yet another challenge in terms of the organisation being able to project accurately what SETA’s will receive in levies, therefore our budget is not a fixed item.”

So, what happens when CHIETA receives more levies that what has been planned?

In 2018 we received R70m more than what we had projected in levies and according to the Grant Regulations, as a SETA you are required to spend 95% or more of that levy income that is available. If you do so, it means that as a SETA you are guaranteed to exceed your budget, as a result of receiving more levies than what was projected.

The other issue with the budget is that in prior years when CHIETA received levies, it was approved by the Minister but you did not have to spend that entire budget because training and contracts do not work within a financial year. Most training takes place over two or more financial years. This means that the contracts that are in place will not expire in the twelve-month period. Meaning that we have contractual commitments that exist at year-end and that the funds that tie up to those contracts will then sit in reserves. The accrual accounting system that is followed by all SETA’s is what allows us to have these reserves that will be made available to be spent in the next year. This means that when those reserves are spent on contractual obligations in the new year, you will automatically exceed your budget.

Typically, in the SETA environment the AGSA understood this concept that if a SETA is spending its current budget plus a portion of its reserve budget, they did in fact not exceed the because some of it from the prior year which has already been preapproved.

A Demonstration of CHIETA’s performance over the past 5 years.

Financial Year Budgeted Expenditure Actual Expenditure Favourable (Unfavourable) Variance Audit opinion Audit Outcome
           
2014/15 458, 170 450, 387 7,783 Unqualified Clean
2015/16 480, 162 500, 090 (19,928) Unqualified Clean
2016/17 504, 295 540, 251 (35,956) Unqualified Clean
2017/18 529, 509 535, 887 (6,378) Unqualified Clean
2018/19 555, 986 582, 005 (26,019) Unqualified Non Compliance – exceeding of budget

If you look at any of those financial years, the CHIETA overspent consistently in the years prior and still received an unqualified clean audit outcome because the CHIETA team was able to explain to the AGSA. The AGSA would then present our argument to the technical team who then deliberated extensively and then come back to CHIETA to say that they agree that as a SETA, CHIETA is supposed to overspend and minimise reserves, therefore CHIETA gets a clean audit outcome.

“Overspending in the SETA environment,” Motala said, “is actually a good thing because you are reducing the surplus commitments and reserves that exist.”

This year there is a new audit team and a new technical team who disagree with their predecessors and with the CHIETA, that because the CHIETA has exceeded the budget, it’s a non-compliance with laws and regulations and therefore it’s not a clean audit. Unqualified yes, but not a clean audit.

“This is the only issue we face and it’s a bit unjust, where CHIETA is concerned because when you look at the trends and the stats above, it actually amounts to a double standard by one office.” Motala said.

“We’ve consistently had a drive as Management and the Board of Directors at the CHIETA, to ensure that we pay out much more than we receive because of the reserves we have.We strive to reduce the reserves to a minimum where we can break even. These reserves primarily are to ensure that the certification targets of the next year are achieved.” He concluded.