1

11

PORTFOLIO COMMITTEE ON PUBLIC SERVICE AND ADMINISTRATION:

BRIEFING

ON

UNAUTHORISED,

IRREGULAR,

FRUITLESS AND WASTEFUL EXPENDITURE AND

REMEDIAL ACTION IMPLEMENTED:

2 MARCH 2011

2

Strategic Interventions to stabilize the department and move to a non qualified audit• Improved institutional arrangement and governance – Exco subcommittees

(Finance , IT and Risk)

• Revision and improvement of delegations

• Dedicated capacity to investigate and institute disciplinary action non compliance and misconduct lead at executive management level

• Additional personnel appointments and training in the supply chain management environment

• Strengthening of internal audit, national and regional oversight and monitoring

• Inclusion of financial and internal control in performance contracts of executive and senior management

• Revision and update of departmental prescripts and policies

• Technical assistance by National Treasury

• Strengthening audit committee oversight and periodic structured engagement with the AG

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3

33

1. IRREGULAR EXPENDITURE

4

44

IRREGULAR EXPENDITURE REPORTED

2009/10 2008/09

R’000 R’000

Opening balance 26,179 94,671

Add: Irregular expenditure – relating to prior year

368,999 25,495

Add: Irregular expenditure – relating to current year

436,387 33,295*

Less: Amounts condoned (refer slide 15) (15,338) (86,964)**

Less: Amounts not recoverable (not condoned) (refer slide 16)

(3,853) (40,318)

Irregular expenditure awaiting condonation

(refer to slides 5 )

812,374***812,374*** 26,179

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55

GENERAL REMARKS

Irregular expenditure awaiting condonation as 31 March 2010 amounted to R 812 374 000 and can be divided into three distinct main groups:

A. Irregular expenditure incurred during the operations of the Department.R 96 808 000 - 11.9% (refer to slides 6 to 19)

B. Irregular expenditure as a result of incorrect application of the principles relating to lease expenditure. Did not obtain Treasury approval for the continuation of lease contracts after the initial lease period.R 34 605 000 – 4.3% (refer to slides 20 to 25)

C. Irregular expenditure as a result of the incorrect principles implemented for the procurement of goods and services. Contravention of the Preferential Procurement Framework Act. R 680 961 000 – 83.8% (refer to slides 26 to 38)

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6

A.

Irregular expenditure incurred during operations

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77

Irregular expenditure incurred during the operations of the Department must be viewed in the light that further investigation confirmed that an amount of R 66 687 000 included in the R 96 808 000 is indeed not irregular

Lechabile Original tax clearance certificate was not on the file. The scheduling documentation indicates that the certificate was submitted but misfiled. It was confirmed that the tax affairs of the supplier is in order. Confirmed by National Treasury - Amount is not irregular

R 13 821 315

Born to Protect Bid was re- evaluated for the second time after the DBAC found inconsistencies in the ratings by the first evaluation.

The AG was concerned that reason the supplier was not recommended by the first evaluation was not considered by the second evaluation. The matter was investigated and found that the reasons was considered in the second evaluation.

R 30 617 999

Colett Security The AG performed a tax verification through SARS website as part of the audit. Investigation by the Department indicated that the SARS website was not updated

R 21 857 419

Frama The AG indicated that the amount is irregular as the requisition was not approved by the delegated authority. However, the matter related to the loading of franking machine that does not constitute a competitive bid process but a transversal contract and is therefore not found to be irregular

R 360 000

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88

Ordainlest 9 Trading AG indicated that the amount is irregular as the requisition was not approved by the delegated authority. Investigation confirmed that the signatory was appointed in an acting capacity

R 28 326

Other The AG indicated that the matter is irregular because a three quotations was not invited. The procurement deals with subscriptions to specific news papers and therefore three quotations is not needed

R 2 266

R 66 687325

9

99

Amount condoned since 31/3/2010 (refer to slide 9) R 295 504

Amount awaiting condonation (Letters to relevant authority) (refer to slide 10)

R 28 726 516

Not condoned, not recoverable (refer to slide 12) R 607 127

Under investigation (refer to slide 13) R 491 060

R 30 120 207

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1010

Amount condoned (Refer to slide 8)

Background on case Reason condoned Condoned by Amount

Case 101-Conference facility

Cost and efficiency was considered. No loss was suffered.

DBAC R 32 234

Case109 – Conference facility

Cost and efficiency was considered. No loss was suffered.

DBAC R 78 632

Case 122 (1) – Procurement of software

Only compatible software available. The software can only be obtained from the supplier

DBAC R 103 769

Case 123 (1) – Procurement of laptops

Official acted in favour of the Department.

Accounting Officer

R 80 869

R 295 504

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1111

Awaiting condonation (Refer to slide 8)

Background on case Relevant Authority to consider condonation Amount

Case 160 – Procurement of cutlery

DBAC – Three quotations not invited. Value for money was received. No malicious action could be identified

R 2 892

Case 161 - Entertainment Judicial Education Institute

DBAC –Three quotations not invited. Value for money was received. No malicious action could be identified.

R 18 000

Case 162 – Psychiatric services

DBAC - Three quotations not invited. Value for money was received. Psychiatric services does not justify the invitation of three quotations. Delegations will be amended

R 3 011

Case 120 – Appointment of consultants

Accounting Officer - Tax clearance certificate- It was confirmed that the tax affairs of the supplier was in order. Tax certificate was a certificate of one of the subsidiaries.

R 24 414 519

Case 122 (2) – Procurement of software

DBAC - Three quotations not invited. Value for money was received. No malicious action could be identified

R 9 105

Case 122(3) - Power supply unit for access control system

DBAC - Three quotations not invited. Value for money was received. No malicious action could be identified

R 7 978

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1212

Awaiting condonation (Refer to slide 8)

Background on cases Relevant Authority to consider condonation Amount

Case 123 (2) – Procurement of vehicles

Accounting Officer – Requisition not approved on correct level. The signing of the payment at the incorrect level is regarded as an oversight. Official has since passed away.

R 845 011

Case124 - Overtime Accounting Officer - Overtime policy not approved. Principles of the Basic Conditions of Employment was applied. No malicious action could be identified

R 3 426 000

R 28 726 516

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1313

Not condoned and not recoverable (Refer to slide 8)

Background on cases

Not condoned, not recoverable

Amount

Case 128 – Quality assurance internal audit – Did not invite bids

Goods/Services were rendered satisfactorily, value for money, no loss suffered

R 276 167

Case 76 – Training initiatives –DBAC approval was not obtained for sole supplier

R 275 167

Case 131 – Promotional items- Requisition not approved on the correct level

R 35 000

Case 134 – Procurement of stationary- requisition not approved on the correct level

R 20 793

R 607 127

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1414

Matters under Investigation (Refer to slide 8)

Back ground on case Amount

Case 117 - Cartridges for printers R 9 500

Case 132 - Maintenance of office plants R 200

Case 163 – Appointment of council R 386 031

Case164 – Installation of ramp for disabled persons R 48 450

Case 165 – Professional services programme director R 35 000

Case 166 – Procurement of IT equipment R 990

Case 170 – Procurement of stationary R 8 101

Case 169 – Cartridges for printers R 2 788

R 491 060

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1515

Condoned (Reported at 31/03/2010 in the Financial Statements) (refer to slide 3)

An amount of R 15 338 000 is reflected as condoned. The amount condoned consists of R 12 284 000 condoned with regard to leases entered into in terms of State Tender Contract (RT 3) and automatically condoned in terms of National Treasury Practice Note.

A further R 3 054 000 was condoned in 23 cases relating to the 200/2008 financial year by the DBAC for training venues utilised by Justice College. The Department did not invite three quotations.

Value for money was received and no malicious actions could be identified.

The matter was rectified by the appointment of an in-house travel agent.

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1616

Not condoned, not recoverable (Reported at 31/03/2010 in the Financial Statements) (refer to slide 3)

An amount of R 3 853 000 representing 30 cases was reported as not condoned and not recoverable.

• Competitive bid process not followed – R 492 280 (1 case)

• Competitive procurement process not followed – R 2 494 744 (8 cases)

• Approval for procurement not obtained from DBAC - R 866 261 (21 cases)

The Department acknowledge that instances of deliberate non-compliance do occur but are dealt with once and when identified. These cases are normally referred for forensic investigation. The recovery of irregular expenditure is only possible if a loss can be determined (However, disciplinary action can be instituted). In the cases referred to, it was confirmed that value for money was received and no malicious activities could be identified during the investigations.

It must be highlighted that it is not correct to typify irregular expenditure as wasted or that it resulted in losses or it that it was misappropriated by malicious actions. Irregular expenditure is sometimes technical in nature and is incurred as a result of the lack of knowledge, wrong interpretation and administrative oversights. Practice Note 4 of 2008 is strictly applied in dealing with these instances of non-compliance.

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17

Disciplinary action taken

Disciplinary action is taken if required. The nature as well as the circumstances surrounding the irregular expenditure are considered prior to disciplinary action being taken. As indicated in slide 16, irregular expenditure is sometimes technical in nature and is incurred as a result of the lack of knowledge, wrong interpretation and administrative oversights.

Since 31 March 2010 disciplinary action were instituted/ recommended or are in the process of being instituted in six cases.

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Current interventions to mediate irregular expenditure

A circular is in the process of being issued dealing with, inter alia, the following:1. Governance framework for the procurement of goods and services including leases.2. Application of the Preferential Procurement Regulations.3. Process in dealing and reporting of irregular expenditure.4. Prohibition of Restrictive Practices.5. Responsibility for disciplinary action. 6. Implemented a checklist to be attached to payments to identify instances of non-compliance. Ensure that all irregular expenditure is identified. Ensure compliance with the prescripts.7. Delegations - Included an Oversight Committee to oversee process and ratify recommendations on recovery, disciplinary action and condonations. Committee in the process of being appointed.8. Training initiatives ongoing. –Procurement of goods and services- PPPFA versus B-BEE - Dealing with irregular expenditure9. An official was appointed to deal with the backlog on irregular expenditure.10. Increased monitoring and escalating of non-compliance.

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19

Restatement of figures for the previous year

• * An amount of R 69 000.00 was erroneously included as irregular expenditure during the previous financial year as relating to current year and has been corrected.

An amount of R 34 615 000.00 previously disclosed as irregular expenditure (current year) in respect of finance leases was reduced with R 1 693 000 and has now been restated as R 32 976 000. During the Leases Project amounts were identified that should not have been included

• ** An amount of R 34 615 000.00 reflected as condoned in the previous year has been reduced and restated to R 12 503 000.00. The amount was incorrectly classified as condoned in terms of finance leases entered into in respect of RT3 and in terms of Practise Note 5 of 2008/09

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20

B.

LEASES

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2121

Irregular expenditure as a result of incorrect application of the principles relating to lease expenditure. Did not obtain Treasury approval for the continuation of lease contracts after the initial lease period. R 34 605 000

The following are the categories of non-compliance for period 1 April 2009 to 31 March 2010 against which Office Heads have been requested to take action against responsible officials: (In progress)

– Leases exceeding the allowed period – 32 %– Use of non-approved suppliers – 7 %– Leases agreements signed by non-delegated

officials – 61 %

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Leases project

The Leases Project which started 1 April 2010 ended 31 July 2010 entailed the following:

– To assist with reconstruction of the leases database, obtaining supporting contracts

– Clean-up of lease payments accounts– Updating of the lease register including the confirmation of the

existence of leased assets– Ensure availability of relevant documentation– Checking of validity of lease agreements in place– Clean-up the entire lease register

The above project was based on the following findings of the financial year 2008/2009:

– That the leases register was incomplete– Lease agreements were signed by incorrect officials– That contracts run after expiry dates– That non-approved suppliers were used– Certain documentation were not available therefore not provided to the

Auditors

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23

Leases project

Although irregular expenditure was identified during this exercise , it must be noted that the Department managed to achieve the desired outcome of the exercise which included, amongst others, the following for the year ended 31 March 2010:– Supporting contracts or supplier confirmations for all leased items

– Complete and accurate lease register

– Lease amortization tables

– Purified leases payments account

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2424

Leases project

Maintaining the Lease register– Due to capacity constraints, the current lease register is 80% verified in

terms of completeness.

– Additional capacity has been approved and the register should be 100% verified for completeness by the 31 March 2011.

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Current Intervention to mediate against Irregular Expenditure

Some of the control measures already put in place are:– A circular dated 29 December 2009 detailing the procedures to be

followed in the administration of leases. This circular was directed to all offices and officials of DOJ+CD.

– Clear indication of who should sign the lease agreements (addendums)– Monthly reporting by various offices (Regions) (submission of copies of

signed lease agreements /addendums)– Enhanced financial delegations (which clearly indicates responsibility

around the leases)

Progress– Leases are approved by the relevant RCC (Regional Control

Committee) or DBAC– Copies of Addendum are forwarded to National Office for reviewing and

record purposes.

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C.Preferential Procurement

Framework Act

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Background

Incorrect use of the preference goals as contemplated in section 2 (d) (i) and (ii) of the Preferential Procurement Policy Framework Act in respect of:

• Contracts via the bid process since 1 April 2005 financial year

until 31 December 2009

• Quotations from April 2005 to 30 November 2010

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Implementation of the B-BBEE

The incorrect preference goals were transparently applied across the broad, however the department regret that

we did not apply the PPPFA

Incidentally there is a move by Government to implement the B- BBEE within the 2011/2012 financial year, as indicated by Senior Officials from National Treasury, at a meeting dated 24 February 2011.

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Implementation of the B-BBEE

Was conducted through a fair, transparent, competitive and cost effective manner through a point system (90/10 and 80/20).

Service providers responded to the department’s requirements knowing exactly the set criteria to be

applied in the evaluation of the bids and therefore none of the service providers were prejudiced in the process.

B-BBEE criteria were consistently and uniformly utilized throughout the department’s procurement process.

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Methodology in determination of non-compliance

In the process of quantifying the irregular expenditure

1)The Department consulted and engaged National Treasury for guidance and assistance

2)The department was of the view that tracing all source documents and verifying all transactions was not cost effective

3)In the engagement with NT they agreed that the methodology to quantify the irregular expenditure should be based on

– Sundry payments as per the financial systems– procurement transaction on JYP

4) The department also excluded all transaction not subjected to the DOJ&CD direct internal procurement processes such interdepartmental claims from Government printers and GG Transport

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CURRENT INTERVENTIONS TO ADDRESS THE NON COMPLIANCE

Since September 2010 reports were requested on a monthly basis from SITA to ascertain the magnitude of the irregular expenditure

During September 2010 – PPPFA learner guides were developed

Training initiatives

In October 2010, the Department embarked on the capacitation of targeted officials nationally on the compliance of the PPPFA (manual process), which was completed by 12 November 2010.

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CURRENT INTERVENTIONS TO ADDRESS THE NON COMPLIANCE

On 29 Nov 2010, a circular dealing with, inter alia, the following was issued:

On the application of the Preferential Procurement Regulations – which detailed the procedures to be followed

The JYP system is configured such that upon evaluation and approval of the quotations on the system based on the B- BBEE, a purchase order is created. With effect from 1 December 2010, the preference points system in terms of the PPPFR is calculated on an excel comparative price schedule, which must be signed by a compiler and the verifier (SCM). In certain instances, it may necessitate the SCM official to override the award on the JYP balance scorecard to align to the recommendation to the PPPFR scoring.

 

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CURRENT INVENTIONS TO ADDRESS THE NON COMPLIANCE

Issued a circular dealing with, inter alia, the following:

1 December 2010 – the department updated and improved the checklist to be attached to payments to identify instances of non-compliance.

Delegations - Enhanced financial delegations (which clearly indicates responsibility around the procurement of goods and/or services)

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Legal/Disciplinary Action

Although the irregular expenditure was identified due to the incorrect application of the preference goals, it must be noted that the Department managed to attain value for money, the contracts were beneficial to the department, goods/services were rendered satisfactorily, no losses were suffered and no malicious activities were involved.

The Department will initiate disciplinary action for non – compliance, upon establishment of the full quantum of the problem.

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Preventative measures going forward

Improved and revised checklist to be attached to payments to identify instances of non-compliance.

Regional Heads and the National Office Director: SCM monthly report in the MFMMM on PPPFR compliance

Future identified cases of non –compliance to PPPFR, institute disciplinary action against offenders

Initiate a 10% random check across the department

Enhance system to perform evaluation in terms of the PPPFR

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Preventative measures going forward

Finalise the evaluation of the new suppliers and update the procurement system with suppliers details in terms of PPPFR requires

Engaged National Treasury on the possibility of implementing the Integrated Financial Management System (IFMS)

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2.

FRUITLESS AND WASTEFULL

EXPENDITURE

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3838

FRUITLESS AND WASTEFUL EXPENDITURE REPORTED

2009/10

R’000

Opening balance -

Fruitless and wasteful expenditure-relating to prior year (refer to slide 42)

222

Fruitless and wasteful expenditure-relating to current year (refer to slide 42)

2 039

Less: Amounts condoned (61)

Fruitless and wasteful expenditure awaiting condonation 2 200

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3939

Paragraph 23 (page 147) of the Report of the Auditor-General

2008/09 Financial Year – Paragraph 23 of the Report of the Auditor-General (page 147) and Disclosure note 12 (page186) to the Annual Financial Statements

• AG raised a finding on possible fruitless and wasteful expenditure-user asset Management plan (UAMP). DOJ&CD did not participate in a process where the DPW appointed a service provider to compile UAMP’s on behalf of the Departments.

• The Department agreed with the AG to appoint an independent evaluator/assessor to assess and report on the contract awarded by DOJ&CD in support of the statement that it can’t be regarded as fruitless expenditure.

•. An independent evaluator was appointed and he submitted his Report on 19 February 2010.“ConclusionsIt is my expert opinion that the funds the DoJ&CD has spent on the UAMP Project (RFP 2006 04) was effectively and proactively applied and has, at that stage, put the DOJ&CD one step ahead of other Departments that followed the DPW route”.

• The AG on 30 June 2010 agreed that the expenditure is not fruitless and wasteful.

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41

Fee charged for officials not boarding flights or not using reserved accommodation

• The reasons for “no shows” are normally as a result of unforeseen circumstances such as ill health and other urgent official matters with a higher importance that needed attention.

• Cases are referred to the legal section where it is thoroughly investigated and liability is determined.

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4242

Interest paid on late payment – R 1 000: This is an isolated case that originated from the 2007/08 financial year amounting to R 578 and paid to the Government Printer. The amount is part of an investigation were stationary ordered was stolen and the payment deliberately delayed.

Fee charged for reserved lecturing facility not used – R 2 000:The expenditure (R 1 692) is as result of the late postponement of a course.

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4343

Lease agreements – option not exercised to pay lower rates after the initial lease period lapsed

• The AG, during 2008/09, raised a finding indicating - RT 3 transversal contract was irregular as the leases were in operation for periods longer than 36 months.

• A Lease Project was launched in order to determine the extent of

the problem in order to deal with the matter. This Project, apart from the irregular expenditure, identified fruitless and wasteful expenditure amounting to R 1 690 000.

• Option was not exercised by the Department in cases where the

leases where continued with after the lease period had lapsed. • Standard clause in the lease agreements that the lease tariff is

lowered once the initial lease period has lapsed. The Department is currently engaging the relevant managers in order to initiate the appropriate action and recovery against the responsible officials.

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4444

Fruitless and wasteful expenditure condoned (refer to slide 40)

• A total amount of R 61 000 was condoned during the financial year.

• The bulk of the amount condoned (R 60 000) refer to cases where officials did not board flights or did not used reserved accommodation.

• Cases were referred to Legal Liability for investigation and the determination of liability.

• The legal outcome of the process is that the officials, in these cases, are not liable for the losses as good reasons existed (e.g. ill health)

• An amount that was outstanding since the 2007/08 financial year was only paid to the Government Printer in the 2009/2010 financial year. This resulted into the Department having to pay interest of R 578 on the late payment. This case was referred to Legal Liability for the determination of liability. Liability could not be determined.

• Cases condoned were duly written-off by the Departmental delegated authority.

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Condoned / Recovered after 31/03/2010

• 20 cases with a value of R 55 550.68 were condoned.

• The cases were submitted to Legal Liability for the determination of liability. In all cases it was concluded that the officials are not liable for the fruitless expenses as good reasons exist.

• e.g. attending to a matter with higher priority/ill health/final logistical arrangements was not received due to communication failure.

• 7 cases with a value of R 11 257.42 were recovered.

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4646

Current interventions to mediate fruitless and wasteful expenditure

A circular is in the process of being issued dealing with, inter alia, the following:

1) Fee charged in respect of officials not boarding the flights or not using reserved accommodation.

2) Fruitless and Wasteful Expenditure Transversal Contract RT 3 (Leases).3) Justice College – Dealing with Fruitless and Wasteful Expenditure Process

in dealing and reporting of fruitless and wasteful expenditure.4) Responsibility for disciplinary action. 5) Implemented a checklist to be attached to payments to identify

irregular expenditure. Ensure that all fruitless and wasteful expenditure is identified.

6) Amend the delegations - Included an Oversight Committee to oversee the process and ratify the recommendations. Committee in the process of being appointed

7) An official was appointed to deal with the backlog on fruitless and wasteful expenditure.

8) Increased monitoring and escalating of non-compliance

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Results of the remedial action

Result of the appointment of a temporary capacity to deal with the backlog on fruitless and wasteful expenditure.

Current status.Amount Cases

Annexure K with Legal Liability - under investigation

R 2 860 127.88 1 629

Written Off/Condoned R 46 440.27 81

Recoveries instituted R 40 975.41 33

R 2 947 543.56 1 743