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UNAUTHORISED EXPENDITURE

BRIEFING TO SCOPA

Presenter: Lindy Bodewig| Chief Director: Technical Support Services| 19 August 2014

Overview

• What is unauthorised expenditure

• Procedures to be followed by departments & responses by relevant treasury,

Parliament / legislature;

• Accounting implications – when discovered and approved;

• Calculation of unauthorised expenditure;

2

Section

38(1)(G)

Legislative Framework

• Section 45(c)

• Section 38(1)(c)(II)

• Section 38(1)(h)(III)

Every official must take effective and appropriate steps to prevent UE, within their responsibility area

AO to take effective & appropriate steps to prevent UE

a) On discovery by official immediately report to AO

b) On discovery by AO immediately report to National Treasury

c) Report in a monthly expenditure report (TR9.1.2)

Must take effective & appropriate steps against any official

who makes or permits UE

3

Definitions and implications

4

What is unauthorised expenditure?

Means –

a) Overspending of a vote or main

division within a vote;

a) Expenditure not in accordance

with the purpose of a vote, or in

the case of a main division, not in

accordance with the purpose of

the main division;

• used more than what was allocated,

usually results in a bank overdraft;

• easy to identify, tricky to calculate

• used allocated funds for purpose

other than intended (linked to vote

and or programme predetermined

objectives);

• not easy to identify, easy to quantify;

Type 1

Type 2

5

Explanation on definitions and concepts

6

Overspending means:

Expenditure under the vote/main division exceeds the amount appropriated for that

vote/main division subject to the virement rules contained in section 43 of the PFMA.

Sec-43 of the PFMA:

Allows for the AO to move funds from one main division of a vote to another to defray

excess expenditure in the main division of a vote that exceeded their voted funds,

with the following conditions:

Savings in a main division

Over expenditure in another main division

Only 8% of the amount appropriated under that main division

The use of virement is not allowed for funds that are:

Specifically and exclusively appropriated for a purpose under a main division

Amount appropriated for transfer to another institution

Amounts appropriated for capital expenditure

What are the procedures to be followed when identified?

Alleged unauthorised expenditure is discovered

Report to the Accounting Officer

Conduct investigation / Perform calculation

Unauthorised expenditure Valid expenditure

(no further action required)

Type 1 Type 2

Type 2 Type 1 / Type 2

The accounting officer must immediately

report the unauthorised expenditure in writing

to the relevant treasury (PFMA 38(1)(g) & 40(4)(b))

The accounting officer must take effective

action and appropriate disciplinary steps (PFMA 38(1)(h) & TR 9.1.3)

Recover amounts where losses

or damages have been incurred (TR 12)

7

What are the implications - Type 1?

Accounting and cash position:

• All expenditure remains in the statement of financial performance (not disallowed);

• Overspending may result in a deficit for the year;

• No surrender of the unauthorised expenditure (UE) to the revenue fund;

• Excess expenditure usually funded by way of bank overdraft (or NRF for national

departments);

• An UE receivable is recognised in the statement of financial position;

8

What are the implications - Type 1 (cont.)?

Example: Department X was allocated R1,000 mil for the financial year and spent

R1,500 mil in total.

Unauthorised expenditure is therefore R500k

Statement of financial performance

Appropriated funds 1,000

Expenditure (1,500)

Deficit for the year (500)

Statement of financial position

Unauthorised expenditure 500

Bank overdraft (500)

9


Accounting and cash position:

• All expenditure remains in the statement of financial performance (not disallowed);

• The expenditure however should not have been funded by the revenue fund - a

department must surrender the unauthorised expenditure (UE) back to the

revenue fund;

• The surrender may result in a bank overdraft;

• An UE receivable is recognised in the statement of financial position;

10

What are the implications - Type 2 (cont.)?

Example: Department X spent R200k on goods and services outside its mandate.

Unauthorised expenditure is therefore R200k


Expenditure (200)


Unauthorised expenditure 200

Voted funds to be surrendered

to the NRF (200)

May result in bank

overdraft

11

Approval process

National Treasury’s public finance unit in consultation with the budget

office submits a report to Parliament (SCOPA) on the unauthorised

expenditure as reported and advises on:

• approval / non-approval

• additional funds / charges against funds allocated in further financial

years (approved without funding)

SCOPA recommends to

Parliament to approve

unauthorised expenditure (PFMA 34(1))

Parliament does not approve

unauthorised expenditure (PFMA 34)

12

Applicable section in the PFMA - 34

• 34(1) – Unauthorised expenditure does not become a charge against the revenue

fund except when –

• 34(1)(a) – the expenditure is an overspending [type 1] of the vote and Parliament or

a provincial legislature, as may be appropriate, approves, as a direct charge

against the relevant revenue fund, an additional amount for the vote which covers

the overspending [approved with funding];

• 34(1)(b) – the expenditure is unauthorised for another reason [type 2] and

Parliament or a provincial legislature, as may be appropriate, authorises the

expenditure as a direct charge against the relevant revenue fund [approved with

funding];

• 34(2) if Parliament or a provincial legislature does not approve in terms of

subsection (1)(a) an additional amount for the amount of any overspending, that

amount becomes a charge against the funds allocated for the next for future

financial years under the relevant vote [type 1 - approved without funding].

13


Approved WITH funds – PFMA 34(1)(a):

• The additional funds are paid to the department from the NRF after tabling (and

approval) of the finance bill;


No entries

Revenue and expenditure are not

effected


Unauthorised expenditure -

(R500 – R500)

Bank overdraft -

(R500 – R500)

The additional funds received are

used to clear the UE control account

14


Approved WITHOUT funds – PFMA 34(2):

• No additional funds are made available to the department. It must use its own

appropriated funds to “recoup” the unauthorised expenditure;

• NB: finance bill must specify over how many years the unauthorised expenditure

must be funded;


Revenue Rxxx

Unauthorised expenditure

approved without funding (R500)

The department is effectively reducing

its allocation through the additional

expenditure charged in the statement



(R500 – R500)

Bank overdraft -

(R500 – R500)

Assuming full amount is written off

15


Approved WITH funds – PFMA 34(1)(b):

• Parliament gives approval to refund the department;

• NB the recommendation should be to refund and not to provide additional funding;


No entries

Revenue and expenditure are not

effected



(R200 – R200)

Bank R200

The additional funds received are

used to clear the UE control account

The bank balance

could be zero, if

overdraft used to

repay UE to

revenue fund

16


Approved WITHOUT funds – No specific provision in the PFMA - consider

34(2)?:

• Parliament does not allow the NRF to refund the department;

• The department must use its appropriate funds to clear the UE;


Revenue Rxxx

Unauthorised expenditure

approved without funding (R200)

The department is effectively reducing

its allocation through the additional

expenditure charged in the statement



(R200 – R200)

Bank R200

17

In summary

TYPE 1 (overspending):

• Additional expenditure may lead to the department reflecting a deficit for the year;

• Unauthorised expenditure (UE) is recognised in the statement of financial position;

• If approved with funding – the UE in the statement of financial position is cleared;

• If approved without funding – the UE is written off in the statement of financial

performance (against the current year’s voted funds) per economic classification;

• If not approved – amount should be recovered from supplier / employee, if cannot

recover must follow debt-write off process;

18

In summary (Cont.)

TYPE 2 (other than in accordance with vote / main division):

• Unauthorised expenditure (UE) is recognised in the statement of financial position;

• If approved with funding – the UE in the statement of financial position is cleared

with amount refunded;

• Should not be approved without funding – the department would have effectively

paid for the good and service 3 times and will result in cash flow problems;

• If not approved – amount should be recovered from supplier / employee, if cannot

recover must follow debt-write off process;

19

Calculation (Type 1)

20

Level at which Legislature Appropriates Funds

Unauthorised expenditure is only calculated at the level of a vote or main division

within a vote BECAUSE

• The relevant provincial legislature appropriate money at that level;

• They do not appropriate at economic classification level,

• Economic classification level is only provided as a breakdown of the

appropriation (total vote & main divisions).

• Economic classification is a statistical representation of government`s

transactions, e.g.:

Sale of goods & services

Compensation of employees

Goods and services

Interest payment

21

How much is the unauthorised expenditure?

Programme Adjusted

budget

R’000

Virements

R’000

Final

appropriation

R’000

Actual

Expenditure

R’000

Variance

R’000

Programme 1 1,567,059 25,838 1,592,897 1,587,229 5,669

Current pmts 1,544,192 25,838 1,570,030 1,531,473 38,557

Trf & subsidies 2,036 - 2,036 4,008 (1,972)

Capital pmts 20,831 - 20,831 51,747 (30,916)

Programme 2 15,537,548 - 15,537,548 15,658,721 (121,173)

Current pmts 13,849,443 - 13,849,443 14,225,700 (376,257)

Trf & subsidies 940,094 - 940,094 929,752 10,342

Capital pmts 748,011 - 748,011 503,269 244,742

Programme 3 322,974 (25,838) 297,136 228,424 68,712

Current pmts 322,974 (25,838) 297,136 228,189 68,947

Trf & subsidies - - - 209 (209)

Capital pmts - - - 25 (25)

Total variance: (46,791) 22

How much is the unauthorised expenditure (Cont.)?

Is it the unauthorised expenditure:

a) per the vote R46,791

b) per programme 2 R121,173

c) per economic classification R268,753

(i.e. on current payments)

Received in total R17,427,581

Spent in total (R17,474,372)

Total deficit /bank overdraft R 46,791

or both (a) and (b)

R167,964

23

How about none of the above?

• In calculating the unauthorised expenditure consideration should be given to the

virement rules.

• 43(4) This section does not authorise the utilisation of a saving in –

a) an amount specifically and exclusively appropriated for a purpose mentioned under a main

division within a vote;

b) an amount appropriated for transfer to another institution;

c) an amount appropriated for capital expenditure in order to defray current expenditure;

• 6.3 for the purpose of section 43(1) of the Act –

a) compensation of employees and transfers and subsidies, …., may not be increased without

approval of the relevant treasury;

b) new transfers and subsidies to other institutions may not be introduced without the approval of

the relevant treasury;

c) allocations earmarked by the relevant treasury for a specific purpose (excluding compensation

of employees) may not be used for other purposes, except with its approval; and

d) virement of funds from compensation of employees to transfers and subsidies for the payment

of severance/exit packages are excluded from the provision of (a) and (b).

24

Analysis of programme 1

Programme Adjusted

budget

R’000

Virements

R’000

Final

appropriation

R’000

Actual

Expenditure

R’000

Variance

R’000

Programme 1 1,567,059 25,838 1,592,897 1,587,229 5,669

Current pmts 1,544,192 25,838 1,570,030 1,531,473 38,557

Trf & subsidies 2,036 - 2,036 4,008 (1,972)

Capital pmts 20,831 - 20,831 51,747 (30,916)

• Effectively using savings on current to fund overspending on “transfers

and subsidies” and “capital expenditure”.

• This is permitted therefore no unauthorised expenditure on P1

• Note: the increase in “transfers and subsidies” would be irregular if

approval was not granted from the relevant treasury

25


Programme Adjusted

budget

R’000

Virements

R’000

Final

appropriation

R’000

Actual

Expenditure

R’000

Variance

R’000

Programme 2 15,537,548 - 15,537,548 15,658,721 (121,173)

Current pmts 13,849,443 - 13,849,443 14,225,700 (376,257)

Trf & subsidies 940,094 - 940,094 929,752 10,342

Capital pmts 748,011 - 748,011 503,269 244,742

• Effectively using savings on “capital expenditure” and “transfers and

subsidies” overspending on “current expenditure”.

• Cannot use savings on amounts appropriated as transfers and savings

on capital therefore the unauthorised expenditure if R376,257

• Note: Section 5 of the Appropriation Act permits NT to approve savings

on capital (applies only to national departments)

• Saving of R255,084 (R10,342 + R244,742) 26


Programme Adjusted

budget

R’000

Virements

R’000

Final

appropriation

R’000

Actual

Expenditure

R’000

Variance

R’000

Programme 3 322,974 (25,838) 297,136 228,424 68,712

Current pmts 322,974 (25,838) 297,136 228,189 68,947

Trf & subsidies - - - 209 (209)

Capital pmts - - - 25 (25)

• Same as for programme 1 no unauthorised expenditure

• Potential irregular expenditure

27

In summary

• By applying the virement rules the unauthorised expenditure for the department is

R376,257 (from programme 2);

Reconciliation of cash position:



Total deficit /bank overdraft (R 46,791)

Amount to be surrendered

Saving on programme 1 R 5,669



Total to be surrendered R 329,465

Total bank overdraft

(after surrender) : R 376,257

Statement of financial position:

Unauthorised

expenditure R376,257

Bank overdraft R376,257

28

In summary (cont.)

• If approval was granted to offset capital savings against the overspending on

current in programme 2, the unauthorised expenditure would be R131,515

(R244,742 - R376,257)

Reconciliation of cash position:



Total deficit /bank overdraft (R 46,791)

Amount to be surrendered




Total to be surrendered R 84,723

Total bank overdraft (after surrender) : R 131,514

29

What about conditional grants?

• 16(1) of 2012 DORA – Despite anything to the contrary contained in any law, an

allocation referred to in Schedules 4 to 8 may only be utilised for the purpose

stipulated in the Schedule concerned and in accordance with the framework

published in terms of section 15.

• Would overspending or improper use of conditional grant money be classified as

unauthorised or irregular expenditure?

30

Conditional grants – example 1

31

Conditional grants – example 1 (Cont.)

32


Final

appropriation

Actual

expenditure Variance

Programme 2 (Total) 20,862,885 21,147,197 (284,312)

Current payment 17,736,603 18,152,627 (416,024)

Transfers & Subsidies 2,092,550 2,131,005 (38,455)

Payment for capital assets 1,033,732 850,872 182,860

Payment for fin assets - 12,693 (12,693)

• From the above analysis, the unauthorised expenditure could be : R467,172

(416,024 + 38,455 + 12,693);

• Or R284,312 if the National Treasury granted approval to defray the capital

savings;

• However need to further consider the variance on the conditional grant;

33


Final

appropriation

Actual


Programme 2 (excl conditional grant) 19,085,045 19,573,791 (488,746)

Current payment 17,697,296 18,126,064 (428,768)


Payment for capital assets 119,772 126,742 (6,970)


Conditional grant 1,777,840 1,573,406 204,434

Current payment 39,307 26,563 12,744

Transfers & Subsidies 824,573 822,713 1,860

Payment for capital assets 913,960 724,130 189,830

Total 20,862,885 21,147,197 (284,312)

34


Unauthorised expenditure (488,746)

Total allocation received 20,862,885

Total amount spent 21,147,197

Bank overdraft (284,312)

Conditional grants to be surrendered (204,434)

Voted funds to be surrendered -

Total bank overdraft (488,746)

Total overspending on P2

excl. conditional grant

money

• Conditional grant money was used to fund other activities of the programme. This

will not be regarded as irregular expenditure because it is already classified as

unauthorised;

35


Final

appropriation

Actual


2.1 Public primary schools 5,527,853 5,717,423 (189,570)

Current payment 5,189,520 5,341,652 (152,132)

Transfers & Subsidies 274,360 291,594 (17,234)


2.2 Public secondary schools 13,451,396 13,747,052 (295,656)

Current payment 12,403,316 12,675,367 (272,051)

Transfers & Subsidies 993,617 1,016,698 (23,081)



2.3 Professional services 12,603 15,530 (2,927)

Current payment 11,417 15,268 (3,851)

Transfers & Subsidies - - -

Payment for capital assets 1,186 262 924

2.4 Human resource developmt 61,545 65,900 (4,355)

Current payment 61,545 65,900 (4,355)


Payment for capital assets - - -

2.5 In-school sport & culture 31,648 27,886 3,762

Current payment 31,498 27,875 3,623


Payment for capital assets 150 11 139

2.6 Conditional grant 1,777,840 1,873,406 (95,566)

Current payment 39,307 26,563 12,744


Payment for capital assets 913,960 1,024,130 (110,170)

20,862,885 21,447,197 (584,312)

What if there is

overspending on the

conditional grant? 36


Final

appropriation

Actual


Programme 2 (Total) 20,862,885 21,447,197 (584,312)

Current payment 17,736,603 18,152,627 (416,024)


Payment for capital assets 1,033,732 1,150,872 (117,140)


37


Final

appropriation

Actual


Programme 2 (excl conditional grant) 19,085,045 19,573,791 (488,746)

Current payment 17,697,296 18,126,064 (428,768)




Conditional grant 1,777,840 1,873,406 (95,566)

Current payment 39,307 26,563 12,744



Total 20,862,885 21,447,197 (584,312)

38


• The unauthorised expenditure is the total overspending on programme 2;

Unauthorised expenditure (584,312)

Total allocation received 20,862,885

Total amount spent 21,447,197

Bank overdraft (584,312)

Conditional grants to be surrendered -

Voted funds to be surrendered -

Total bank overdraft (584,312)

39


Final

appropriation

Actual


Programme 2 (Total) 20,862,885 20,781,197 81,688

Current payment 17,736,603 17,602,627 133,976

Transfers & Subsidies 2,092,550 2,031,005 61,545

Payment for capital assets 1,033,732 1,134,872 (101,140)


• From the above analysis, there is no unauthorised expenditure;

40


Final

appropriation

Actual


Programme 2 (excl conditional grant) 19,085,045 18,907,791 177,254

Current payment 17,697,296 17,576,064 121,232

Transfers & Subsidies 1,267,977 1,208,292 59,685



Conditional grant 1,777,840 1,873,406 (95,566)

Current payment 39,307 26,563 12,744



Total 20,862,885 20,781,197 81,688

Deemed to be irregular expenditure

(non-compliance with section 16 of DORA)

41

Consequences

42

Executive Directive Having Financial

Implications

43

ACCOUNTABILITY ARRANGEMENTS BETWEEM ACCOUNTING OFFICER (AO)

AND THE EXECUTIVE AUTHORITY (EA)

EXECUTIVE AUTHORITY

ANY DIRECTIVE FROM EA TO AO HAVING A FINANCIAL IMPLICATION MUST BE IN WRITING

ACCOUNTING OFFICER & EXECUTIVE AUTHORITY

IF THE EA DIRECTIVE WILL RESULT IN UE - AO MUST ADVISE EA IN WRITING OF SUCH LIKELIHOOD

IF THE EA INSISTS ON IMPLEMENTING THE DIRECTIVE - AO MUST INFORM THE NT, AG & PROV TREASURY (IF APP) WITH REASONS PROVIDED BY THE EA

ACCOUNTING OFFICER

AO SHALL BE HELD ACCOUNTABLE FOR THE UE IF THE AO FAILED TO INFORM THE EA IN WRITING OF THE LIKELILHOOD OF INCURRING UE

Financial Misconduct

Section 38(1)(c)(ii) of the PFMA

• Appropriate steps to prevent unauthorised expenditure, losses resulting in

criminal conduct;

Section 38(1)(h)(ii) of the PFMA

• Disciplinary steps against officials undermining the department`s internal control

system;

Section (1)(h)(iii) of the PFMA

• Disciplinary steps against officials/employees that make or permit unauthorised

expenditure.

44

THANK YOU

Questions?

45

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