REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF THE NATIONAL SOCIAL SECURITY FUND FOR THE YEAR ENDED 30 th JUNE, 2015

Transcription

1 OFFICE OF THE AUDITOR GENERAL THE REPUBLIC OF UGANDA REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF THE NATIONAL SOCIAL SECURITY FUND FOR THE YEAR ENDED 30 th JUNE, 2015 OFFICE OF THE AUDITOR GENERAL KAMPALA, UGANDA

2 CONTENTS PAGE Fund Information 1-2 Report of the Directors 3 Statement of Directors Responsibilities 4 Report of the Auditor General 5-6 FINANCIAL STATEMENTS: Statement of changes in Net Assets Available for Benefits 7 Statement of Net Assets Available for Benefits 8 Statement of Changes in Members Fund and Reserves 9 Statement of Cash Flows 10 Notes to the Financial Statements ii

3 REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF THE NATIONAL SOCIAL SECURITY FUND (NSSF) FOR THE YEAR ENDED 30 TH JUNE, 2015 THE RT. HON. SPEAKER OF PARLIAMENT I have audited the Accompanying Financial Statements of National Social Security Fund which comprise the statement of Net Assets available for Benefits as at 30 th June 2015, the statements of changes in Net Assets Available for Benefits, changes in Members Fund and Reserves, and cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Directors Responsibility for the Financial Statements The Fund s directors are responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards and the requirements of the Ugandan National Social Security Fund Act (Cap.222), and for such internal controls as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility My responsibility as required by Article 163 of the Constitution of the Republic of Uganda and Sections 13 and 19 of the National Audit Act, 2008 is to audit and express an opinion on these statements based on my audit. I conducted the audit in accordance with International Standards on Auditing. Those standards require that I comply with the ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the Auditor s judgment, including the assessment of the risks of material misstatements of financial statements whether due to fraud or error. In making those risk assessments, the Auditor considers internal control relevant to the entity s preparation and fair presentation of financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control.

4 An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. I believe that the audit evidence obtained is sufficient and appropriate to provide a basis for my opinion. Part A of this report sets out my opinion on the financial statements. Part B which forms an integral part of this report presents in detail all the significant audit findings made during the audit which have been brought to the attention of management. PART "A" OPINION In my opinion, the accompanying financial statements present fairly, in all material respects, the financial position of National Social Security Fund as at 30 th June 2015 and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards and the requirements of the National Social Security Fund Act (Cap 222). Emphasis of Matter Without qualifying my opinion, I draw your attention to Note 35 (b) to the Financial Statements which indicates that the fund is challenging the basis on which the Uganda Revenue Authority (URA) disallowed certain expenses in calculating the company s tax assessment for the year ended 30 th June The note also indicates the directors have not recognised any provision for the liability of UGX.84.4 billion to the URA, as management believes the tax treatment adopted by NSSF is in accordance with the provisions of Section 22 (1) (a) and Section 25 of the ITA. Guidance provided by URA in 2001 allowed for the deduction of these expenses. The note gives detail of the court case and explains the directors have disclosed a contingent liability as the ultimate outcome of the case cannot presently be determined. John F.S. Muwanga AUDITOR GENERAL 20 th October,

5 PART "B" DETAILED REPORT OF THE AUDITOR GENERAL This Section outlines the detailed audit findings, management responses, and my recommendations in respect thereof. 1.0 INTRODUCTION Article 163 (3) of the Constitution of the Republic of Uganda, 1995 (as amended) requires me to audit and report on the public accounts of Uganda and all public offices including the courts, the central and local government administrations, universities, and public institutions of the like nature and any public corporation or other bodies or organizations established by an Act of Parliament. Accordingly, I appointed M/S KPMG, Certified Public Accountants to carry out the audit on my behalf and report to me to enable me report to Parliament. 2.0 BACKGROUND INFORMATION National Social Security Fund (the Fund ) is a corporate body domiciled in Uganda. The Fund is primarily involved in collection of contributions and investment of the contributions in a professional manner to earn a good return to meet the benefit obligations to its members as stipulated under the National Social Security Fund (NSSF) Act, (Cap 222). The Fund is largely financed by the employees and employers contributions. The total contribution is 15% of the employees gross salary, of which 10% is paid by the employer and 5% is paid by the employee. Government is currently implementing policy reforms whose objective is a liberalized and regulated retirement benefits sector. These reforms have entailed the enactment of the Retirement Benefits Regulatory Authority Act 2011, which came into force in September The new law establishes the Retirement Benefits Authority (RBA) whose function is to regulate all retirement schemes including NSSF. 3

6 3.0 AUDIT SCOPE The audit was carried out in accordance with International Standards on Auditing and accordingly included a review of the accounting records and agreed procedures as was considered necessary. In conducting my reviews, special attention was paid to establish: a. Whether the Fund managers are managing the Fund in accordance with the NSSF Act; b. Whether the financial statements present a true and fair view of Fund financial position as at 30 th June 2015, and its revenue and expenditure incurred for the period, in conformity with the International Financial Reporting Standards; c. Whether the Fund has adhered to established financial compliance requirements; d. Whether goods and services financed have been procured in accordance with the procurement law; e. Whether all necessary supporting documents, records and accounts have been kept in respect of all Fund activities and whether linkages exist between the books of account and the financial statements; f. That the Fund s internal control structure for financial reporting and/or safeguarding assets, including controls in computer based systems are suitably designed and implemented to achieve the control objective; g. That the internal controls are in compliance with the relevant laws, policies, practices and regulations governing procurements, accounting and human resource; 4.0 DETAILED FINDINGS 4.1 Notice of Assessment for Corporation Tax The Fund received a notice of assessment for Corporation tax from Uganda Revenue Authority amounting to UGX.84.4 billion. The Fund objected to the assessment on grounds that the Tax Authority computations wrongly disallowed interest payments that are considered deductible for tax purposes. The Fund has initiated legal proceedings against URA from which a favourable outcome is expected and as such no provision has been made in the Financial Statements. In accordance with the Income Tax Act the Fund paid a deposit of 30% of the assessed tax (UGX.25.3bn) pending the decision of the court. I await the outcome of the court proceedings. 4

7 4.2 Board Appointments Section 3 of the NSSF Act (Cap 222) states that the Minister shall appoint a Board of Directors for a period of three years. During the audit, I noted that the term for all board members expired on 1 st June 2015 and no board had been appointed until early September Concurrent expiry of board terms creates a vacuum that renders the Fund management unable to undertake any activities that require board approval during that period. Management s explained that they had informed the Minister of the expiry of the Board three months in advance. Although I advised the staggering of terms for board members to avoid the expiry at same time, management expressed concern on the practicability since one constituency may feel aggrieved by serving a shorter term than the other. To reduce the time-lag during transition from one board to another, Management is advised to constantly engage the Minister to ensure timely appointments. 4.3 Ratification of investments by the Board Chairman Section 9.2 of the Investment Policy requires that for investments under the mandate of Management Investment Committee (MIC), the Managing Director (MD) should seek the Board Chairman's approval before such investments are undertaken. During the audit, the following issues were noted; a) There was no documentary evidence to demonstrate that such investments were approved by the Board Chairman before acquisition as required by the policy. A sample of UGX.134bn in Treasury bond investments was not approved. Absence of documentary approval before investments are undertaken could result in Suboptimal investment decisions. b) That notwithstanding, this requirement appears to be assigning the Board Chairman an executive role in the operations of the Fund which may affect his independence in exercising his oversight role and contradicts the principles of corporate governance that require separation of the Board roles form those of Management. 5

8 Management stated that for effective independence of the Board s oversight role, they will propose to the next Board that: The Board approves investments through the approval process of the budget, the strategic asset allocation and the Investment Policy. The Board, through quarterly meetings, reviews and ratifies the investment decisions made by management. I also advised management to explore the option of having approval thresholds within which different categories of management can approve investments, leaving the board with major and material investments to approve. 4.4 Loss of opportunities due to Delayed approval of investments Although the Investments Procedures Manual and Policy require all non-fixed income investments to be approved by the Management Investment Committee (MIC), the Investment and Projects Management Committee (IPMC), the Board of Directors (BOD), the Attorney General and the Minister of Finance, I noted instances where delays occur in the approval process hence impacting on the performance of the Fund and loss of opportunities. Instances of significant delays are noted below; a) In July 2013, the Fund attempted to purchase 3 million shares in Tanzania Breweries Limited (TBL) at a maximum share price of TZS 4,500 during a period when the company s financial performance was better than its peers. Although all approvals of the MIC, IPMC and BOD were obtained and a letter sent out to the Minister of Finance, Planning and economic development (MoFPED) on 3 rd October 2013 to approve the purchase, there was no response received until 4 May 2015 (over 11/2 years later). Following the approval, the Fund initiated the purchase of 3.5 million shares in TBL at a maximum price of TZS 15,200. These were subsequently purchased in May 2015 at the trading price of TZS 14,500 per share. As a result of delayed approval and clearance the Fund missed out on capital gains of up to TZS 10,000 per share which translated to UGX.54.9 billion. b) On 5 th May 2011, the Board consulted the office of the Ministry of Finance, Planning and Economic Development (MoFPED) to obtain approval for swap of the Fund s 6

9 shares in TPS (U) for shares in TPS Eastern Africa Ltd. The Minister required the Fund to conduct a commercial and legal due diligence upon which the results were to be submitted to the Minister. Subsequent to obtaining legal advice from the Solicitor General to proceed with the share swap on 24 th September, 2013, the Fund sought approval from the Minister on 4 th October, Following the initial request, the board again requested the Minister to make a pronouncement on the matter on 15 th September 2014, as no responses had been received earlier. At the time of reporting no response had been received by the Fund. The fund could lose potential investment opportunities due to delayed approvals Besides, with the impending liberalisation of the pension sector, such delays in approval of investments would not ensure the Funds competitiveness. Although management stated that this was out of its control I advised them to seek legal advise as to what constitutes consultation and on the basis of such advise identify practical ways of consulting the minister without causing delays. 4.5 Follow-up of Prior Year Audit Recommendations A review of the status of implementation of prior year audit recommendations revealed that a number of them had been implemented while others had either not been implemented or at different levels of implementation, as shown in the table below: Observation and recommendation IT and Risk functions not at the appropriate level in the organisation structure The newly approved organisational structure of the Fund places the Information Technology under the Chief Finance Officer and the Head Audit update A new organizational structure was developed in which there are appropriate reporting line Management update 7

10 of Risk under the Head of Internal Audit. Contracts for senior management positions expiring at the same time leaving a leadership gap The contracts for all senior management positions were awarded with the same terms and expiring at the same time. Senior Management were appointed at different times so their contracts would not expire at the same time. Encroachment on properties There is hectares (out of hectares) of land at Lubowa encroached on. The estimated market value of the encroached on land is Ushs 487,399,079. Property at plot 5 Mvule close Naguru, comprises of a commercial building and a residential house. The estimated market value of the property is Ushs 894,674,556. The case in relation to encroachment on Lubowa land is still in court. For the Naguru land, the occupant is still residing in the house and management is still substantiating the extent of the encroachment before any action can be taken. The Fund has been able to evict most of the tenants who occupied the Land with the exception of two tenants who we are still pursuing in court. The Naguru land has not been resolved. The Fund has applied to open the boundaries. 8

11 No reassessment of useful lives of assets There is no indication that the useful lives and residual values are reassessed at least annually as required by IAS 16, Property, Plant and Equipment. Discrepancies in Lubowa land that require urgent attention The following were noted from the Lubowa land survey done by Geomaps i) Plot 1058 block 269 had been encroached on by a church infrastructure, permanent kiosk structures and related structures whose ownership was not known. One pillar at one end is missing and the total acreage encroached on was acres. ii) Plot 274 block 269 had its pillars beyond the correct boundaries indicating that NSSF had encroached on the adjacent plot by acres. iii) Plot 1322 block 269 had its pillars beyond the correct boundaries indicating that NSSF had encroached on the adjacent plot by acres. From discussions with management, assessment of useful lives is done on an annual basis. The matters relating to encroachment of the land are currently in court. To be resolved when the actual construction starts. 9

12 No evidence that the Fund is actively searching for buyers of properties approved for disposal Properties at Plot 47 Masaka, Kampala Road, Plot 87 Churchill Road, Gulu and Plot 8 Masaka Close, Mbarara were approved for disposal by the Board of Directors in 2011 but had not been sold as at 30 June There was no evidence that management was actively searching for a buyer of the properties despite the resolution to sale the properties. Benefits payments not completed for a long time As at 30 June 2014, benefits amounting to Ushs 265 million processed and approved for payment in the years from 2010 to 2014, had not yet been paid by the Fund s banker, Citi Bank Benefits paid by the bank but not appearing in the Fund s books of account. As at 30 June 2014, benefits amounting to Ushs 46.3 million had been paid out by the bank but did not appear Partially The decision to sale this property has not yet changed. Although, a Government Valuer for the land was contracted, the fund is still awaiting the Valuer s report. As such the Fund is not yet actively looking for a buyer. This land has been classified under Finance lease and Investment property. We noted that the benefits were completed within the year. We noted that as at the year end, there were no Benefits paid by the bank but not appearing in the Fund s books of account. The Fund is in the process of engaging a real estate agent to market these properties. The procurement process of obtaining the broker is ongoing. 10

13 in the Fund s accounting system as benefits paid No basis for waiver of special contributions and adjustments made to final assessments We noted that the Fund waived special contributions without clear justification. In addition to waiving the special contributions, it was also noted that the assessments for Speke and Munyonyo were changed and there was no evidence on file for the basis of the changes between the first final report and second final report issued. Some of the waived special contributions have been collected. In the case of Munyonyo, the Fund is in the process of obtaining a letter from the Magistrates court to review the prior audit work done in order to issue a revised report. Some of the waived special contributions have been collected SBI reconciliation was completed & employer informed of outstanding amounts. A second audit to update the account is planned for this FY ending June For Speke Group, the High Court delivered judgment stating that the Fund has no automatic right to reopen a concluded audit without the authority of the Magistrate s Court. We are evaluating the limited evidence obtained before we can seek an order to reopen the audit. 11

14 Unallocated members contributions in the migration account For the period 2012/13, contributions received amounting to Ushs 14 billion were yet to be credited to members statements. These amounts have been credited to a separate account known as the migration account. For some of these contributions, the Fund is yet to receive the members schedules to establish the contributing members. Separation of interest receivable accounts in the system The interest receivable for both DFCU Bank Limited and Housing Finance Bank Limited loans is booked on the same account code (203108) and not part of the principal balances as required by the amortised cost method stipulated in IAS 39. We noted that there still contributions that cannot be allocated to member statements because there are no members schedules from employers and member numbers. As at the 30 June 2015, the issue was resolved. The DFCU loan had been completely paid off and the outstanding one was the HFB only. There will always be the need for a migration account to cater for the timing difference between when funds are received and when schedules are received. With the new e-collection system, we hope to resolve this issue. Employers will be expected to upload the schedule with all the necessary details onto our system and make payment on the schedule uploaded to our system. 12

15 Loan to related party not secured The Fund issued an unsecured 10 year term loan to Uganda Clays Limited (UCL) in The repayments were due in January 2013 but Uganda Clays Limited had since failed to make good of the repayments. We noted that the loan is still maintained in the books and is still unsecured. Weaknesses in HRM and accounting systems The JD Edwards system at several occasions fails to complete double entry transactions and differences have to be identified through manual reconciliations and reposted. Activity Logs not monitored and reviewed We noted that although there are activity logs on NSSF systems (InspireHRM, Aquilla and JDE) which were activated, there is no evidence of period monitoring and review of the logs. Lack of a Test Environment We noted that NSSF has no test environment. A test environment is key when testing if the changes are working as required before being deployed into production. We noted that no repayments were received during the year. However, the Fund is in the Process of converting the Debt to Uganda Clays into Equity. The Fund is in the process of obtaining a new system We noted that these activity logs are on the systems still not monitored We noted that they have test environments. The Fund is in the process of converting the expected debt to equity. The Fund is in the process of obtaining a new system. The Fund hired an Information Security Officer who is currently reviewing this. 13

16 IT Policy not signed The NSSF IT Policy in use was not yet signed and is still in draft form. System does not revalue all foreign balances Monetary items amounting to USD 0.3 million and Kshs 109 million had not been appropriately translated at the closing foreign exchange rates as required by IAS 21. Receipting of rent at inappropriate foreign exchange rates The Fund invoices tenants occupying its properties in the US Dollars. However, the Fund does not communicate an exchange rate to tenants who wish to pay in Uganda Shillings and they therefore use their own rates. Improper accounting for property service charges and maintenance expenses Both the service charge fees and maintenance expenses are not recognised in the Fund s books of account despite the Fund being the principle within the contracts and hence holding the risks and rewards therein. The revised policy was approved on 18th March 2015 by the board. We noted that the system requires manual intervention prior to revaluation and therefore the risk of errors and omissions exist. Refer to current year findings. The Fund fixed the exchange rate at UGX.3,000 and this was communicated to the tenants. We noted that an adjustment proposed by the prior auditors was passed. The Fund is currently recognizing the service charge income correctly. We are in the process of procuring a pension system that will support the automatic revaluation of all currencies for all accounts. 14

17 Long outstanding uncollected rent We noted that the Fund was exposed to the risk of financial loss due to uncollected rent. We noted that there is still rent outstanding as at 30 June 2015 that have been outstanding for over 360 days. The total outstanding as at 30th June 2015 was UGX.2.18 billion as compared to UGX.2.9 billion as at 30 June 2014 and is mainly comprised of recent invoices. A recovery of UGX.762 million was made during the period. Security deposit not collected from tenants The tenancy agreements between the Fund and its tenants require the Fund to collect a security deposit equivalent to one month s rent. However, the Fund has not collected this deposit as stipulated in the contracts. Partially We noted that new tenants were charged the security deposit. However, no deposit has been collected from old tenants. The problem mainly comes from government tenants who cite disbursement issues with Ministry of Finance and former tenants who left the two buildings. Legal department has been tasked to recover all outstanding arrears form former tenants as we also continue to engage all government tenants. Partially Rental agreements for new tenants were modified to include a security deposit clause. 15

18 Differences between system and physical cash balances There were variances between cash on hand recorded in the system and physical cash as per the cash count certificates. Weaknesses in cash and bank reconciliation process As at 30 June 2013, the cash and bank balance of the Fund stood at Ushs 65 billion compared to bank statement balances of Ushs 15 billion. The variance was a result of missing and/or double posting made in the cashbooks. Some of the reconciling items had cleared during the period but had not been matched off the reconciliations. Furthermore, there was a migration account of Ushs 63 billion which had been created to post amounts that had been deposited in the Fund s bank accounts but had not been receipted by the contributions department. Long outstanding cash reconciling items in the bank reconciliations The bank reconciliation statements of the Fund for the month ended 30 June 2011 comprised of reconciling items We noted differences between the cash on hand recorded in the system and physical cash as per the cash count certificates as at 30 th June We noted that there is still inadequate and inaccurate preparation and review of bank reconciliations. Refer to current year findings. We still noted long outstanding reconciling items in the bank reconciliations in the current year. Refer to current year findings. No significant differences noted. The Fund has 49 bank accounts which are reconciled daily and monthly reports for reconciling items prepared by the reconciliation team are reviewed by the Financial Controller. The reconciliation for Account Standard Chartered has since been corrected. We will ensure that reconciliations are accurately prepared. Most of the long outstanding items were cleared by end of June The ones outstanding are still being investigated. 16

19 which had not been resolved. These relate to unallocated receipts whose schedules have not been received. No oversight by those charged with governance on the activities of the compliance unit Compliance has no direct oversight exercised by those charged with governance over the activities of the Compliance Unit. We noted that the Finance committee of the board discusses the role and activities of the compliance unit. Inadequate documentation of the compliance audit files There are no documented audit programs detailing the procedures that the staff are supposed to execute in the field. There are no adequate working papers on the audit files to evidence the procedures executed, results of the procedures and the conclusions reached. The current audit files are supported by working papers. However, there are no documented audit programs detailing the procedures that the staff is supposed to execute in the field. All that is available is the compliance audit process. The concern of inadequate documentation has since been handled through new Compliance guidelines. 17

20 Insufficient details kept in the compliance audit tracker The Fund has a compliance audit tracker with details that are not sufficient enough to make an assessment of the entities audited without looking at the reports themselves. The current audit tracker does not provide an adequate snap shot of the status of the ongoing and concluded audits. The new tracker is in advanced stages with final touches being done by the Business Strategy Team. A forecast of payments from deeds- including a net off of balances, Legal & BOD reports were incorporated with relevant fields of status & updates. I have advised management to implement the still outstanding audit recommendations so as to ensure enhanced accountability and better stewardship of the Fund. 18