FOR STAT. 1st Series JABATAN MALAYSIA

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1 AUDITOR GENERAL S REPORT FOR THE YEAR 2012 Prefacee And Report Summary The Activities Of The State Depa artment/agencies And The Mana agement Of Thee State Govern nment Companies 1st Series STAT TE SABAH JABATAN AUDIT NEGARA MALAYSIA

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3 PREFACE 1. Article 106 of the Federal Constitution and the Audit Act 1957 requires the Auditor General to audit the Financial Statements of the State Government, the Financial Management, and the Activities of State Departments/Agencies. Section 5 (1) (d) of the Audit Act 1957 empowers the Auditor General to audit a company registered under the Companies Act 1965, which received grant/loan/guarantee from the Federal Government or the State Government and a company where more than 50 % of the paid-up share capital is held by the Federal Government, State Government or State Government Agencies. An order cited as the Audit (Accounts of Companies) Order 2004 (amended 2009) with the consent of the Supreme Head of Malaysia, His Majesty, Seri Paduka Baginda Yang di- Pertuan Agong has authorised the Auditor General to conduct an audit on the State Government companies. While Article 107 of the Federal Constitution requires the Auditor General to submit his report on the audit findings to the Supreme Head of Malaysia, His Majesty, Seri Paduka Baginda Yang di-pertuan Agong and His Excellency, the Head of State of Sabah. His Majesty will give his Royal Assent for the tabling of the Report in Parliament while His Excellency will then consent for the tabling of the Report in the State Legislative Assembly. 2. Starting from 2013, the National Audit Department is responsible to implement the four initiatives under the GTP2.0: Anti-Corruption NKRA. One of these initiatives is to table the Auditor General s Report on the Activities of the State Departments/Agencies and the Management of State Government companies at each Parliamentary / State Legislative Assembly session. Therefore, it can be immediately accessible by the public in accordance with the requirements of the Government s agenda for the success of the Government Transformation Programme for the period 2013 to I hope this report, on the implementation of the Activities of the State Ministries/ Departments / Agencies and the Management of the State Government Companies for the year 2012, tabling first for the year 2013, would be a basis for improving all weaknesses, reinforcing improvement efforts, enhancing accountability and integrity as well as getting value for money for every expenditure incurred as aspired by the Government. 3. My report is the result from the auditing that has been carried out on certain/specific activities implemented/undertaken by 4 Departments and 2 State Government Companies. The Audit of the activities of the Ministries/Departments/ Agencies was to assess whether the planned programs and activities successfully implemented in a timely manner, without wastage and achieved its objectives. While the audit of the company's management is to evaluate whether the financial performance of the company is good, management and financial activities as well as corporate governance implemented appropriately in accordance with the set rules and have achieved the desired objectives of its incorporation. To improve the shortcomings raised or to avoid reoccurrences of the weaknesses, I have put forward 27 recommendations for remedial actions by the Head of Ministries/Departments/Agencies and State Government s Companies concerned. 157

4 4. I would like to express my gratitude to all officers in the various Ministries/ Departments/Agencies and State Government Companies in Sabah who has given their full cooperation to my officers during the audit. I would also like to extend my appreciation and thanks to all my officers who have worked diligently and given their full commitment to complete this report. (TAN SRI DATO SETIA HAJI AMBRIN BIN BUANG) Auditor General Malaysia Putrajaya 3 February

5 REPORT SUMMARY ACTIVITIES OF STATE MINISTRIES/ DEPARTMENTS/AGENCIES AND MANAGEMENT OF STATE COMPANIES 1. SOCIAL WELFARE DEPARTMENT OF SABAH - Public Assistance Scheme Program 1.1. Public Assistance Scheme (PAS) is a financial assistance scheme that aims to provide temporary relief for a period of 12 months to an individual or family. Only of families who are incapable to meet the basic needs of life due to disability, illness, death and other factors beyond control are eligible to apply. If the recipient wishes to extend the financial assistance beyond the stipulated period, further investigation will be carried out by the Department to determine the recipient's eligibility to continue the scheme. Starting from year 2010, the Social Welfare Department has used Online Welfare Assistance Management System (esbk) to implement PAS. PAS is fully funded by the State Government. The total allocation for the year 2009, 2010, 2011 and 2012 amounted to RM45.09 million, RM39.10 million, RM38.35 million and RM37.02 million respectively An Audit conducted from June to October 2012 revealed that overall the performance of the program was satisfactory. This is because from the 45 recipients who responded to the questionnaires distributed, 36 or 80% were satisfied with the implementation of the program. For the year 2010 to September 2012, a total of 70.3% or 11,267 applications were approved as opposed to the set quota of 16,036. However, there were weaknesses in the management and implementation of the program as follows: Investigations at the individual or family s house were not done. Payments made were not in accordance to eligibility. The financial assistance was paid to dead recipients. The financial assistance was paid to a recipient who did not submit application form. Weaknesses in security control and data integrity of esbk To improve and to overcome the above problems thus preventing recurrence, the Department is recommended to take the following actions: 159

6 Collaborate with other government agencies such as Police Department, Village Development and Security Committee (JKKK) and village chief for updated reports on the status of the recipients Ensure all applications are processed and approved according to the set guidelines Update the database of esbk to ensure information is complete, accurate and similar to the application form and supporting documents so as to avoid fraud. 2. Department of Land and Survey - Management of Stone Quarry License Issuance 2.1. Department of Land and Survey (DLS) is responsible to issue stone quarry license in Sabah under Land Ordinance Cap.68, No.15 Of 2004, Land (Amendment), Land Rules (Section 46) G.N. 505 of 1930 and Environment Protection Enactment DLS is responsible to check, process, prepare report and refer stone quarry operators application to the Secretary of Natural Resources (SONR) for approval. Remove Articles License will be issued to quarry operators under Rule 3(2), Land Rules (Section 46) G.N. 505 of 1930 through district Collector of Land Revenue Office to allow the execution of stone quarry activities. For the year 2010 to 2012, a total revenue of RM12.87 million were collected from stone quarry operators with total stone production of 4.88 million cubic meters. As at 2012, 28 approvals and licenses were issued to stone quarry operators all over Sabah An Audit conducted from June to September 2012 revealed that the management of the issuance of stone quarry license in Sabah was less than satisfactory due to the following weaknesses: Prolong time taken to the issuance of license as DLS delays in the submission of operator s application to SONR and also delays in the preparation of offer letters to operators between 95 days to 808 days and 55 days to 693 days respectively. Poor enforcement has enabled 5 stone quarry operators to operate illegally and 9 or 64.3% from 14 stone quarry operators with Environmental Impact Assessment (EIA) approval violating the environmental conditions imposed by the Department of Environmental Protection. Inability to collect estimated revenue of RM1.98 million from 4 stone quarry operators whose license has expired To improve and strengthens the management of stone quarry license issuance in Sabah, the Department of Land and Survey is recommended to take the following actions: Establish an improved procedure to expedite the quarry license issuance process by preparing a checklist of required documents for new and renewal application. 160

7 Execute periodic supervision and carry out surprise checks at stone quarry operator s site to ensure adherence to license conditions and valid approval have been obtained. Review existing renewal application procedures and issue temporary periodical permit to operators applying for renewals. This will enable revenue to be collected from the operators for activities carried out during the renewal application process to avoid losses to the Government if renewal license is not approved. 3. MINISTRY OF YOUTH AND SPORTS SABAH - Management of Youth Centre 3.1. Under Section 34 (1) and (2) (a) to (h), Act 668 Youth Societies And Youth Development 2007, the Youth And Sports Minister is responsible to facilitate the development of youth by providing facilities for social interaction and youth development programmes. Paragraph (a) and (b) Cabinet Paper No. 110/65 of Youth Welfare Policy 1965, outlined that Government is responsible to give encouragement and financial assistance such as providing premise and equipment to registered youth organization. Youth Centre is provided for social interaction facility that is conducive and comfortable in order to achieve youth development policy to produce healthy, active and progressive youth community. The management of Youth Centre in Sabah falls into 6 divisions that is responsible in to monitoring the management of 21 district Youth Centres There are 4 core programmes planned by Youth and Sports Ministry Sabah (KBSS) namely 9-Core-Programme, Leadership Development Programme, Network Collaboration Programme, Skills and Entrepreneurship Programme. Programmes are is either held indoor or outdoor base on local youth associations suitability and preference For the year 2010 to 2012, Sabah State Government has allocated RM4.16 million for maintenance and repair of Youth Centres and RM2.89 million or 69.4% was spent. Meanwhile, RM14.09 million was allocated for development expenses for youth and RM10.52 million or 74.7% was spent An Audit carried out from June 2012 to September 2012 found that the management of Youth Centre in Sabah was unsatisfactory. There are weaknesses that should be given attention by KBSS as follows: Under achievement in participation compared to target participation for youth development program and declining numbers of participants in Creative Stitching Courses from 50% to 27% in year Facilities in Youth Centres were not fully utilised, not properly maintained and cleaned. To ensure efficiency in the management of Youth Centres and meet the set objectives, KBSS is recommended to take the following actions: 161

8 Plan specific programmes in Youth Centre Arena Belia and provide suitable facilities for the programmes Encourage participation in Creative Stitching Course by providing cost of living allowance, upgrade commissioned certification equivalent to Malaysian Skill Certificate and provide logistic facilities Increase promotion of Youth Centre facilities to youths Impose charges for the usage of facilities in Youth Centre by unregistered youth association and for activities not organised by KBSS Monitor the cleaning work, appoint cleaners and revise the cleaning contract rates which should be based on width area Provide sufficient allocation for periodical maintenance work and keep maintenance record accordingly. 4. Tawau Municipal Council, Sabah - Management Of Assessment Tax 4.1. Tawau Municipal Council (Council) is responsible to impose and collect assessment tax in their administrative areas. On average, property assessment tax has contributed 26% of Councils revenue for 2010 and Assessment tax is a tax levied on rateable properties within its area of responsibility as provided in Section 10 to Section 12 of the Local Government Ordinance According to Section 72 of the Local Government Ordinance 1961, a rateable property refers to immovable property which includes land and buildings on land or permanent buildings on anything attached to the land. Section 82 of the Ordinance states, owners of all rateable properties shall pay assessment tax An Audit carried out from the month of June to September 2012, revealed that generally the management of assessment tax was satisfactory. However, there were some weaknesses as follows: From 2010 to 2012, assessment tax collected were 75.6%, 62.4% and 56.2% respectively while the collection of assessment tax arrears for 2010 to November 2012 were o42.9%, 43.9% and 40.8% respectively. Properties were not revalued within the stipulated period as prescribed in Local Government Ordinance The expansion of rateable area is in the process of gazette. Surveying work was delayed between 34 to 196 days as opposed to the 30 days set in the customer charter in 35 of 60 cases or 58.3%. 162

9 The Company appointed to collect assessment tax arrears only managed to collect RM0.87mil or 29.9% of RM2.9mil contracted out to them. The agreement for assessment tax collection and data cleaning between the Company and Council did not protect the Governments interest. The Company is allowed unlimited access into TMCs data and there was no provision for employees training on the Tax Assessment Computer System 4.3. To improve efficiency in the management of assessment tax collection and tax arrears, Council is recommended to take the following actions: Revise and update the Local Government Ordinance 1961 with regards to Section 94 (1) in giving Council the authorisation to take action against any property owner who fails to pay the assessment tax Revalue all rateable properties at least once in every 4 years in accordance to Section 74 (1) of Local Government Ordinance Streamline and strengthen the Valuation Division to include enforcement, monitoring and surveying works on rateable properties Review the number of tax arrears cases contracted out to responsible companies to ensure a more effective tax arrears collection system Revise the terms and conditions of the Agreement to consider the access level of Company employees and include training provision to Council staff. 5. SABAH ECONOMIC DEVELOPMENT CORPORATION - Perkasa Hotel Holdings Sdn Bhd 5.1. Perkasa Hotel Holdings Sdn. Bhd. (PHHSB) was established in 1979 under Company Act 1965 to facilitate the development of tourism industry in rural areas. PHHSB has an authorized and paid up capital amounted to RM20 million. PHHSB is wholly owned by Sabah Economic Development Corporation (SEDCO). PHHSBs main activity is to provide hospitality services. PHHSB has 3 hotels which are Mount Kinabalu Heritage Resort & Spa in Kundasang, Hotel Perkasa Keningau and Hotel Perkasa Tenom An Audit conducted from 3 July to 28 September 2012 found that the company financial performance was satisfactory. In 2011, PHHSB recorded profit before tax of RM1.04 million. The management of its main activity and corporate governance were also satisfactory even though some weaknesses noted were as follows: 163

10 Occupancy rates did not reach the target that had been set Insufficient security level Non-comprehensive Standard Operating Procedure Bonus pay-out was not submitted to the State Authority for approval. Poor asset management To strengthen its activity and financial management, PHHSB is recommended to take the following actions: Improve supervision on the operation in 3 network hotels to ensure achievement of yearly occupancy rate target Install Closed Circuit Television (CCTV) Camera to secure and increase safety level of its customers and assets Revise the Standard Operating Procedures to include items on security, appointment of internal auditor, dividend pay-out, investment and credit management, journal preparation, asset and store management procedures Organize, maintain assets accordingly and take immediate action on disposal of assets. 6. SABAH HOUSING AND TOWN DEVELOPMENT AUTHORITY - Kuala Menggatal Development Corporation Sdn. Bhd Kuala Menggatal Development Corporation Sdn. Bhd. (KMDC) was established on 17 January 1983 under Company Act 1965 with an approved capital of RM6 million and paid up capital of RM5.10 million. KMDC is a subsidiary company of Sabah Housing and Town Development Authority with 95% shareholding. The objective of KMDC is to develop housing projects and commercial centre along the Sepanggar Road and Kota Kinabalu Industrial Park as in the early 80 s, the Sabah State Government found the area to be fast developing. The main activity of KMDC is in the development of housing projects and commercial centre An Audit conducted from the month of June to August 2012, revealed that generally KDMCs financial performance was not satisfactory. KDMC suffered a loss of RM0.80 million and RM0.76 million for the year 2010 and 2011 respectively. In terms of activity management and corporate governance, there were weaknesses as follows: Land plots were not sold, abandoned, priced at lower than market value and projects were delayed. 164

11 Standard Operating Procedures and basic policies on financial management and accounting procedures were not prepared, statutory records were not updated, accounts preparation were delayed and weakness in financial management The overall performance of the company in terms of financial performance, activity management and corporate governance were unsatisfactory. KMDC is recommended to take the following actions The Board of Directors and Sabah Housing and Town Development Authority, should set the Company s direction and vision on land management to increase its financial sustainability Valuation is carried out before any property sale and purchase transaction to ensure market value and avoid losses to the Company Enhance promotion in the sales of housing lots in Weston Expedite property developments or rental of undeveloped lands by identifying potential developers and tenants Prepare Standard Operating Procedure and policies on financial and asset management to enhance orderly administration, avoid misappropriation and unnecessary spending The management, Board of Directors and LPPB should monitor activities and corporate governance of the Company to ensure it is carried out satisfactorily and complies with related rules. 165

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