UNAUTHORISED EXPENDITURE

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

Legislative Framework Section 45(c) Section 38(1)(h)(III) Every official must take effective and appropriate steps to prevent UE, within their responsibility area Must take effective & appropriate steps against any official who makes or permits UE 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) Section 38(1)(c)(II) Section 38(1)(G) 3

Definitions and implications 4

What is unauthorised expenditure? Means a) Overspending of a vote or main division within a vote; Type 1 used more than what was allocated, usually results in a bank overdraft; easy to identify, tricky to calculate 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; Type 2 used allocated funds for purpose other than intended (linked to vote and or programme predetermined objectives); not easy to identify, easy to quantify; 5

Explanation on definitions and concepts 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 6

What are the procedures to be followed when identified? Alleged unauthorised expenditure is discovered Report to the Accounting Officer Conduct investigation / Perform calculation Type 2 Type 1 Valid expenditure Unauthorised expenditure Type 2 Type 1 / Type 2 (no further action required) The accounting officer must immediately report the unauthorised expenditure in writing to the relevant treasury (PFMA 38(1)(g) & 40(4)(b)) Recover amounts where losses or damages have been incurred (TR 12) The accounting officer must take effective action and appropriate disciplinary steps (PFMA 38(1)(h) & TR 9.1.3) 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 Statement of financial position Unauthorised expenditure 500 Expenditure (1,500) Deficit for the year (500) Bank overdraft (500) 9

What are the implications - Type 2? 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 Statement of financial performance Expenditure (200) Statement of financial position 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) Parliament does not approve unauthorised expenditure (PFMA 34) SCOPA recommends to Parliament to approve unauthorised expenditure (PFMA 34(1)) 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

What are the implications - Type 1? 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; Statement of financial performance No entries Revenue and expenditure are not effected Statement of financial position Unauthorised expenditure - (R500 R500) Bank overdraft - (R500 R500) The additional funds received are used to clear the UE control account 14

What are the implications - Type 1? 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; Statement of financial performance Statement of financial position Revenue Unauthorised expenditure approved without funding Rxxx (R500) Unauthorised expenditure - (R500 R500) The department is effectively reducing its allocation through the additional expenditure charged in the statement Bank overdraft - (R500 R500) Assuming full amount is written off 15

What are the implications - Type 2? 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; Statement of financial performance No entries Revenue and expenditure are not effected Statement of financial position Unauthorised expenditure - (R200 R200) Bank R200 The bank balance could be zero, if overdraft used to repay UE to revenue fund The additional funds received are used to clear the UE control account 16

What are the implications - Type 2? 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; Statement of financial performance Statement of financial position Revenue Unauthorised expenditure approved without funding Rxxx (R200) Unauthorised expenditure - (R200 R200) The department is effectively reducing its allocation through the additional expenditure charged in the statement 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) 22 Total variance: (46,791)

How much is the unauthorised expenditure (Cont.)? Is it the unauthorised expenditure: a) per the vote R46,791 b) per programme 2 R121,173 or both (a) and (b) R167,964 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 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

Analysis of programme 2 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

Analysis of programme 3 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: Received in total R17,427,581 Spent in total (R17,474,372) Total deficit /bank overdraft (R 46,791) Amount to be surrendered Saving on programme 1 R 5,669 Saving on programme 2 R 255,084 Saving on programme 3 R 68,712 Total to be surrendered R 329,465 Statement of financial position: Unauthorised expenditure R376,257 Bank overdraft R376,257 Total bank overdraft (after surrender) : R 376,257 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: Received in total R17,427,581 Spent in total (R17,474,372) Total deficit /bank overdraft (R 46,791) Amount to be surrendered Saving on programme 1 R 5,669 Saving on programme 2 R 10,342 Saving on programme 3 R 68,712 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

Conditional grants example 1 (Cont.) 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

Conditional grants example 1 (Cont.) Final appropriation Actual expenditure Variance Programme 2 (excl conditional grant) 19,085,045 19,573,791 (488,746) Current payment 17,697,296 18,126,064 (428,768) Transfers & Subsidies 1,267,977 1,308,292 (40,315) Payment for capital assets 119,772 126,742 (6,970) Payment for fin assets - 12,693 (12,693) 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

Conditional grants example 1 (Cont.) Unauthorised expenditure (488,746) Total allocation received 20,862,885 Total amount spent 21,147,197 Bank overdraft (284,312) Total overspending on P2 excl. conditional grant money Conditional grants to be surrendered (204,434) Voted funds to be surrendered - Total bank overdraft (488,746) 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

Conditional grants example 2 Final appropriation Actual expenditure Variance 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) Payment for capital assets 63,973 84,177 (20,204) 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) Payment for capital assets 54,463 42,294 12,169 Payment for fin assets - 12,693 (12,693) 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) Transfers & Subsidies - - - Payment for capital assets - - - 2.5 In-school sport & culture 31,648 27,886 3,762 Current payment 31,498 27,875 3,623 Transfers & Subsidies - - - 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 Transfers & Subsidies 824,573 822,713 1,860 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

Conditional grants example 2 (Cont.) Final appropriation Actual expenditure Variance Programme 2 (Total) 20,862,885 21,447,197 (584,312) 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 1,150,872 (117,140) Payment for fin assets - 12,693 (12,693) 37

Conditional grants example 2 (Cont.) Final appropriation Actual expenditure Variance Programme 2 (excl conditional grant) 19,085,045 19,573,791 (488,746) Current payment 17,697,296 18,126,064 (428,768) Transfers & Subsidies 1,267,977 1,308,292 (40,315) Payment for capital assets 119,772 126,742 (6,970) Payment for fin assets - 12,693 (12,693) Conditional grant 1,777,840 1,873,406 (95,566) Current payment 39,307 26,563 12,744 Transfers & Subsidies 824,573 822,713 1,860 Payment for capital assets 913,960 1,024,130 (110,170) Total 20,862,885 21,447,197 (584,312) 38

Conditional grants example 2 (Cont.) 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) The unauthorised expenditure is the total overspending on programme 2; 39

Conditional grants example 3 Final appropriation Actual expenditure Variance 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) Payment for fin assets - 12,693 (12,693) From the above analysis, there is no unauthorised expenditure; 40

Conditional grants example 3 (Cont.) Final appropriation Actual expenditure Variance 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 Payment for capital assets 119,772 110,742 9,030 Payment for fin assets - 12,693 (12,693) Conditional grant 1,777,840 1,873,406 (95,566) Current payment 39,307 26,563 12,744 Transfers & Subsidies 824,573 822,713 1,860 Payment for capital assets 913,960 1,024,130 (110,170) 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 ACCOUNTABILITY ARRANGEMENTS BETWEEM ACCOUNTING OFFICER (AO) AND THE EXECUTIVE AUTHORITY (EA) EXECUTIVE AUTHORITY ACCOUNTING OFFICER & EXECUTIVE AUTHORITY ACCOUNTING OFFICER ANY DIRECTIVE FROM EA TO AO HAVING A FINANCIAL IMPLICATION MUST BE IN WRITING 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 AO SHALL BE HELD ACCOUNTABLE FOR THE UE IF THE AO FAILED TO INFORM THE EA IN WRITING OF THE LIKELILHOOD OF INCURRING UE 43

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