Lottery corruption: Has the Auditor General been missing in action?

Not a single dodgy deal uncovered by reporters has been dealt with by the state watchdog

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The National Lotteries Commission is embroiled in scandals. Yet, except for one technical finding, the Auditor General has been giving this state enterprise a clean bill of health. We asked the Auditor General if it is doing its job properly. Photo: Ashraf Hendricks

  • News publications, Members of Parliament and Minister Ebrahim Patel have raised concerns about governance at the scandal-ridden National Lotteries Commission (NLC).
  • Yet, except for 2016, the NLC has received clean audits.
  • Here are answers to our questions sent to the Auditor General to understand why it has not uncovered the problems that we and others have found.

In the last two years various reporters, especially Raymond Joseph for GroundUp and Anton van Zyl for the Limpopo Mirror, have uncovered numerous examples of misspending of public money by the National Lotteries Commission (NLC). We have published about 90 stories that you can read here.

But why, we asked, had the Auditor General not uncovered any of this? Why has the public had to depend on reporters, with much more limited access to information, to report dodgy deals that to our minds should have been found by the official state body responsible for ensuring adherence to the Public Finance Management Act (PFMA)?

For example, GroundUp has revealed how the NLC COO’s family benefited from NLC grants, how R8 million was spent on a Facebook page, and how dormant organisations have been hijacked in order to receive tens of millions of rands in NLC grants. NLC projects chronically fail to deliver the essential services they often promise, like toilets.

These stories provide evidence that the NLC is riddled with corruption.

In the past six years, the NLC received five unqualified - or clean - audits from the Auditor General. The NLC received one qualified report in 2017/18 (despite NLC officials claiming otherwise), but this qualification did not relate to problems uncovered by GroundUp. Instead it dealt with a technical oversight about the incorporation of a body within the organisational framework of the NLC.

In its efforts to rebuff GroundUp’s reporting, the NLC has repeatedly brought the Auditor General into the dispute. NLC board members and executives have stated that the Auditor General has repeatedly given their stamp of approval to the NLC, implying that little or no corruption exists in the distribution of lottery grants.

On 1 August 2019 the NLC released a media statement (now deleted on the NLC’s website, but archived here) which makes the following claim: “The NLC has adequate controls in its grant-making processes. This is evidenced by the achievement of a clean audit for the past four years. The clean audit covers the grants specifically and it is important to note that the NLC has achieved 100% performance on all its targets.”

Likewise, in Parliament in November 2019, Professor Alfred Nevhutanda, Chairperson of the NLC Board, claimed (falsely) that the NLC had received five years of clean audits.

When asked by Parliament about the allegations raised by GroundUp’s investigations, Nevhutanda is recorded to have said: “The NLC had conducted an investigation …The Auditor General gave the NLC a clean audit and the investigations confirmed that … The NLC was among the ten best-run government entities in the country and was nominated for an award. The NLC did not protect itself; it acted according to the PFMA. The Board cooperated with the Minister, launched an investigation and compiled a report. The Minister wrote that nothing was found related to a conflict of interest … If a conflict of interest had been detected, the Chairperson and the Commissioner would have acted.”

In fact forensic investigators — appointed by Minister of Trade, Industry and Competition Ebrahim Patel to investigate a questionable R27.5 million NLC grant — have recently handed a dossier of evidence to police.

GroundUp sent questions to the Auditor General. We publish here the questions and the full answers received.

Our questions

  1. Has the Auditor General flagged any issues of poor governance, fraud, corruption or emphasis of matter concerns at the National Lotteries Commission or National Lotteries Distribution Trust in the last year? If so, what concerns have been flagged?
  2. Has the Auditor General had sight of GroundUp’s reporting on the NLC corruption, and will the Auditor General be engaging with these allegations?
  3. Would the Auditor General comment on the claims made in Parliament and the press by NLC officials? Do these statements accurately reflect the Auditor General’s position on the matter?
  4. If it is the case that the Auditor General “covers the grants specifically”, and that the NLC has adequate controls in its grant-making processes, then why has the Auditor General missed the extensive corruption that has been uncovered so far by GroundUp and the Limpopo Mirror? In short, what explains the Auditor General’s clean audits of the NLC?
  5. Has the Auditor General ever encountered evidence of wrongdoing in the grants allocation at the NLC, and if so, what were these cases and what did the Auditor General do?

  6. Has the Auditor General seen the investigation report referred to by Professor Nevhutanda?
  7. Is it true that the Auditor General has audited all grants projects, including pro-active grants?
  8. Do the audits examine who supplies NPO grantees (as in the Denzhe case linked above)?
  9. Has the Auditor General communicated with the NLC’s internal or external auditors, and if so, what communication has been received from these parties?
  10. KPMG was appointed to operate the whistleblowing Service of the NLC in October 2016. Does this auditing firm communicate any findings with the Auditor General?

  11. What process does the Auditor General follow when auditing the NLC? Specific outlining of the steps that the Auditor General takes to check the organisation as a whole, and also the grants would be desirable.
  12. What are the hard limits to the discoveries that the Auditor General can make when auditing the NLC, and do these limits account for the Auditor General’s lack of findings against the NLC?

  13. If not the Auditor General, then who is responsible for checking that grants issued by the NLC are not corrupt?
  14. With the gazetting of the new Auditor General bill, will the Auditor General have sufficient powers to investigate and report corruption at the NLC, if the Auditor General finds such behaviour?
  15. What steps should an official who discovers serious issues of fraud and corruption at a state owned entity take?

Auditor General’s response:

The aim of a regularity audit is to provide reasonable assurance that the financial statements fairly present the financial activities of an entity. Furthermore, work is performed to test the reliability of information provided on their performance for the year as well as testing for non-compliance with identified laws and regulations. Therefore, clean audits are indicative that basic controls and processes set for transactions and performance were adhered to. The main purpose is to provide a picture of the financial health and performance, including recommendations to improve the effectiveness of risk management, control, and governance processes.

To provide reasonable assurance, the audit is planned based on the detailed understanding the auditors have of the auditee, this includes understanding the control environment and assessing the risk profile. Risk is identified through environmental scanning, which includes media articles, investigation reports and interviews with the internal audit unit, the board and other key role players. Therefore, risks specific to the NLC were also established through the investigation report that was provided to the auditors in the 2018-19 financial year, discussion with amongst others internal audit and media articles, including those of Ground up. The risk identified informed the sample selection and the procedures that were performed to ensure appropriate response to the risks identified.

Based on these risks, some projects were selected and visited to verify the existence of the projects and recipients. Weaknesses that were identified through this procedure were communicated to management through the management report. This report is aimed at assisting management to implement corrective action as necessary and it is not a public document. None of the weaknesses identified were found to be material, resulting in the NLC receiving clean audit opinions since 2015-16 with the exception of 2017-18 where the NLC was qualified due to them not consolidating their financial statements as required.

The regularity audit process is not an investigation that employs different types of evidence-gathering techniques designed to focus on reconstructing the past financial transaction(s) for a specific purpose, such as proving the existence of fraud. As a result, the regularity audit does not test 100% of transactions, including projects. Furthermore, conflict of interest is tested to the extent that tests the involvement of management as directors in companies that receive grants. There is a limitation as the process would not enable testing for family and friends involved in companies that have benefited. As much as the audit process focuses on risk and in the event that fraud might be identified, it is difficult to identify fraud in cases where there is collusion.

It remains the responsibility of management and the executives to have systems in place to prevent and detect fraud and corruption. The previous minister requested an investigation into the activities of the COO in 2018-19 and, based on the outcomes of the investigation, no wrong-doing was identified. Subsequently, the Board and the current minister requested investigations into similar allegations in 2019-20. However, these reports are still pending due to the impact of the lockdown.

The amended Public Audit Act (PAA) expands the mandate of the Auditor GeneralSA beyond auditing and reporting to include powers of referral, remedial action and the issuance of certificates of debt to recover material financial losses reported as part of a material irregularity (MI). Although the amendments were effective from 1 April 2019, a phasing in of the requirements of the amended PAA is followed at selected audit engagements and based on the criteria of the selection used, the NLC did not make the current list of those auditees. Once the PAA is implemented and applied to the NLC, there must still be evidence of material non-compliance and a material financial loss before an MI exists. On the identification of an MI, the Auditor GeneralSA will be able, in line with the regulations and the act, to refer the MI to a public body, institute remedial action and issue a certificate of debt if the remedial action was not implemented.

TOPICS:  Corruption National Lotteries Commission

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