Background document on CIPRO 2008/09 annual report and ECM tender, May 18 2010

Today, at the meeting of the Standard Committee on Public Accounts, Scopa, the Companies and Intellectual Property Rights Office (Cipro) had to account for a qualification in its 2008/09 annual report as well as the report of the Auditor-General released in March 2010.

Cipro has come a long way since 2005/06 financial year when the Auditor-General gave Cipro the lowest possible grade, namely a disclaimer. At this time the Auditor-General was unable to express an opinion on the financial statements due to the weak internal control environment, which resulted in policies and procedures being either non-existent or not strictly followed or enforced.

Since then, Cipro has developed a turnaround strategy in the 2006/07 financial year, to ensure that sound financial management principles and proper financial controls were introduced. The objectives of this strategy were to ensure that all the issues raised by the Auditor-General during the previous report were addressed. This resulted to CIPRO being given an unqualified report for 2006/07 and 2007/08.

Although CIPRO continued to implement its plan and controls, it received a qualification in 2008/09 which was by its nature very technical, the reason for the qualification relates to the manner in which Cipro records its revenue as it deviates from the relevant South African statements of Generally Accepted Accounting Principles (SA GAAP) in the accounting treatment of Annual Return Revenue. To address this qualification, the following actions were taken and implemented:

* A task team was established in September 2009 to simplify the deregistration process of companies and close corporations by reducing the number of letters to be issued as well as automate certain processes
* A general marketing/awareness drive was conducted to sensitise companies, close corporations and stakeholders on the duty to comply with annual returns and the consequences of non-compliance. Lists of non-compliant companies were published on the CIPRO website and there were general advertisements on radio and in the printed media to inform companies that they would be referred for deregistration for failing to submit annual returns
* All non-compliant companies and close corporations since inception of annual returns, and up to 30 April 2010 have been referred for deregistration. The process is still continuing for companies and close corporations
* The annual return lodgement and support systems, applications and processes are being reviewed in order to improve the quality of the systems, applications and processes and subsequently the integrity of the CIPRO database.

The referral of non-compliant companies for deregistration because of non-compliance with annual returns will assist CIPRO to more accurately project the expected volumes of annual returns, and thus the accompanying income to be received. The outcomes of the project will, over time, result in a more accurate database of active companies and close corporations and will assist CIPRO to accrue for annual return revenue, as required in terms of the relevant accounting standards.

The Minister of the Department of Trade and Industry (dti), appeared before Scopa today, 18 May 2010, to discuss the 2008/09 annual report and the qualification relating to this report, however, given the dti's recent engagement at the Portfolio Committee on Trade and Industry, the minister had committed to ensuring that the dti would be better placed to discuss matters relating to the ECM tender based on a forensic investigation commissioned in October 2009. The commissioning of the forensic investigation was taken based on the report of the Auditor-General which stipulated that the dti needed to act as follows:

* Determine the reasons why the financial sustainability of the successful bidder was not assessed before the contract was awarded
* Assess the significance of non-compliance with the procurement process in awarding the contract to the successful bidder and regularise accordingly
* Determine if the successful bidder had received information not available to other bidders, in an appropriate manner. Based on the outcome, the contract with the successful bidder should be reconsidered and those responsible should be held accountable
* Determine the reasons for the variances in the points scoring between the two evaluation teams," said by the Minister of the dti, Dr Rob Davies.

The minister continued that based on the recommendations from the report of the Auditor-General, he then decided to appoint a company to conduct a further investigation into the recommendations made in the Auditor-General's report. The scope of this investigation included amongst others:

* An investigation into allegations of possible involvement of CIPRO senior and other officials in the improper conduct relating to meetings with bidders outside of the normal rules and processes
* An investigation into alleged improper conduct or irregularities by CIPRO officials regarding the awarding of the ECM tender
* Assist in the legal process to prosecute perpetrators or disciplinary action against perpetrators
* Investigate allegations relating to the involvement of CIPRO officials in corrupt and fraudulent practices.

This forensic report has highlighted, amongst others, a number of key issues:
* Deviation from procurement processes as followed by both State Information Technology Agency (SITA) and CIPRO resulting in a potential risk of non-compliance, as a result of the conduct of certain individuals
* The investigation revealed that certain relationships existed between various parties involved in the procurement of the ECM system
* The leakage of confidential information
* That CIPRO officials are involved in fraudulent and corrupt activities, leading to duplication of companies, removal of directors without the company's knowledge, opening of new accounts for companies and the transfer of fake companies created through the CIPRO processes
* That the CIPRO award of the IT tender for the Enterprise Content Management (ECM) has irregularities
* That CIPRO officials who raised concerns about these allegations were being victimised by the management of CIPRO.

The Department of Trade and Industry has made a series of interventions in CIPRO since having had sight of the information relating to these irregularities. The minister has personally been involved in these interventions. Despite evidence of the relevance of ECM to CIPRO, doubt has been cast on the system that CIPRO has procured. The ECM system has been procured to improve the creation, management, sharing, storage and retrieval of information within CIPRO for officials to carry out their responsibilities in the most efficient manner. This system will facilitate access to records and information and is intended to optimise procedures relating to security, control and data integrity. This will also allow CIPRO to reengineer business processes and workflows going forward. The new Companies Act will lower the requirements to register companies and CIPRO is moving into the commission. This will be in place by 1 October 2010, with revised processes and the minister has made a commitment to ensure that CIPRO is turned around. The department has placed the CEO, Mr Keith Sendwe and the CIO, Dr Michael Twum-Darko on suspension and have notified Valor-IT that the dti intends repudiating the ECM contract.

Statement issued by the Department of Trade and Industry, May 18 2010

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