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Auditor-general flags lack of accountability as the major cause of poor local government audit results

PRETORIA – The auditor-general (AG), Kimi Makwetu, today released yet another set of municipal audit results that show an overall decline in audit results for the 2017-18 financial year.

• Releasing his latest report on the performance of South Africa’s municipalities, Makwetu said this undesirable state of deteriorating audit outcomes shows that various local government role players have been slow in implementing, and in many instances even disregarded, the audit office’s recommendations.
• As a result, the accountability for financial and performance management continues to worsen in most municipalities.

This general report deals with the audit outcomes of local government for the financial year ended 30 June 2018. It precedes the amendments to the Public Audit Act, which became effective on 1 April 2019.

Accordingly, the requirements of these amendments will be applicable for the first time to audit reports issued for the financial years that ended on or after 31 March 2019.

These amendments introduce the concept of a material irregularity in audits performed under the Public Audit Act and, once a material irregularity has been identified, may result in a number of possible actions, including the referral of the material irregularity to an investigative body, where there are complex and intricate matters not capable of being concluded directly by the audit.

Once a recommendation is made through an audit such will be required to be effected within a period prescribed by the auditors, failing which, a binding remedial action will be issued by the auditors to the accounting officer to correct the identified material irregularity, also within a prescribed period. The last recourse, after all the above steps are exhausted, will be for the Auditor-General to consider initiating a process that would trigger a certificate of debt in the name of an accounting officer or accounting authority associated with such material irregularity, once all the relevant, appropriate evidence has been secured.

Unheeded accountability advice yields undesirable audit results

• Makwetu’s office has, as early as 2013, consistently cautioned those charged with oversight and governance about administrative lapses that could cripple local government and its ability to deliver services to the citizenry.
• Since the current local government administration took office, the governance issues affecting municipalities have continuously been flagged with them in various formats, including individualised meetings with the leadership and through the AG’s 2016-17 general report, but the latest set of results indicates that this constant advice has largely been ignored.
• The AG notes that there were municipalities across the country that were able to consistently achieve a clean audit status even though they were faced with similar challenges than their counterparts.
• Twelve of these municipalities were in the Western Cape and included the local municipalities of Swellendam, Witzenberg, Bergrivier, Breede Valley, Cape Agulhas, Cederberg, Hessequa, Matzikama and Overstrand.
• Other municipalities that consistently perform well were Senqu (Eastern Cape), Midvaal (Gauteng) and Okhahlamba (Kwazulu-Natal).
• The best practices at these municipalities included stable leadership that is committed to a strong control environment and effective governance.
• Continuous monitoring of their audit action plans in order to timeously address any audit findings and a pro-active approach to dealing with emerging risks were also common features at these municipalities.
• It is unfortunate that these limited excellent practices are often dwarfed by the pervasive control and monitoring failures evident at a significant number of other municipalities across the country.
• The impact is that the fiscal resources placed at their disposal are either misused or not properly accounted for as required by public finance management laws.
• The trickle-down effect of these failures on services has been glaringly evident over the years across a number of municipalities, large and small.
• Evidence of these is largely incomplete projects, unsupervised projects, lack of maintenance of significant service delivery infrastructure and haphazard road maintenance projects and infrastructure.
• Contained in the detail of this report are examples of these deficiencies and municipalities where they are prevalent.

A. Accountability in local government continues to decline

• The central message of the AG’s latest report is that as a result of unheeded advice to implement his office’s recommendations, local government “accountability for financial and performance management continues to deteriorate”.
• The report lists the following as the main indicators of the deteriorating accountability during the year under the review:

1. Audit outcomes regressed and irregular expenditure remains high

• The Auditor-General of South Africa (AGSA) audited 257 municipalities and 21 municipal entities for the 2017-18 financial year.  
• To ensure reporting simplicity and targeted messaging, the latest report focuses on only the municipalities.
• The outcomes of the municipal entities are included in the report’s annexures (available on www.agsa.co.za).

Overall audit outcome regression

• Of the audited municipalities, the audit outcomes of 63 regressed while those of 22 improved.
• Only 18 municipalities managed to produce quality financial statements and performance reports, as well as complied with all key legislation, thereby receiving a clean audit.
• This is a regression from the 33 municipalities that received clean audits in the previous year.

Poor quality of submitted financial statements and performance reports

• Makwetu explains that credible financial statements and performance reports are crucial to enable accountability and transparency in government.
• He reveals that most municipalities still continue to fail in these areas.
• He states that: “Not only did the unqualified opinions on the financial statements decrease from 61% to only 51%, but the quality of the financial statements provided to us for auditing was even worse than in the previous year.
• Only 19% of the municipalities could give us financial statements without material misstatements.
• ” Makwetu adds that the performance reports of 65% of the municipalities that produced such reports had material flaws and were not credible enough for the council or the public to use.

Highest level of non-compliance with key governance laws since 2011-12

• The AG reported material non-compliance with key legislation at 92% of the municipalities, an increase from 85% in the previous year.
• Municipalities with material compliance findings on supply chain management increased from 72% to 81%.
• Both these are the highest percentages of non-compliance the AGSA has reported since 2011-12.

Irregular expenditure remains high, but is lower than in previous year

• Makwetu reports irregular expenditure that still remains high, but decreased from R29,7 billion to R25,2 billion after the record highs in the previous year.
• He says the reported total includes the R4 billion irregular expenditure of those municipalities of which the audits had not been completed by the cut-off date of his report.
• “The amount could be even higher, as 46% of the municipalities were either qualified on the incomplete disclosure of irregular expenditure or disclosed in the financial statements that they did not know the full extent of irregular expenditure,” he explains.
• In total, R17,3 billion (81%) of the irregular expenditure related to expenses incurred in 2017-18 – representing 5% of the local government expenditure budget. This total includes R6,4 billion in payments made on contracts irregularly awarded in previous years – if the non-compliance was not investigated and condoned, the payments on these multi-year contracts continue to be viewed and disclosed as irregular expenditure.

Delays in the tabling of annual reports to councils

• The Municipal Finance Management Act (MFMA) prescribes that municipalities should submit their annual reports to their respective municipal councils.
• The AG reports that by 31 May 2019, of all audits completed, only municipalities in the Gauteng, KwaZulu-Natal, Mpumalanga and the Northern Cape have fully complied with this MFMA prescript – all registering a 100% tabling rate.
• The following provinces have municipalities that had not tabled their reports by 31 May 2019:
  • North West and Eastern Cape have one municipality each that had not tabled
  • Two municipalities each have not tabled for Limpopo and the Western Cape
  • Free State has three municipalities that had not yet tabled.
• “The MFMA prescribes steps that must be taken by the municipal manager or mayor in the cases that the municipality is unable to meet the requirements to table its report to council.
• Furthermore, the Act also empowers the AGSA to submit the financial statements and the audit report of a municipality directly to the municipal council, the National Treasury, the relevant provincial treasury, the MEC responsible for local government in the province and any prescribed organ of state, should the mayor fail to table the municipal annual report,” the AG reminded.

2. Lack of consequences for transgressions and irregularities

• The report reveals that the recommendations made by Makwetu’s office to local government leadership last year to ensure that the basics were in place, thereby improving accountability and audit outcomes, did not receive the necessary attention at most municipalities.
• And there were largely no consequences for those who flouted existing legislation, as highlighted by the key findings below:

Failure to investigate findings

• The audit office’s consistent and insistent calls for local government leadership to effect consequences for transgressions and irregularities were not heeded.
• The AG reports material non-compliance with legislation on implementing consequences at 60% of the municipalities – an increase from 54% in the previous year.

Failure to take action on findings

Auditors found the following:

• A total of 74% of the municipalities did not adequately follow up allegations of financial and supply chain management misconduct and fraud, and 45% of the municipalities did not have all the required mechanisms for reporting and investigating transgressions or possible fraud.
• Inadequate follow-up was also evident in municipalities again not paying sufficient attention to the findings on supply chain management and the indicators of possible fraud or improper conduct that Makwetu’s office had previously reported and recommended for investigation.
• “More than half of the municipalities did not investigate any of the findings reported. Where investigations did take place, 34% of the municipalities failed to resolve all of the findings satisfactorily,” says the AG.
• At 62% of the municipalities, the council failed to conduct the required investigations into all instances of unauthorised, irregular and fruitless and wasteful expenditure reported in the previous year – a slight regression from 60% in the previous year.
• The AG further notes, “sufficient steps were also not taken to recover, write off, approve or condone unauthorised, irregular and fruitless and wasteful expenditure as required by legislation.
• As a result, the year-end balance of irregular expenditure that had accumulated over many years and had not been dealt with totalled R71,1 billion, while that of unauthorised expenditure was R46,2 billion and that of fruitless and wasteful expenditure was R4,5 billion”.

3. Increasingly difficult environment for auditing

• The AG raised his concern about the continued difficulties facing his audit teams when conducting their audit work.
• “The audit environment became more hostile with increased contestation of audit findings and pushbacks whereby our audit processes and the motives of our audit teams were questioned,” says Makwetu.
• He also points out that in some municipalities, pressure was placed on audit teams to change conclusions purely to avoid negative audit outcomes or the disclosure of irregular expenditure, without sufficient grounds. Instances of threats to and intimidation of our auditors were also experienced in most of the provinces,” revealed the AG.
• He further disclosed that the persistent culture of not responding to audit recommendations not only affected his office, but has now extended to other accountability role players within municipalities – such as internal audit units, audit committees and municipal public accounts committees.
• “At some municipalities, the recommendations of these role players were not implemented, which made it difficult for them to have a positive impact on the audit outcomes.
• It is also worth noting that some municipalities did not implement the programmes initiated by the treasuries and cooperative governance departments to influence positive audit outcomes and service delivery initiatives.
• Some municipalities did not respond to these key departments’ support initiatives aimed at improving governance in local government in general and at the ailing municipalities in particular” he adds
• Makwetu re-iterated that leadership should set the tone for accountability, and if audit outcomes are not as desired, energy should rather be directed at addressing the system relapses identified instead of coercing the auditors to change their conclusions.

Negative impact of accountability failures on the lives of citizens

• Accountability failures in local government have a negative impact on the lives of citizens, warns Makwetu.
• “Where there is no accountability, municipalities struggle or fail to meet their objectives. This in turn adversely affects the citizens who rely on municipalities for their service delivery.”
• The AGSA’s audits highlighted two key areas of impact, namely:

Financial health of municipalities

• The inability to collect debt from municipal consumers was widespread.
• In these circumstances, it is inevitable that municipalities will struggle to balance their books. In total, 34% of the municipalities disclosed expenditure that exceeded their income (deficit) – the total deficit for these municipalities amounted to R5,8 billion.
• The financial woes of local government also weighed heavily on municipal creditors.
• The impact of this inability to pay creditors was most evident in the huge sums owed for the provision of electricity and water to Eskom and the water boards, respectively.
• Five provinces responded to the impending financial crises through provincial intervention by placing a total of 18 municipalities under administration.

The AG points out that: “While the poor economic climate does play a role in the deterioration of municipalities’ financial health, many are just not managing their finances as well as they should. For example, we are reporting fruitless and wasteful expenditure that amounted to R1,3 billion for the period under review. This is effectively money lost. The potential R1,6 billion loss of investments made with the VBS Mutual Bank also significantly weakened the financial position of the 16 affected municipalities, and had an impact on the delivery of infrastructure and maintenance projects.”

Shortcomings in the development and maintenance of infrastructure

• The AGSA’s audits again identified a number of shortcomings in the development and maintenance of infrastructure by municipalities.
• These included the underspending of grants, delays in project completion, and non-compliance with supply chain management legislation.
• Makwetu cited as a key concern “the lack of attention paid to water and sanitation infrastructure”.
• He says the condition of water and/or sanitation infrastructure was not assessed by 32% of the municipalities responsible for water and sanitation; and almost half did not have policies for maintenance.
• “It is not unexpected then, that 39% of the municipalities that disclosed their water losses reported losses of more than 30%, resulting in an overall loss of R2,6 billion.”