Local Government Audit Outcomes: Office of the Auditor-General and Department of Cooperative Governance briefings

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Cooperative Governance and Traditional Affairs

02 September 2014
Chairperson: Mr M Mdakane (ANC)
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Meeting Summary

The Office of the Auditor-General, Department of Cooperative Governance, briefed the Committee on audit outcomes of local government. Root causes of qualification were slow responses from political leadership and lack of consequences for poor performance. There had been slight improvement since 2008/09, with progress made in KZN, Gauteng and the Western Cape. For improved assurance, the drivers of internal control had to improve. Those were leadership, financial and performance management, and governance. Senior managers had to implement basic financial and performance management controls. Internal audit and audit committees had to encourage submission of regular financial and performance reports. Municipalities had to improve internal control, governance and accountability.

The Department of Cooperative Governance (DCoG) briefed on municipal audit outcomes. There had been a reform programme for financial management in local government which resulted in the Generally Recognised Accounting Practice (GRAP), which was geared to professionalisation. The previous administration introduced the “Operation Clean Audit 2014” programme, but municipalities were often confused about how to obtain a clean audit. The DCoG and the Treasury considered simplifying the compilation of annual financial statements. There was increased transparency in financial management and reporting. There were challenges related to the physical verification of assets due to deficient asset registers and lack of supporting documentation. The supply chain management process and revenue management had to improve. There was a prevalent use of consultants to prepare annual financial statements. Municipalities were encouraged to strive for unqualified audit opinions whilst improving service delivery.

In discussion, there was concern over the lack of assurance provided by the Portfolio Committee and the NCOP. It was felt that reliance on consultants compromised the independence of municipalities. There was concern about the financial health of municipalities, and inability to deliver. Compliance was questioned. The salience of leadership was stressed. There was some dissatisfaction among the Committee with the rate of progress. Lack of consequences for poor performance and/or corruption received attention. The inability of small municipalities to attract and afford necessary skills, was commented on. It was felt that district municipalities could do more to assist local municipalities. There was concern about unqualified CFOs and municipal managers. It was asked how the Department followed up on AG recommendations. It was remarked that there were bad audit outcomes because there was too much to be complied with. A DA Member remarked that local government officials were divided along party lines, and an ANC Member called a point of order about that. The Portfolio Committee would commit itself to providing assurance through oversight.

Meeting report

Office of the Auditor-General and Department of Cooperative Governance briefings on local government audit outcomes
Mr Vusi Msibi, Corporate Executive, Office of the Auditor General South Africa (AGSA), indicated that root causes of qualification were slow responses from political leadership and lack of consequences for poor performance. When key positions were vacant it contributed to audit outcomes. There had been slight improvement since 2008/09. Disclaimers were addressed. Progress was made in Gauteng, the Western Cape and KZN. The six risk areas that had to receive attention were supply chain management; quality of performance reports; human resource management; quality of submitted financial statements; information technology controls, and financial health.

For improved assurance, drivers of internal control had to improve, relating to leadership, financial and performance management, and governance. Senior managers had to implement basic financial and performance management controls. Municipal managers had to support a strong control environment. Internal audit and audit committees had to encourage submission of regular financial and performance reports. Monitoring actions had to be taken in the case of known transgressions with appropriate resources assigned to the six risk areas. District municipalities had to coordinate development and delivery and play a supporting role in financial management. Best practices had to be shared with local municipalities, and daily financial and performance management had to be embedded. Municipalities had to improve internal control, governance and accountability.

Mr M Hlengwa (IFP) referred to levels of assurance. He said that he was taken aback. He asked how it could be improved. It was not inspiring confidence. The NCOP and the PC were not giving assurance.

Mr M Mapulane (ANC) was likewise concerned about the fact that there was no assurance from the Portfolio Committee. Expectations had to be defined regarding what levels of assurance were required from Parliament.

Mr Msibi replied that the Portfolio Committee was also a player. Accountability lay with senior management, who were responsible for the budget. The role of the auditor was to provide independent assurance. The AG engaged with legislators in the provinces. There was a disability programme for audit weaknesses. The legislature was engaged to establish the level of assurance. The PC and the NCOP legislated, and the AG related at the provincial level.

Mr Hlengwa referred to the six risk areas under supply chain management. Levels had to be assisted.

Mr Msibi replied that the role of the audit office was to audit and report. Supply chain management, financial health, policy and recommendations were not the AG official mandate. Weaknesses in the system and risk issues were identified.
The extent of repeat findings was looked at. Leadership had to have action plans. The AG audited supply chain management, but could not see the service provider. Management had to declare that good service was paid for. When the AG opined that there was no competitive bidding, the internal audit committees had to see to it that three quotations were received. If the same issue cropped up for three years, there had been a lack of response by leaders.

Mr Hlengwa remarked that there was juxtaposition between the financial health of municipalities, and the fact that municipalities were being assisted by consultants at huge cost. He asked about the internal capacity of municipalities. The situation with consultants was said to have improved, but there was still heavy reliance on them. He asked if consultants were qualified and reliable. Municipal independence was compromised by high expenditure on consultants.

Mr Msibi replied that the AG did not say no to consultants, but rather asked how they were being managed. Transfer of skills and deliverables was noted. Financial health was related to control issues. Municipalities without debt collection capacities were at risk.

Mr Hlengwa noted that there was an increase in the number of outstanding auditees. He asked how that could be corrected.

Mr K Mileham (DA) noted that slide 36 had not been covered in the briefing. The slide was a shocking indictment of the inability of municipalities to deliver. 70 percent of the auditees had more than 10 percent irrecoverable debt. There was underspending on conditional grants. Creditors were not paid within 90 days. It had been part of the 2009 operation clean audit to improve payment of creditors. The Department and the Treasury had to enable municipalities to get clean. He asked what was being done. There had been no progress in five years.

Mr Msibi replied that the AG could report on internal control deficiencies. The AG selected contracts to audit, and could not get supporting documents. Audit issues were addressed at the level of senior management. Risks in the environment were pointed out. Root causes were a number of variables. There was a lack of supply chain management skills.

Mr Mileham said that there was good legislation in the Municipal Finances management Act (MFMA), but compliance with the Property Rates Act was not good. He asked how compliant municipalities were with tabling their budgets.

Mr Mileham expressed concern over the high level of vacancies in senior management and the high turnover rate.

Mr Mileham noted that the number of municipal managers and CFOs who did not meet minimum competencies was 33 percent. Improvement of performance management still had a long way to go. He asked what steps were being taken.

Mr N Masondo (ANC) referred to qualification on supply of information on property infrastructure and equipment. He asked what the rate of improvement was, and proposals for the collection of data.

Mr Masondo noted that leadership was seen as a driver of internal control, but leaders were slow to respond. There were many organisations who were talking leadership. Successful companies produced leaders. Any proposals to improve leadership had to be both broad and specific. There had to be leadership to manage resources.

Mr Masondo wondered if IT was in fact a burden, not a solution. He asked about the rate of improvement over the preceding five years.

Mr Msibi replied that there were solutions found to IT risks. There was progress. A governance framework had been developed. The AG appreciated the lack of IT skills. There had to be minimum competencies to meet legal requirements, and reports on performance information.

Mr B Bhanga (DA) asked who intervened when there was no financial management. There was a lot of media comment on the matter. Many municipalities had commissioned investigations into finance management reports. Different companies had made recommendations, but there was no action. The DCoG had to answer. He asked who was made liable when there was fruitless expenditure. The Minister had taken action, but the question was when it would reach a municipality like Nelson Mandela municipality.

Mr Bhanga said the country was twenty years into democracy. It was said that there had been improvement since 1994. But some elements were only introduced at a later stage. There were compliance challenges in the management system. There was a lack of work rules. The question was what progress had been made with service delivery on the ground.

Mr Msibi replied that there was a lack of skilled managers to manage conditional grants. If a budget was tabled, there had to be budget control. Managers and leaders had to address issues. There had to be compliance with property rates. The AG could not do 100 percent audits on the ground. Key risk areas were covered. The results of investigating reports could not be made public.

Mr Bhanga remarked that the Department of Agriculture never had a disclaimer, and yet millions had been stolen. There was a festival of stealing but everything was reported to be in order.

Mr Bhanga asked when actions to ensure consequences would be seen, especially in the Northern Cape, the Eastern Cape and North West. There had to be a template for action.

The Chairperson told Mr Bhanga that he had just given his own audit opinion.

Mr Mapulane said that the picture of municipalities was not rosy, and not only financially. Improvements stated were welcomed, but he would have liked a comparison over five or ten years. He asked what the movement was, and whether there was real progress twenty years into democracy. Departments set performance targets. The Department had to state what it followed up.

Mr Muthotho Sigidi, DCoG Deputy Director General: Intergovernmental Relations, replied that the provincial committee looked at every issue raised by the AG. Major issues in each province were identified. The back to basics initiative was a response to the situation.

Mr Mapulane noted that the municipalities of KZN, Gauteng and the Western Cape had done well. There was a highly developed concentration of skills. There was a correlation between levels of development, concentration of skill, and performance. Resources were there in municipalities, but small municipalities had to attract skills. He asked if the AG and the Department recognised the importance of that.

Mr Mapulane congratulated the office of the AG for executing the mandate well. Other chapter nine institutions played more to the gallery. The AG had done painstaking work well.

Mr M Matlhoko (EFF) added that chapter nine institutions had to have teeth to bite, to protect the Constitution.

Mr Matlhoko referred to findings on supply chain management (slide 29). Problems had been identified, but there was no action plan. The AG office had to look into remedial actions.

Mr Matlhoko noted that previous recommendations were not implemented, and internal control deficiencies had not improved. The AG had to look at control measures, to protect the public.

Mr A Mudau (ANC) asked about audit outcomes for section 139 municipalities.

Mr Sigidi replied that there were 12 municipalities under section 139.

Mr Mudau remarked that small municipalities did not have money to pay municipal managers. He asked about the situation with regard to asset registers. Municipalities were slowly improving.

Mr E Mthethwa (ANC) noted that three provinces were doing well, but in others there was lack of leadership, non-compliance and financial ill-discipline.

Mr N Khubisa (NFP) asked about steps to assist provinces who had not done well. He asked how many municipalities were under administration. There had to be clear targets and controls in place. Proper quality in supply chain management was a problem.

Mr Khubisa referred to fraud and corruption. During 2012/13 half a billion rand in tenders had gone to family companies owned by councillors. Families obtained tenders. He asked how often the AG looked into the matter with municipalities. There had to be constant attention to the matter. A plethora of issues were involved in the turnaround process.

Department of Cooperative Governance briefing on municipal audit outcomes
Ms Lereto Thuane, Chief Director: Municipal Audit Outcomes at the DCoG, stated that there was a reform programme for financial management in local government. There had been a conversion from the previous reporting framework to the standards of Generally Recognised Accounting Practice (GRAP) which was geared to professionalisation. The GRAP standards brought increased complexity in reporting for property, infrastructure and equipment. 36 percent of municipalities received qualifications in that regard. The previous administration introduced a programme called “Operation Clean Audit 2014”. Some municipalities were still confused on how to achieve clean audits. There was also the perception that a clean audit implied service optimisation, which was in fact not the case.

The terminology of unauthorised, irregular and fruitless and wasteful expenditure was often misunderstood by the public. Irregular expenditure did not necessarily imply fraud and corruption. The Department, together with National Treasury, was considering simplifying the compilation of annual financial statements. A key achievement was improved transparency in financial management and reporting. Municipalities were keeping better records of their operations, which had led to a reduction in disclaimers. There were challenges related to the physical verification of assets due to incomplete asset registers and a lack of supporting documentation. Municipalities would be capacitated to implement adequate supply chain management processes. 25 percent of municipalities had deficient revenue management practices. There was a prevalent use of consultants by municipalities in the preparation of annual financial statements. Improved audit outcomes were realised when there was extensive assurance provided by key role players. Those were management/leadership, and internal and external independent assurance and oversight. Emphasis would be placed on municipalities that were qualified or received adverse or disclaimer opinions for further support and capacitation. Municipalities had to strive for unqualified audit opinions over the medium term while focusing on improved service delivery outputs.

Ms N Mthembu (ANC) remarked that consultants had to transfer skills. Some municipalities could not perform because they were not independent. Rural municipalities could not attract needed skills. She asked what the Department did when there was no revenue to pay for skills. There had to be a hub of skills. District municipalities could bring relief to local municipalities. After the 2011 municipal elections new municipalities did not appoint senior managers. Good governance was needed for financial health.

Mr Bhanga said that his experience in the fourth Parliament had been that one heard new things in the first year, but after that things became old. The fundamental weakness of maladministration was not following procedures and a lack of consequences. Malpractices had cost the country R863 billion over the preceding 20 years. There had previously been a governance commission that prescribed actions to be taken, but that was a long time ago. Problems with supply chain management had always been known, but the question was what actions were being taken. The MFMA was an intervention. He asked if it was functioning.

Mr Bhanga asked what tangible actions were taken against disclaimers. If there were no solutions, the problem would still be there in the following year. There had to be practical actions for the MFMA to work. Nelson Mandela municipality was good in the beginning, but after five years it collapsed into being one of the worst performing municipalities. There were impacts on all South Africans who needed service. There was an inability to take action against corruption. The Committee had to be told what concrete actions it could perform to assist collapsed municipalities in the Eastern Cape.

Mr Mapulane returned to his earlier question about setting targets for clean audits. It was possible for the AG to identify trends and areas that needed intervention. There had to be scientific tracking of what needed to be done. The PC had to pronounce on minimum competencies.

Mr Mapulane referred to the AG statement that some CFOs and municipal managers were unqualified. If officials could not comply, they had to be taken out.

Mr Michael Sass, Accountant-General, National Treasury, replied that labour laws prevented firing someone because that person was not qualified. There was a process to go through that could take years. The solution was to make sure that minimum competency was in place when new appointments were made.

Mr Mapulane asked if that meant that nothing could be done about someone who was already appointed without minimum competency. He asked if nothing could be done legally.

Mr Sass replied that many had been appointed who could not be retroactively dismissed. There was only the lever of poor performance that resulted in disciplinary action. Stronger action was needed, but it would not do to answer wrong with another wrong.

The Chairperson said that there was hope.

Mr Mapulane noted that the AG reported progress. He asked how the Department followed up on AG recommendations about areas that were lagging behind. It was not a direct competency of the Department, but there could be cooperation with provincial departments for interventions in areas mentioned by the AG.

Mr Mapulane remarked that all who had worked in local government knew how hard it was to comply with legislation and to regulate. A review had to be embarked on. There were bad audit outcomes because there was too much to comply with. He agreed with Mr Masondo about a correlation between a clean audit and the level of service delivery.

Mr C Matsepe (DA) remarked that the DCoG could take drastic steps to replace municipal officials. District municipalities dictated who got posts. There was division along party lines. Each group wanted its own person. People were appointed to deal with tenders for kickbacks. HR managers came under pressure about who to appoint.

Mr Masondo called a point of order. Mr Matsepe could write it down and submit it.

Mr Bhanga said that political interference impacted on leadership. It contributed to the lack of qualifications.

The Chairperson said that administration had to be separate from political leadership. Political leaders were not supposed to instruct.

Mr Mthethwa asked that Members refrain from naming political parties. It was not in order to talk about people who were not there.

The Chairperson said the example Mr Matsepe had made, was understood. The ANC fought corruption and fraud. Progress to nine percent clean audits was a step forward but things were still moving slowly. The PC was not doing enough oversight.

Mr Sass stated that transfer of skills was important, and that a transversal contract was desirable. Consultants had to be seen as friends. If a municipality did not have a CFO, there was nobody to assume an oversight role. There were challenges of misinterpretation of what had to be done. Values were not assigned to the asset register. It had to be ensured that there was someone to transfer skills to. Consultants were paid a retention fee, but they had to show that skills transfer had been done.

Mr Sass referred to the creation of hubs. The AG could work with the Department to assign a bigger role to district municipalities, so as to be able to assist local municipalities. There was not necessarily a link between audit outcomes and service delivery. Audit outcomes were not a determinant in that sense. There was a need for clear targets. All aspired to an unqualified audit, but it was important to at least get the basics right.

Mr Vusi Madonsela, DCoG Director General, remarked that the point raised by Ms Mthembu was important. District municipalities had to assist those municipalities who did not have the revenue to afford skills. The Department would come with a detailed presentation about the back to basics initiative. A local government summit was planned at which the initiative would be tabled. Data gathering had commenced. The Minister was visiting Mpumalanga on that day. Intervention strategies had to respond to conditions on the ground. There were complaints from municipalities about overregulation. There was a plethora of legislation. The intention behind the legislation was to ensure that there were no loopholes. The Department agreed that gaps had to be closed, but there was overregulation. A review was needed. What was essential could remain. But it had to be known what local government was doing on a daily basis. The intention behind legislation was noble, but things had to be made easier.

The Chairperson said that there had to be a discussion on the matter. The back to basics initiative would be discussed the following week. The Committee had not yet looked at traditional leadership.

Mr Mileham said that the issue of debt recovery by municipalities was supposed to have been discussed in two previous meetings. It was owed to municipalities to discuss it. He suggested that it be brought up the following week, with reference to debt recovery strategies. Often it was government departments that did not pay municipalities.

The meeting was adjourned.

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