Local government audit outcomes: Auditor-General briefing

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Cooperative Governance and Traditional Affairs

04 August 2015
Chairperson: Mr M Mdakane (ANC)
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Meeting Summary

The Office of the Auditor-General of South Africa (AGSA) briefed the Committee on the local government audits for 2013/4. The audits examined three areas; whether the financial statements were a fair representation, and whether it together with the performance information was reliable and credible and complied with key legislation. Overall AGSA felt there was an improvement in audit outcomes, however it felt key role players should provide more extensive assurance, most notably, the oversight role on local government by the provincial portfolio committees.

AGSA said attention needed to be paid in the areas of key controls, risk areas and root causes. The presentation then looked at the audit outcomes in relation to the budgets of municipalities. It then looked at each of the province’s performance status, where attention should be paid, what progress had been made on commitments given in 2010 and which municipalities needed special attention. The presentation then moved on to look at the improvement in the quality of financial statements. AGSA provided a list of recommendations. The presentation then gave a list of key legislation that was not complied with (see p24) as well as the findings on SCM.

Irregular expenditure had decreased but was still significant. 99% of occurrences were caused by non compliance with SCM legislation. Fruitless and wasteful expenditure had decreased with 80% caused by late payments and interest on overdue accounts. There was a large increase in unauthorised expenditure from R8.5b in 2012/13 to R11.4b in 2013/14. 95% of the occurrences were caused by overspending of the budget because of poorly prepared budgets.

The presentation then moved on to look at the financial health of municipalities which showed a regression. The biggest challenge was filling the posts of Head of SCM. There was concern noted over the lack of record keeping and documents by municipalities which would stymie the effectiveness of the consultants. Attention should be paid to leadership, financial and performance management and governance. With regard to the status of Information Technology, the different financial accounting systems being used by municipalities presented a challenge. Controls that needed to be implemented were that security management systems, user access management controls and service continuity controls still needed to be designed.

Members were concerned that some of the numbers and associated percentages given in some of the slides did not add up. Members were concerned that a number of auditees had not followed up and addressed the root causes identified in the previous year. What was the current status of the ten auditees whose reports were not finalised? How much of the fruitless and wasteful expenditure was attributable to Eskom debt interest.

Members were concerned about the assurance provided by the provincial portfolio committees who were either dysfunctional or semi dysfunctional. Members said the levels of SCM non compliance were horrendous and it was not acceptable or right for senior public representatives not to perform. Members said consultants were being employed to do corrective measures in putting together financial statements but that this was losing sight of the actual problem which was that day to day record keeping and controls were not taking place. Consultants therefore would not credibly address municipal problems. To what extent were skills being transferred to build institutional capacity when consultants were being used? Members said municipalities that were still operating the same as they were five years ago and showing no improvement should be called before the Committee. Members questioned how the governance of municipalities could be regarded as right but the financial and performance management and leadership were not in place. Members wanted the names of the worst performing municipalities and what was being done to share best practices of the best performing municipalities with them? What has been the role of SALGA and other partners?

Members said the presentation was stale news as the information had been released weeks before and thought that the Committee would have been amongst the first to be engaged. Members were concerned that the issue of competencies was not a recommendation as people should not be appointed to key leadership positions who did not have the minimum competencies. Members said that an improvement in the audit outcomes of an organisation did not mean an improvement in the financial health of an organisation. The reporting was getting better not the financial health and slide 30 in fact indicated the financial health was getting worse. Were the figures reflected in slide 30 on financial health reflecting the same municipalities? If this was the case were they budgeting for deficits and losses and were they sustainable organisations? Regarding spending patterns, Members asked whether misuse of conditional grants like MIG funds for operational expenses was a cause for concern. What was the scope of this issue and how was it being addressed?

Members asked if the major metros were improving and were they making a profit. Cities were deemed to be doing well because of their size and because they were centres of attraction. Members said the report focussed on local government and not on provincial government and the performance of provinces. 

Meeting report

Briefing by the Office of the Auditor-General on local government audit outcomes
Ms Corne Myburgh, AGSA Business Executive responsible for COGTA National, said the municipal audits covered the period 2013/14 and examined three areas - that financial statements were a fair representation, and that it together with the performance information was reliable and credible and complied with key legislation. Overall there was an improvement in audit outcomes, however key role players should provide more extensive assurance, most notably, and oversight on local government by the provincial portfolio committees.

Attention needed to be paid in the areas of key controls, risk areas and root causes. Under risk areas, attention needed to be paid to the quality of the financial statements submitted as well as the quality of Supply Chain Management (SCM) submissions. Under root causes, attention needed to be given to the slow response time to correct issues, the inadequacy of performance reports submitted and the filling of vacant positions. She said there would be a slow improvement as long as there were no consequences for officials and therefore no change in their behaviour.

The presentation then looked at the audit outcomes in relation to the budgets of municipalities. They were grouped into those with fairly strong financial management which comprised municipalities in the Western Cape/ KZN/ Gauteng. Those with significant financial management were the municipalities in the North Cape/ Eastern Cape/ Mpumalanga. Municipalities with very weak financial management and weak controls were in Free State/ North West/ Limpopo. There had been improved outcomes in all provinces since 2007/8, except Mpumalanga province, which improved to a lesser degree.

She then looked at each of the province’s performance status, where attention should be paid, what progress had been made on commitments given in 2010 and which municipalities needed special attention. The Eastern Cape had shown some improvement but sustainability was a concern and attention needed to be paid to challenges. Gauteng had shown significant improvements in clean audits while Mpumalanga had shown a regression in outcomes.

The presentation then moved on to look at the improvement in the quality of financial statements. Mr Andries Sekgetho, Senior Manager at AGSA, said that of concern was that municipalities did not have accurate and up to date fixed asset registers. As long as this remained the case, there would be repeated qualifications and hence no progress would be recorded. The other areas of concern were receivables/revenue, because challenges with the billing systems of municipalities lead to contestations about how much was owed by whom. AGSA’s recommendations included that action plans be implemented and monitored and capacity constraints in finance units be addressed. The presentation then gave a list of key legislation that was not complied with (see p24) as well as the findings on SCM, where 58% underwent uncompetitive or unfair procurement processes. There were procedural challenges in providing the names of officials involved. The names were however given in the management report to municipalities so the portfolio committee could approach the municipality if it wanted to know the names involved.

Irregular expenditure had decreased but was still significant. The previous years’ irregular expenditure was not investigated at 113 auditees. 99% of occurrences was caused by non compliance with SCM legislation.
Fruitless and wasteful expenditure had decreased, but 94 auditees had not investigated the fruitless and wasteful expenditure of the previous year. 80% of fruitless and wasteful expenditure was caused by late payments and interest on overdue accounts. There was a large increase in unauthorised expenditure from R8.5b in 2012/13 to R11.4b in 2013/14. At 100 auditees, the unauthorised expenditure of the previous year was not investigated. 95% of the occurrences was caused by overspending of the budget because of poorly prepared budgets and 61% of this was due to incorrect budgeting of non cash items like depreciation etc. The AGSA gave a list of recommendations (p29) amongst which was the recommendation that the position of Head of SCM be filled by an official who had the required minimum competencies.

The presentation then moved on to look at the financial health of municipalities. This showed a regression. Municipalities had bigger overdrafts, recorded bigger deficits and had bigger net current liability positions.
It looked at the performance reports in terms of its usefulness, the reliability of the information and the cases where no reports were given. He said the biggest challenge was filling the posts of Head of SCM which accounted for the largest percentage of key posts vacant at 22%. He said that there appeared to be a correlation between the stability in the key position of municipal manager and whether that municipality attained an unqualified audit with no findings. The presentation also looked at minimum competencies not achieved by key personnel. It found that 265 auditees were assisted by consultants to the amount of R765m. There was concern noted over the lack of record keeping and documents by municipalities which would stymie the effectiveness of the consultants. Attention should be paid to leadership, financial and performance management and governance. With regard to the status of Information Technology, he said the different financial accounting systems being used by municipalities presented a challenge. Controls that needed to be implemented were that security management systems, user access management controls and service continuity controls still needed to be designed.

He said that AGSA interacted with SALGA, COGTA and Treasury to help local government move in the right direction.

Discussion
Mr K Mileham (DA) said he was concerned that some of the numbers and associated percentages given in some of the slides did not add up. He was concerned that a number of auditees had not followed up and addressed the root causes identified in the previous year. No action was being taken at the municipal level to improve the situation. What was the current status of the ten auditees whose reports were not finalised? He said it was difficult for smaller municipalities to verify or place a value on an old underground pipe. How would one do that especially if it was a small municipality developing a fixed asset register? Regarding fruitless and wasteful expenditure, he said SALGA had raised the issue of Eskom starting to charge interest on its accounts after 15 days at 20% interest. Was this acceptable? How much of the fruitless and wasteful expenditure was attributable to Eskom debt interest. He said the percentages and numbers did not match up on slide 34 on municipal management who had not yet achieved minimum competencies.

Ms Myburgh said the numbers would not add up because it was a specific assessment of the 335 municipalities.

Mr Sekgetho said the information was collated at national level from the provinces and that there were movements in the numbers up to and even subsequent to the release of the document.

Regarding the ten municipalities, he said that AGSA had either not received anything or that the audit had not started. He would provide the list of names of the ten municipalities in writing as well as respond to the apparent mismatch between the numbers and percentages.

Regarding the valuation of underground piping being a challenge, he said proper source documentation and record keeping would resolve that challenge and that there was equipment that could verify the presence of underground pipes but that this might not be relevant for smaller municipalities from a cost perspective.

Regarding Eskom interest rates, he said that there was an Act that governed Eskom so if changes were to be made it would have to be via that legislation. A significant portion of municipal fruitless and wasteful expenditure was related to Eskom debt interest.

Ms Myburgh said that the root causes were a real concern for AGSA and was related to the slow responses to issues and the filling of key vacant posts. Oversight bodies such as the portfolio committees should enforce and monitor action plans as AGSA could not enforce oversight.

Mr M Hlengwa (IFP) said he was concerned about the assurance provided by the provincial portfolio committees who were either dysfunctional or semi dysfunctional. The Committee should do some form of intervention. He said the levels of SCM non compliance were horrendous and it was not acceptable or right for senior public representatives not to perform. He said consultants were being employed to do corrective measures in putting together financial statements but that this was losing sight of the actual problem which was that day to day record keeping and controls were not taking place. Consultants therefore would not credibly address municipal problems. To what extent were skills being transferred to build institutional capacity when consultants were being used? He wanted an assessment of municipalities that were under section 139 a, b or c. He said municipalities that were still operating the same as they were five years ago and showing no improvement should be called before the Committee.

Ms Myburgh said she shared the Committee’s concerns on consultants with regard to sustainability. After the consultants leave the risk was there that the municipality would fail again. AGSA did not have figures regarding what skills transfer takes place. A further concern was that consultants did not deliver against what it contracted to do, that is they were paid but did not deliver certain assessments.

Mr Sekgetho said that from a legal and constitutional point of view, municipalities reported to their own structures.

Mr A Masondo (ANC) questioned how the governance of municipalities could be regarded as right but the financial and performance management and leadership were not in place. He wanted the names of the worst performing municipalities and what was being done to share best practices of the best performing municipalities with them? What has been the role of SALGA and other partners?

Ms Myburgh said there was some detailed information they would provide in writing as they did not have it on hand. She said regarding the detail on SCM contraventions, that they would to go to the provinces to get the details.

Mr Sekgetho said once recommendations were issued on key controls, AGSA went on a quarterly basis to municipalities and did assessments especially with regard to the implementation of the action plan. He said that overall, the trend was of slow improvement in all areas. What was important was the process and not the leadership in place at any particular time.

Regarding other stakeholders, he said that AGSA was doing coordinated interventions with other stakeholders like SALGA, Treasury and COGTA. SALGA’s sphere was the training of counsellors, Treasury covered financial management while COGTA focussed on infrastructure and service delivery.

Mr P Mapulane (ANC) said the presentation was stale news as the information had been released weeks before and thought that the Committee would have been amongst the first to be engaged. He was concerned that the issue of competencies was not a recommendation as people should not be appointed to key leadership positions when they did not have the minimum competencies.

Mr Sekgetho said the timing in presenting the report to the Committee was late. AGSA did have the opportunity to present on the 23 June which did not take place. The report had been released on 3 June. Municipalities had three months to present and then the AGSA had three months until the end of November after which a consolidation process took place. Efforts were being made to shorten this process time and in the previous year the report had been released in July while this year it was released in June. After consultation the AG briefed Cabinet in May so it was possible for the Committee to be briefed earlier on a draft but that such a session would have to be a closed session.

Regarding competencies, Ms Myburgh said minimum competency frameworks had been set and that if there was a vacancy, municipalities had to make sure they found a qualified and trained person and that there should be a clear performance agreement in place.

Mr Mileham said that an improvement in the audit outcomes of an organisation did not mean an improvement in the financial health of an organisation. The reporting was getting better not the financial health and slide 30 in fact indicated the financial health was getting worse. Were the figures reflected in slide 30 on financial health reflecting the same municipalities? If this was the case were they budgeting for deficits and losses and were they sustainable organisations? Regarding spending patterns, he asked whether misuse of conditional grants like MIG funds for operational expenses was a cause for concern. What was the scope of this issue and how was it being addressed?

Mr Sekgetho said analyses had been conducted. AGSA only reported on what had been reported. It had found that where 88% of the budget had been reported as spent only 49% or 54% had related to MIG grants being achieved. It was for management and the oversight bodies to follow up and engage municipalities.

The Chairperson asked if the major metros were improving and were they making a profit. Cities were deemed to be doing well because of their size and because they were centres of attraction.

Mr Sekgetho said the general report’s annexures gave comparative details per municipality for the previous five years on compliance and HR issues of all municipalities and noted the improvements of Mangaung, Tshwane, City of Johannesburg and Buffalo City.

Mr Mileham said the report focussed on local government and not on provincial government and the performance of provinces.

The Chairperson said this could be considered for inclusion in the Committee’s work programme.

The meeting was adjourned

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