The Committee met with the provincial Auditor-General to be briefed on the performance of municipalities across the Western Cape for the financial year of 2016/17. She devoted a significant portion of her presentation to stress the importance of accountability by municipal officials, pointing out the need for proper planning, adequate internal controls, checking on performance and carrying out the necessary actions to ensure favourable audit outcomes. The AG expressed concern about the regressions observed in all these aspects at many of the province’s municipalities. Other issues highlighted included ineffective supply chain management, inadequate internal control structures, and information communication technology (ICT). The lack of service delivery agreements between municipalities and third-party service providers, as well as improper consequence management, was another challenge that led to regressions in key performance areas.
The Committee questioned the real consequences for repeat findings, and their effect on non-performance. What was the impact of instability in leadership caused by key vacant positions, and political instability? What mechanisms were in place to rescue municipalities from recurring regressions? Members were concerned about the stagnation in the performance of the ICT unit because of the role ICT plays in the post-industrial era. The Committee stressed the importance of appropriate service delivery agreements between municipalities and third-party service providers. This would help to improve performance and prevent the province from being captured by unscrupulous individuals.
The AG visited selected municipalities twice a year to evaluate compliance with prescripts and make recommendations to the management in order to prevent repeat findings on subsequent visits, as well as to improve performance in key performance areas. The focus areas for audit were financial health, oversight and monitoring, financial management, IT management, performance management, HR management, compliance management, procurement and contract management and performance management.
The Committee requested the AG to give a comprehensive breakdown of municipalities that defaulted in respect of supply chain management. The Committee would visit problematic municipalities to evaluate the challenges and possibly hold corrupt government employees accountable for their actions and decisions.
The Chairperson welcomed members of the Portfolio Committee and everyone in attendance, and informed them that the purpose of the meeting was to hear the Auditor-General’s (AG’s) report on the audit outcomes of the 2016/2017 financial year (FY). Members were expected to engage the AG, based on her presentation, in order to address areas of concern. The National Council of Province (NCOP) should work hard to finalise its negotiating mandate to avoid unnecessary delays in the legislative process. He expressed concern that the Department of Local Government had not accompanied the AG to the meeting. He apologised on behalf of the Ministers of Local Government and Finance, who were unable to attend the meeting.
Audit outcomes: Auditor General’s overview
Ms Sharonne Adams, Auditor General: Western Cape (WC) Province, gave a brief summary of the national AG’s comments on the general audit reports for the 2016/2017 FY, which indicated the areas of performance that needed improvement throughout all the provinces across the country.
Her presentation of the WC audit report started with an in-depth analysis of the accountability wheel (AW). As practised in recent years, the accountability wheel helped to explain accountability which was critically important in terms of audit outcomes and the implementation of recommendations associated with the audit outcomes. It helped to hold people accountable for their decisions and actions, especially when they digressed in their roles and responsibilities. Accountability was all about the Plan-Do-Check-Act (PDCA) cycle. The AW showed the need for institutions to have well-defined targets. It also addressed internal controls and supervision.
The AG went to municipalities twice a year to speak about the control environment and feedback. She spoke about the importance of basics, as processes flowed appropriately if the basics were handled effectively. Monitoring of all assurance providers was also important to ensure that people were held accountable for their actions and decisions. Internal controls and the audit committee played critical roles in this regard. Consequence management was also important. The AG had put a handbook together that detailed consequence management in terms of the Public Finance Management Act (PFMA) and the Municipal Finance Management Act (MFMA). This ultimately improved outcomes and, by implication, service delivery to the citizens. She discussed the AW in terms of the individual components and the current status -- improvements, regressions or static.
Ms Adams spoke about the PDCA cycle in terms of the percentage of municipalities that complied with the prescripts.
The plan component regressed either because there were repeat findings or internal control deficiencies which had not been appropriately addressed in the action plan. The usefulness of performance indicators and targets was that they helped the AG to monitor compliance of institutions with applicable prescripts and verify the compliance. She said that Beaufort West had had findings in respect of performance indicators and targets.
The AG discussed the overall internal environment. There had been improvements in the area of internal controls, especially in aspects relating to governance. Areas of concern included inadequate internal risk management and inadequate internal audit committees. These areas of internal control needed improvement.
Basic finance and performance management control indicated a slight regression. The internal control in this regard referred to leadership, financial and performance management, as well as governance.
Information Communication Technology (ICT) controls remained unchanged. However, she was concerned about the low performance of 25% in this area. Some of the identified concerns included user account access, where people could have administrative rights within the municipalities with specific responsibilities to change specific functions without appropriate delegated authority, which was dangerous. Another area of concern was security management. Sometimes, there was no appropriate service delivery agreement (SDA) between the municipalities and third-parties. Most municipalities within the province did not have an in-house system, as they depended on third-party service providers. Failure to follow appropriate SDA processes meant that roles and responsibilities were not clearly defined. It meant the third party could make and authorise changes within the system. She urged municipalities to have appropriate SDAs with the third party in order to avoid this problem.
Service continuity was another area of performance monitored by the AG. It indicated how municipalities responded to service continuity, especially after a disaster. She expressed concern about the implementation of applicable regulations, especially those that had come into effect on 15 July 2017. She was concerned about the quality of the reports that were submitted for audit purposes.
A regression in the performance of senior management was another indicator that internal controls were not in place. The AG was concerned that senior management and service providers lacked expertise in financial management, supply chain management (SCM), predetermined objectives and action plans. The Mayors, Municipal Managers, councils and Municipal Public Accounts Committees (MPACs) had shown a slight improvement in performance, whereas the internal audit units and audit committees had remained unchanged. The national and provincial role players had also remained unchanged.
This referred to consequence management. Were there appropriate systems in place to punish transgressors? Overall, there had been regressions in compliance findings within the WC Province. She was concerned about the negative audit outcomes resulting from inappropriate consequence management. Investigations of the prior year had revealed that unauthorised, irregular, fruitless and wasteful expenditure had remained practically unchanged. Investigations had been conducted at certain municipalities, especially in terms of SCM.
The clean audit outcomes had regressed from 80% in 2015/2016, to 69% in 2016/2017. Certain municipalities had regressed in terms of their audit outcomes. The City of Cape Town had had a clean audit in 2015/2016, but an unqualified audit with findings in 2016/17, especially pertaining to SCM and other areas of non-compliance. Bitou Local Municipality had also had an unqualified audit with findings in 2016/17 in terms of SCM because appropriate procurement procedures were not followed. Other areas of concern included irregular and wasteful expenditure. Eden District also had not complied with SCM procedures. She expressed concern about how SCM was handled throughout the province.
Beaufort West had gone from an unqualified audit in 2015/16 to a disclaimer audit in 2016/17. She was not sure if municipalities with clean audits in the current year would sustain that status in the succeeding years. Action plans were not being well implemented, and there was a need for an improvement in SCM in most of the municipalities.
There had been an overall regression in audit outcomes of the Western Cape.
Ms Adams spoke about the movement of audit outcomes for municipalities within the Western Cape, as well as other provinces across South Africa. Two municipalities had had outstanding audits in the finalised report. A municipality had received an unqualified audit with findings on predetermined objectives. They had moved from a clean audit in the prior year to an unqualified audit in the current year.
Kannaland had moved from disclaimer audit in the prior year to a qualified audit with findings in the current year. She was concerned that regression in the audit report for Eden District in the current year remained the same as that of the prior year. Karoo District, which had a clean audit for the first time, had areas of concern.
Accountability and transparency, as well as performance reporting on financial statements submitted for audit, was also considered. The quality of financial statements submitted before any adjustments had regressed from 89% in 2015/16 to 86% in the current FY. After audit adjustments, which made provision for municipalities to make corrections in the statements, 96% of the municipalities could make corrections in the prior year but this value had reduced to 89% in the current FY. There were some cases of repeat findings because action plans were not implemented and corrections were not made.
The performance report also dealt with the quality of the financial statements submitted for auditing. Only 36% of municipalities, compared to 37% in the prior year, had submitted statements that did not require correction. She urged municipalities to work more on the quality of information submitted for audit purposes, especially those relating to predetermined objectives. The usefulness and reliability of information submitted for auditing had also regressed in the current year. The reason for the regression was incorrectness of information submitted for auditing. Municipalities had to put appropriate internal controls in place to ensure the correctness and credibility of information that was submitted for audit.
Ms Adams said there had been considerable improvement in irregular expenditure in the current FY compared to the prior year. However, non-compliance remaied a major challenge. The AG only included errors that were significant in the audit outcomes. Errors with insignificant material findings were often excluded in the audit report. The AG, however, recommended effective management of immaterial findings to avoid regression into material findings.
The AG had addressed the challenges it had with deviations in the management report circulated to all municipalities within the province. Deviations were allowed in terms of the regulations guiding the SCM. Deviations were meant to provide for exceptions in certain cases. Unfortunately, deviations were becoming the norm in most municipalities. The AG aimed to minimise misappropriations associated with deviations. The AG usually required internal auditors to justify deviations. In terms of the MFMA regulations, Section 36 made it clear the process justification needed to go through.
Municipalities that played biggest roles in irregular expenditure were the City of Cape Town, Beaufort West and Eden District.
Awards made without following local content prescripts were recorded in 14% of the municipalities. Projects worth R2 million had been awarded to government officials. Such awards were prohibited because government officials were not allowed to do business with the municipalities. False declarations of interests had been made by 16 suppliers, and 57% of the municipalities were involved in uncompetitive and unfair procurement procedures.
The possible impacts of SCM failure included deviations from procurement processes, suppliers may overcharge for the goods and services that they offer, losses to the public and public purse, fruitless and wasteful expenditure could increase, delays due to inappropriate contract management, and impacts on service delivery. Also, oversight might not be able to perform its function if irregular, fruitless and wasteful expenditure were not reported appropriately. This made consequence management difficult to implement.
The root causes of accountability failure included a lack of understanding of SCM prescripts, vacancies, instability and the absence of SCM processes and procedures, which contributed to non-compliance with procurement processes, audit findings and recommendations not being acted upon with the necessary rigour in all instances. These were inclusive of management report findings. Other causes included the failure to sufficiently monitor and implement action plans to address prior year findings, political instability and vacancies in leadership positions. She stressed the importance of instituting processes to avoid regressions in audit outcomes even when changes occur at senior management levels.
The AG produced management report detailing where managements went wrong with the corresponding actions to correct errors. Another input by the AG was audit reports, which showed the root causes of the findings, as well as a general report that unpacked the findings. She said the AG seeks to identify weaknesses in internal controls and communicate them to the management. Risk assessment was conducted to identify risks and have a meaningful communication with the management. The AG made recommendations to management about action plans that could help to mitigate risks and minimise regressions.
The status of records reviews was done twice a year -- at the end of December and the end of March. The AG went into the municipalities to evaluate performance and compliance with relevant prescripts, and provided feedback to the leadership. The AG was concerned about the failure to get the desired results, despite its inputs and recommendations to the municipalities. It evaluated performance in eight key areas: financial health, oversight and monitoring, financial management, performance management, procurement and contract management, compliance management, human resource (HR) management, and IT management. These areas played important roles in the regressions recorded in the current FY. The specific objectives of the status of records reviews were to identify key areas of concern that may derail progress in the preparation of financial and performance reports and compliance with relevant legislation, and consequential regression in audit outcomes.
The status of records reviews also helped to assess progress made in implementing action plans and follow through with commitments made in the previous agreements. It helped to identify matters that add value in putting measures and action plans in place well in advance to mitigate risks. It also helped to assess the status of key focus areas that had been reviewed. The AG provided feedback as early warning signals to the management on what they needed to look out for in terms of the status of records reviews.
The AG included recommendations in the annual reports, on areas identified for improvement. It gives the Accounting Officer ample time to investigate concerns in line with the MFMA. It had the mandate to refer a case to the relevant authorities if the Accounting Officer failed to address the matters within six months. The authority was obliged to give feedback to the AG. The AG could then, through appropriate processes, recover the money from the culprit through the public purse.
A number of amendments had been made to the Public Audit Act (PAA). The amendments were still under consultation. The Bill, if passed, would come into effect on 29 April 2019. The AG aimed to communicate the impact of the amendments to all stakeholders. The PAA amendments would allow referral for investigation of any acts/omissions identified through the audit conducted by the AG, which caused (or could cause) a loss of public resources or which resulted (or could result) in public resources not being used for their lawful purpose.
The Chairperson appreciated the work performed by the AG. He the Committee could attest to the areas of concern identified by the AG. Parliament had been dealing with such cases and sought to have more engagements with the executives to find out what their action plans were to implement the recommendations of the AG. This would ensure that people in charge of state-owned enterprises (SOEs) used the budgets appropriated by the Parliament for their intended purposes.
Members of the Committee would visit problematic municipalities to see exactly what the challenges were. The regressions and findings did not result from inadequate training, but from a deliberate act by corrupt officials to steal from the public purse. The culprits should be arrested and jailed. This would serve as a deterrent to others who held positions in the government. Though the regressions were minimal in terms of the outcomes, the rand value could be significant. Where corruption thrived, the efficiency and quality of governance and the value of public good were compromised.
Mr N Hinana (DA) asked who checked the activities of the AG. At what level did the AG intervene in municipalities having concerns with the financial statements and SCM? Which municipalities were having issues with SCM? Early interventions had the potential to reduce regressions. He cited the case of the City of Cape Town, where the appropriated budget had not been used to alleviate the suffering of the people. Earlier interventions by the AG would lead to the timely detection of such problems. This would ensure that necessary services were provided to the people, thereby preventing most civil unrest and protests that could otherwise lead to the destruction of infrastructure. He stressed that one of the responsibilities of the AG was to visit municipalities and evaluate action plans, and to be aware of the challenges the municipalities were facing.
Mr T Simmers (DA) sought clarity on the distinction between a quality submission and a quality report. Did the interactions of the AG with the municipalities have any positive impact on the quality of results the AG submitted to the Committee? What did the AG do once it identified an area of concern? The AG should create warning signs to address areas of concern, and staff must be trained at all levels in order to reduce regressions. Was the AG’s engagement limited to the management? He observed that the main problem was with administration and management. Despite the fact that regulations became more stringent every year with respect to SCM, people still found means of bypassing the regulations.
Mr R Dyantyi (ANC) commented on the sense of accountability displayed by the AG, which gave clarity on the roles of the Office of the AG and the involvement of the Committee in the whole process. He said that every component of the PDCA was equally important. However, there were problems with each component, which had led to the regressions in the FY under review. Could the findings or regressions result from bad leadership? He lamented the current status of each component of the PDCA cycle. He spoke about the possible link between challenges with SCM and ineffective leadership. To him, the improvement in terms of filling the vacant positions -- from 4% in 2015/16 to 14% in 2016/17 -- was not significant and there was still room for further improvement. He also talked about the need for improvement in ICT controls. He expressed concern about the approach of most municipalities towards the action component of the model. It was important for the AG to coordinate with the Provincial Treasury and other government departments to get municipalities to implement recommended action plans in order to minimise regressions. The AG must adequately communicate information about SCM and internal controls to the Department of Local Government and the Provincial Treasury, which had the mandate to monitor municipalities. He urged the AG to give a comprehensive breakdown of the 57% of municipalities that were involved in irregular expenditure, as well as uncompetitive and unfair bidding process. It was equally important to give a breakdown of the other 43% that were not involved in these practices.
Mr Simmers asked if the political instability that affected the constitution of the Council could lead to regressions or poor performance.
The Chairperson sought clarity on what the AG was doing to improve ICT controls. Despite being stable at 25%, he was not comfortable with the rating in this area of performance. The world was in the post-industrial era, and ICT was vital if the WC Province were to play an effective role at local, national and global levels. Measures must be in place to strengthen this area of performance so that unscrupulous people would not have the means to capture the Province.
He was glad that there had been a reduction in the number of municipalities using consultants in the 2016/17 compared to 2015/16, although the decrease was only 1%. He expressed concern about the lack of SDAs between municipalities and contractors, the third-party service providers. This could lead to state capture, as previously experienced in the country. The award of contracts must be fair and competitive. It was important that the AG give a breakdown of defaulting municipalities so that the Committee, as the oversight body, could deal individually with those municipalities. Government staff should not compete with suppliers in the bidding process. He commented that some suppliers failed to disclose the identities of their directors, and false declarations of interest had been made by 16 suppliers. This was a very serious problem, which must receive adequate attention. The AG must give adequate recommendations to the management on its findings, and those who stole money from the public purse must be made to pay back. It was important that the AG did its job without fear or favour.
Regarding the question on the roles of the AG in respect of early warning signs, and who checked the AG, Ms Adams said that the AG was audited independently by a firm, and the AG produced an annual general report which was available on the website. It also reported to the appropriate authorities which exercised oversight over it. The AG had a clean audit status in 2016/17, and this was contained in the annual report. It followed the specified prescripts in all its involvements. Regarding the early warning signs, the AG visited municipalities twice a year (at the end of December and at the end of March) to monitor compliance and to identify risks that may negatively impact performance. The AG makes recommendations and expects management to implement action plans to mitigate the identified risks. Problems may arise if the management fails to implement action plans. She pointed out that the AG did not inspect all the municipalities. Its report was based on the sampled municipalities.
The internal audit was important in providing early warning signals. While the AG comes to inspect only at the end of the FY, the internal audit was proactive and better placed to evaluate the control environment throughout the year. The internal audit unit could be utilised to improve performance. Their role was to identify factors that could increase performance and those factors that could hamper performance. They looked at the control environment and gave findings on areas of concern within the control environment.
In response to Mr Simmers question on the quality of submissions and quality of reports, Ms Adams said that the quality of submissions dealt with the number of errors in the report submitted to the AG. What was the significance of the error? Insignificant errors were often not included in the report, whereas significant errors were included in the report because they were of material importance and they were linked to the quality of information that was submitted for audit purposes.
In response to the question on training within the municipalities, the AG did not provide training to municipal staff as that role was the mandate of the management. The AG only gave independent recommendations to the management in terms of compliance and performance. The management of municipalities across the WC had various programmes to train their staff.
Regarding the challenges associated with vacancies, the AG said most vacant positions had not not been filled during the year, and had been were filled only at the time of the audit. A lot of municipalities had new Chief Financial Officers (CFOs) and Municipal Managers.
Ms Adams presented the Committee with a paper that detailed all municipalities in respect of their irregular expenditure and uncompetitive bidding. The document indicated the findings and the quantum of irregular expenditure in terms of their rand value.
The findings in respect of ICT control could be easily addressed, because SDAs could be driven by the local governments in terms of standardisation. Every municipality could use the standardized SDA instead of re-inventing the wheel. It was important that the ICT unit, which was a specialised skill and currently understaffed, was properly structured within the municipalities.
She said she would to give a breakdown of municipalities regarding the consultants they used for performance management and financial statements. The quantum of deviation could be obtained from the financial statements of municipalities. The Provincial Treasury could help with that information because the municipalities were obliged to disclose the information in their financial statements. The Department of Local Government could also provide information on overall deviations that occurred with respect to the total number of transactions. The AG reported the findings to the municipalities and tried to monitor compliance with action plans and recommendations in the subsequent year.
The meeting was adjourned.
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