Municipal Audit Outcomes 2016/17: Auditor-General briefing

Public Accounts (SCOPA)

16 July 2019
Chairperson: Mr M Hlengwa (IFP) and Mr S Somyo (ANC)
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Meeting Summary

2017/18 Local Governement Audit Outcomes

The Standing Committee on Public Accounts met jointly with the Standing Committee on the Auditor-General to receive a briefing from the Auditor General - South Africa on the 2017/18 local government audit outcomes.  

The Auditor General – South Africa (AGSA) pointed out that irregular expenditure in municipalities remained very high and was currently at R71 billion. This was mainly due to the fact that irregular expenditure was not being addressed year-on-year by municipalities. All provinces had deteriorated in key compliance with legislation, supply chain management, as well as in effecting consequences. Accountability continues to deteriorate in municipalities. On financial statements, key issues identified include late submission and poor quality of statements. The quality of published financial statements was worse than previous year. On performance reports, the quality submitted for auditing had slightly improved but some of the performance indicators and targets were not useful, and achievements were being reported unreliably. On compliance with key legislation, material non-compliance on financial and performance management continued to escalate in most municipalities. Material non-compliance was identified at all metros and material non-compliance with supply chain management was widespread – highest since 2011-12. Further, material non-compliance with legislation on implementing consequences had regressed. There were many cases involving inadequate follow-ups on allegations of financial and supply chain management misconduct and fraud. Councils had failed to conduct investigations into all instances of unauthorised, irregular, fruitless and wasteful expenditure, and sufficient steps had not been taken to recover, write-off, approve or condone same.

The AGSA further highlighted that non-compliance with supply chain management legislation was widespread, and one indicator of deteriorating accountability. This was because unfair or uncompetitive procurement processes most often lead to higher prices or potential losses and exclusion of preferential suppliers (including local suppliers), which undermines the country’s social transformation goals. In this regard, the most common findings were: three written quotations not invited; competitive biddings not invited; declaration of interest not submitted by suppliers; and bid documentation not stipulating the minimum threshold for local production and content. Unauthorised expenditure increased from R11.2 million to R12.9 million; R7 million of the R12.9 million was as a result of non-cash items, and nearly 100% of unauthorised expenditure was as a result of overspending. Although fruitless and wasteful expenditure decreased slightly from R1.6 million to R1.3 million, the number of municipalities incurring irregular expenditure slightly increased from 211 to 219. 197 municipalities use consultants on their finances and R9.7 million had been spent on such consultants. Irregular expenditure remained high and that of previous years was not properly dealt with through investigation, and followed by condonement, recovery or write-off of the expenditure. Top five contributors to the accumulated irregular expenditure (constituting 32% of R71.1 billion) which also did not investigate all instances of the prior year’s irregular expenditure were: Nelson Mandela Bay Metro (EC) – R12.4 billion; OR Tambo District (EC) – R3.2 billion; City of Matlosana (NW) – R2.8 billion; City of Johannesburg Metro (GP) – R2.7 billion; Mogalekwena (LP) – R1.7 billion. Material non-compliance with legislation on implementing consequences increased from 54% to 60% with the most common findings being that unauthorised, irregular and/or fruitless and wasteful expenditure were not being investigated.

Members raised concerns about municipalities that were still spending a lot of money on consultants who do the basics. They asked the AGSA to send the list of municipalities where they received threats and the details of the cases that have been opened in this regard, so that the committees could assist the Office by following up with law enforcement agencies on the progress of these cases. The expanded mandate seeks to bolster accountability and there was need for it to gain traction and its full implementation. They identified the need for a metro-focused report from AGSA in the future, because that was where big money was. Was existing legislation a hindrance or an enabler both to the work of AGSA and municipalities? This should be flagged for discussion on a later date. The Co-Chairperson directed AGSA to avail all the information and relevant documentation as requested by Members. For a long time, the Office of the AG had not been happy about its powers and this had been addressed by Parliament. The necessary pointers had been provided to the Committees. Nobody was going to escape from appearing before SCOPA. He also requested the Office of the AG to send through a list of the 17 municipalities which are repeat offenders and the age analysis. This was in order for the committees to start the process of scheduling hearings with those municipalities. 

Meeting report

Co-Chairperson Hlengwa welcomed everyone and indicated that the Auditor General - South Africa (AGSA) had been called to give the Committee a briefing on the 2017/18 Municipal Audit Outcomes. This was a joint meeting between the Standing Committees on Public Accounts and the Auditor General but Members of the Portfolio Committee on Cooperative Governance and Traditional Affairs had also been invited to attend. He invited the presentation from AGSA.

Briefing by the Office of the Auditor General - South Africa (AGSA)

Ms Alice Muller, Acting National Leader: Audit, AGSA, took the Committees through a presentation on the municipal audit outcomes for the 2017/18 financial year. She pointed out that irregular expenditure in municipalities remained very high and was currently at R71 billion. This was mainly due to the fact that irregular expenditure was not being addressed year by year by municipalities. All provinces had deteriorated in key compliance with legislation, supply chain management, as well as in effecting consequences.

Ms Sharome Adams, Business Executive, AGSA, added that accountability continues to deteriorate in municipalities. On financial statements, key issues identified include late submission and poor quality of statements. The quality of published financial statements was worse than the previous year. On performance reports, the quality submitted for auditing had slightly improved but some of the performance indicators and targets were not useful, and achievements were being reported unreliably. On compliance with key legislation, material non-compliance on financial and performance management continued to escalate in most municipalities. Material non-compliance was identified at all metros and material non-compliance with supply chain management was widespread – the highest since 2011-12. Material non-compliance with legislation on implementing consequences had regressed. There were many cases involving inadequate follow-ups on allegations of financial and supply chain management misconduct and fraud. Councils had failed to conduct investigations into all instances of unauthorised, irregular, fruitless and wasteful expenditure, and sufficient steps had not been taken to recover, write-off, approve or condone same.

Ms Linda le Roux, Business Executive, AGSA, said the Office of the AG was operating in a difficult environment, amid an increase in contestations, pushbacks, threats and intimidation in municipalities. Regular service delivery protests were also a cause for concern coupled with a lack of commitment towards implementing recommendations that enable improved audit outcomes. Cases of no response were most evident in Free State and North West. The financial health status of 76% of municipalities was concerning or required intervention. Municipalities were unable to collect debt, 34% disclosed a deficit, 87% exceeded 30-day payment period (average payment-period 174 days), and 31% were in vulnerable financial positions. Total outstanding debt amounting to R18.28 billion was owed to Eskom and R9.05 billion to water boards. She noted that the financial losses suffered at 14 municipalities due to VBS investments had led to a R1.6 billion write-off and 18 municipalities having to be placed under administration.

 

Mr Solomon Segooa, Corporate Executive, AGSA, highlighted concerns about service delivery and maintenance of infrastructure in municipalities. Service delivery was in most cases poor or non-existent due to underspending of grants, poor project management and delays and non-compliance with supply chain management legislation. Condition of water and sanitation infrastructure had not been assessed by 32% of municipalities, and 39% disclosed water losses of more than 30% - loss of R2.6 billion. 23% had not carried out condition of roads assessments and 41% had no road maintenance plans in place. Accountability continued to deteriorate with late submission of financial statements increasing by one percentage point and cases of financial statements being submitted for auditing containing material misstatements had increased by 4%. Overall irregular expenditure decreased although some provinces showed an increase. Accountability and transparency was not being enabled through credible financial and performance reporting as 32% achieved unqualified opinions only because they corrected all misstatements identified during the audit.

Non-compliance with supply chain management legislation was widespread, and one indicator of deteriorating accountability. This was because unfair or uncompetitive procurement processes most often lead to higher prices or potential losses and exclusion of preferential suppliers (including local suppliers), which undermines the country’s social transformation goals. In this regard, the most common findings were: three written quotations not invited; competitive biddings not invited; declaration of interest not submitted by suppliers; and bid documentation not stipulating the minimum threshold for local production and content. Unauthorised expenditure increased from R11.2 million to R12.9 million; R7 million of the R12.9 million was as a result of non-cash items, and nearly 100% of unauthorised expenditure was as a result of overspending. However, fruitless and wasteful expenditure decreased slightly from R1.6 million to R1.3 million. The number of municipalities incurring irregular expenditure slightly increased from 211 to 219. Also, 197 municipalities use consultants on their finances and R9.7 million had been spent on such consultants.

 

In a nutshell, irregular expenditures remained high and those of previous years were not properly dealt with through investigation, and followed by condonement, recovery or write-off of the expenditure. The top five contributors to the accumulated irregular expenditure (constituting 32% of R71.1 billion), which also did not investigate all instances of the prior year’s irregular expenditure, were: Nelson Mandela Bay Metro (EC) – R12.4 billion; OR Tambo District (EC) – R3.2 billion; City of Matlosana (NW) – R2.8 billion; City of Johannesburg Metro (GP) – R2.7 billion; Mogalekwena (LP) – R1.7 billion. Material non-compliance with legislation on implementing consequences increased from 54% to 60% with the most common findings being that unauthorised, irregular and/or fruitless and wasteful expenditure were not being investigated.

Discussion

Mr J Mamabolo (ANC) asked about outstanding audits and what would happen to municipalities that were perpetually disregarding the law by refusing to cooperate with public audit processes. He asked whether AGSA had enough capacity, both human and financial. The deterioration in audit outcomes was apparent and there was need for consequence management.

 

Mr A Lees (DA) asked why the AG was not in attendance. On the expanded mandate which came into effect on 1 April 2019, presumably the AGSA had issued binding statements to municipalities subsequently. Was this the case? Audit outcomes were getting worse and there was need for real consequences. What form of interventions should be taken against transgressing municipalities? He pointed out that constitutionally enshrined legislative provisions were not working due to lack of political will. He requested the Office of the AG to submit the list of the nine municipalities that have outstanding audits to date.

Co-Chairperson Hlengwa replied that the meeting had been called at short notice such that the AG had tendered an apology to say he could not make it due to prior commitments.

Mr J De Villiers (DA) wanted to know about the sort of remedial action the AGSA could institute and what was being done with auditees who do not pay for audit services.

Mr M Dirks (ANC) asked about the expertise that the auditees have within the supply chain space. He pointed out that rural municipalities largely lack skills and capacity, and if this could possibly explain their poor audit outcomes. How many municipalities were complying with the Treasury circular issued a few years back? Were there any action plans in an effort to improve audit outcomes on the part of municipalities and was the AG a part of these processes?

Ms M Tlou (ANC) noted that the AGSA makes recommendations to municipalities as per the provisions of the Municipal Finance Management Act (MFMA). Audit reports come with timeframes as to when municipalities would be expected to put their houses in order, failure to which binding remedial action is instituted. She noted the high turnover in municipalities, particularly of skilled personnel, as partly a driving factor in the recurrence of poor audit outcomes. Instability in municipalities was a challenge.

Mr Segooa replied that the AGSA’s interventions in municipalities with poor audit outcomes would include the status of records review where the auditor gets to visit these municipalities on a quarterly basis to assess progress in implementation of relevant recommendations. He agreed financial and capacity constraints were a challenge partly owing to the need for a lot of travelling across the country on the part of the AGSA. The vacancy rates in municipalities, which were as high as 22% in some cases, were a challenge manifesting itself through poor audit outcomes. The supply chain management space needed competent people, and it was particularly difficult for rural municipalities which are also characterised by politically-charged environments.  Addressing skills and competence concerns was crucial as poor audit outcomes were being reported continually. AGSA was planning on having discussions with National Treasury on how funds owed to AGSA by municipalities could be recovered.

Ms Adams explained that the AGSA would not ask accounting officers to do anything outside their mandate or outside MFMA prescripts. The Office of the AG hoped municipalities would not reach a stage where certificates of debts would have to be issued. Accounting authorities needed to work together with AGSA to address areas of concerns and expeditiously implement recommendations. The definition of irregularities as per the MFMA was quite all-encompassing and wide. The Office of the AG had however decided this definition would be implemented in phases. All cases of non-compliance with financial loss would be looked into in the current financial year.

Ms F Muthambi (ANC) commented on the appropriateness of the existing legislation. She pointed out that the MFMA in its current form was too prescriptive and had too many regulations. Since 2003, an average of six circulars were being released per year, thus making compliance a challenge. Municipalities do not have the necessary capacity such that they had to rely on consultants and, under normal circumstances, consultants are not keen on experience-sharing. She asked how this was affecting audit outcomes. Document management was a challenge which compromised the work of AGSA. She could not understand why this was the case in the fourth industrial revolution. Municipalities ought to develop a culture of scanning and storing documentation electronically to assist the Office of the AG in discharging its mandate. 

Ms B van Minnen (DA) commented on the AGSA’s extended mandate, which came into effect over 100 days ago. The level of non-compliance on the part of municipalities gave an impression that the biggest challenge was the AG’s lack of teeth and reluctance to implement the provisions of the expanded mandate.

Ms H Mkhaliphi (EFF) expressed concern about the absence of the Department of Corporate Governance and Traditional Affairs. The role of said Department in bringing about the crises in municipalities was on record as it had been highlighted during previous engagements. She asked what recourse AGSA had in an event that provincial and national governments do not act after the former gives a recommendation which would require some form of intervention. Parliament had been receiving these reports year in year out but it was unclear whether there is adequate consequence management. At what stage does the AG identify a municipality as requiring intervention? Was it when it was at the verge of total collapse?

 

Ms G Opperman (DA) asked what Parliament could do to assist in turning the situation in identified municipalities around. She pointed out that municipalities were spending significant amounts of money on consultants rather than on service delivery. To what extent were amendments to the Public Audit Act (PAA) being implemented? Which municipalities were deliberately neglecting application of the provisions of PAA and MFMA?

Ms le Roux explained that the huge turnover of accounting officers in municipalities meant incumbents might not necessarily be the ones who would have presided over the poor financial management in some case. Therefore, the AGSA would want to institute investigative proceedings in an effort to recover the money lost through malfeasance. With the expanded mandate which came into effect recently as noted by Members, the AGSA would apply the provisions fully in due course. The concerns raised about the engagement of consultants has also been a theme for the AG for many years. Even though some municipalities do tick all the right boxes in terms of compliance, they were still spending an extraordinary amount of money on consultants to do basics. Some do well with consultants, and some not. The PAA allows municipalities to work on correcting adverse findings before remedial action could be instituted.

Mr B Hadebe (ANC) said legislation would have loopholes at times, and asked these to be identified particularly in relation to supply chain management. Was existing legislation not the root cause of some of these poor audit outcomes? Was the AGSA able to assist legislators by identifying the loopholes and ensure these are rectified through amendments? What does the AGSA regard as an exceptional or unforeseen circumstance during its audit exercise? Referring to his previous deployment as a councillor, he pointed out that councillors do not have an opportunity to interrogate deviations by accounting officers in some instances. He asked how soon AGSA could furnish the Committees with its audit report on metros. He had a keen interest in the City of Cape Town’s audit outcomes, with particular emphasis on the Bus Rapid Transit system.

Ms E Spies (DA) indicated the need to emphasise the role of political office bearers in bringing about changes to problems in municipalities. Whereas meaningful change calls for collective efforts, councils do not take their roles seriously. The intervention by AGSA on a quarterly basis was well-appreciated.

Ms B Zibula (ANC) commented on the consistent trend of wasteful expenditure in many municipalities. How could this be addressed once and for all to ensure there is accountability? She reiterated the need for political leadership to take centre stage in bringing about change. She noted cases where provincial governments had to intervene owing to a recurrence of poor outcomes. Would this be replicated in other municipalities as accountability was continually deteriorating?

Mr K Ceza (EFF) asked about the interventions by AGSA in terms of Section 189 of the Constitution. There seemed to be no sense of urgency on the part of AGSA in as far as turning the situation in municipalities around was concerned.  

Co-Chairperson Hlengwa raised concerns about the matter of the VBS Mutual Bank investments that impacted 16 municipalities in the Gauteng, Limpopo and North West provinces. The AGSA had stated that the MFMA prohibits municipalities from investing in mutual banks. Two municipalities were able to withdraw their investments in time but 14 municipalities still had those investments when the VBS Mutual Bank was placed under curatorship. He asked whether the AGSA had raised these issues with municipalities in their month-on-month or quarter-to-quarter intervention meetings. He requested the AGSA to send the list of municipalities where they received threats and the details of the cases that have been opened in this regard, so that the committees can assist the Office of the AG by following up with law enforcement agencies on the progress of these cases. The expanded mandate seeks to bolster accountability and there was need for it to gain traction and its full implementation. He identified the need for a metro-focused report from AGSA in the future, because that was where big money was. He also asked for a breakdown of municipalities that had engaged consultants but had poor audit outcomes. Was existing legislation a hindrance or an enabler both to the work of AGSA and municipalities? This should be flagged for discussion on a later date.

Co-Chairperson Somyo asked what should be done to guarantee some veneer of stability in municipalities. To what extent were the AGSA’s audit reports reviewed by councils?

Mr I Groenewald (FF+) made reference to the roles of councillors and implementation of action plans as recommended by AGSA. The deterioration accountability was concerning. He pointed out that legislation requires all irregular expenditures to be investigated. However, it appeared there were a number of such expenditure which had gone unreported and investigated.

Ms Muller replied that asset management systems were a concern for both the AGSA and the Department of Cooperative Governance and Traditional Affairs. This was an area the Committees might also need to consider. Leadership at all levels was crucial to turn the situation around and do away with the trends where audit outcomes are affected by political and electoral cycles. On the incidences of intimidation, police cases were opened in eThekwini and Ekurhuleni municipalities and the Commissioner of Police had been engaged to ensure the cases are dealt with. On the effectiveness and applicability of existing legislation, AGSA could not express itself on this because the formulation of laws is within Parliament’s purview. The Office of the AG only expresses itself in cases of non-compliance with the legislation. It was important to make the distinction. Members’ concerns were noted, and the Office of the AG was easing into the expanded mandate and making sure priority areas are implemented expeditiously. The Office of the AG would endeavour to furnish the Committees with all the information as requested.

Co-Chairperson Hlengwa directed the AGSA to avail all the information and relevant documentation as requested by Members. For a long time, the Office of the AG had not been happy about its powers and this had been addressed by Parliament. The necessary pointers had been provided to the Committees. Nobody was going to escape from appearing before SCOPA. He also requested the Office of the AG to send through a list of the 17 municipalities which are repeat offenders and the age analysis. This was in order for the committees to start the process of scheduling hearings with those municipalities. 

The meeting was adjourned.

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