Local Government Audit Outcomes 2018/19; COVID-19 impact on AGSA

Standing Committee on Auditor General

10 July 2020
Chairperson: Mr S Somyo (ANC)
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Meeting Summary

In a joint virtual meeting, the Auditor-General briefed the Standing Committee on the Auditor-General (SCAG), Portfolio Committee on Cooperative Governance and Traditional Affairs (COGTA) and Standing Committee on Public Accounts (SCOPA) on the 2018/2019 local government audit outcomes. The briefing presented a bleak view of the financial management of municipalities. The Auditor-General addressed the debt to Eskom and water boards; money spent on consultancy services; supply chain management non-compliance as the main cause of irregular expenditure; and preventative controls not working effectively if all assurance providers are not playing their role. He noted that municipalities used consultants for financial reporting at a cost of R1,26 billion with many of these consultants delivering financial statements with material misstatements.


Committee members raised the underspending of conditional grants; repeat disclaimers and adverse opinions and the 28 outstanding audits; the non-improvement in outstanding revenue recovery; the internal audit function; the interventions required to staunch for the deteriorating audit outcomes; corruption versus irregular expenditure and the full implementation of the Public Audit Amendment Act.

They suggested that the state of local government audit outcomes needed to become a national imperative to improve their financial management and the oversight provided by the many assurance providers. They all agreed that a united approach is required for better oversight mechanisms to be implemented.

The Auditor-General who was presenting his final Local Government Audit Report appealed to the three committees to avoid lamentations but put into action a concrete plan of action. He provided clear solutions that could be implemented.

Meeting report

Local Government audit outcomes 2018-2019
The Auditor-General, Mr Kimi Makwetu, said the report title on the Local Government Audit Outcomes was "Not much to go around, yet not the right hands at the till". He had visited all the provinces to have discussions with the auditors of the respective provinces and looked deeper into the financial statements than they had before. When audit outcomes are analysed, people direct their focus to common observations such as that 'irregular expenditure does not mean corruption'. AGSA wanted to address the problem of audit outcomes being analysed without a full appreciation of the financial statements. He wanted to discourage the analysis of the number of clean audits and disclaimer opinions without a true appreciation of what is reflected on the balance sheet, the statement of comprehensive income and the cash flow going in and out of the entity. As reflected over a number of years, it is clear that local government does not receive much in terms of financial resources. Those responsible for managing these limited resources do a poor job and are not adequately trained to handle massive transactions. Consequently, they become a conduit for those that do have the know-how to be able to commit corruption in the system. This is what is meant by "not the right hands at the till". Due to the weaknesses of the financial statements and management, it creates the right circumstances for external entities to capitalise on this and commit fraud.

He took the Committees through the stark reality of local government finances. Looking at all the financial statements they audited; it was important to inform the public on the exact amount they were reporting on. Of the 229 audits completed, the total revenue reported in the income statements, bar those outstanding, came to a total of about R26 billion. This is the direct charge for services rendered.

He took the Committee through the audit outcomes per municipality, the financial health of the municipalities and the use of consultants for financial reporting services. He provided explanations for the causes of irregular expenditure and the preventative controls needed to deter irregular spending. He concluded the report by speaking about the COVID-19 impact on Auditor General SA (AGSA) financial sustainability.

Discussion
Mr N Singh (IFP) was pleased that the Chairpersons of other Portfolio Committees were invited to the meeting. They are extremely depressed by the report but the Committee’s role is to support the role of the Auditor-General to ensure that there is consequence management and good financial accountability. The Auditor-General delivered a stark reality but in real terms it must be much worse than what was presented as the Auditor-General only does sample auditing so the rot must be deeper in financial management of the municipalities. The situation requires an urgent national imperative. The Auditor-General’s work comes after the fact. Where is the Office of the Accountant General? Where is COGTA? Where is National Treasury? What do they do to ensure that before all these problems occur, the heads of all these government entities are properly trained to do the job? The Auditor-General stated that not the right hands are at the till. There are so many hands going into the proverbial till. There is enough money but too many people are stealing. We need this time of interaction in this meeting to make this a national imperative to stamp out corruption and to ensure good financial management not only at the local level but in all the country. He concluded by commending the Chairperson’s work in supporting the Office of the Auditor-General.

Mr B Hadebe (ANC) referred to the disclaimers and adverse opinions and outstanding audits. Of the municipalities that received these audit opinions, how many have obtained these before and how many have improved? The presentation did not provide this comparison.

Ms S Van Schalkwyk (ANC) requested that the Members receive the full narrative report from the Auditor-General in future. She expressed her concern at the lack of revenue generation and the non-improvement in outstanding revenue recovery. It is unlikely that this outstanding revenue will be collected in these municipalities. What is the view of the internal audit of each of these municipalities on its role and responsibilities especially with the municipalities that are repeat offenders?

Ms E Spies (DA) acknowledged COGTA’s assistance in supporting the Committee in their oversight role of the Auditor-General's municipal audit outcomes. Whenever the municipal audit outcomes are presented, a common challenge is the underspending of conditional grants. COGTA needs to enforce stronger oversight over the municipalities on that. The role of the internal audit in municipalities cannot be underplayed or undervalued. Once municipalities get their allocation of conditional grants and equitable share, why do they not have delivery plans in place? Why are those delivery plans not monitored? There should be a mid-year internal audit report and the municipalities must be monitored or have their conditional grants taken away. COGTA needs to pronounce itself stronger on this matter.

With the assurance providers, specifically the municipal public accounts committee (MPAC) for municipalities cannot simply be a municipal council committee that is not properly established. It needs to have more power and, if not, this needs to be reviewed. If the MPAC does its work within municipalities, supported by all the other assurance providers, these repeated problems can be detected early on. Several municipalities with negative audit outcomes appeared before the COGTA Portfolio Committee. Was there any progress in the audit outcomes of these municipalities? A discussion needs to be had on that matter.

Ms H Mkhaliphi (EFF) agreed that the Auditor-General’s report was traumatising. She asked the Auditor-General to confirm if only 20 obtained clean audits out of 257 municipalities. She asked for clarity on what type of interventions are needed in the different municipalities such as training in the skills needed to solve the problems experienced. How does the Auditor-General distinguish between corruption and wasteful expenditure when corruption is happening under the pretence of wasteful expenditure?

She commented that the R2.26 billion spent on consultancy is being wasted. With the Auditor-General’s amended powers conferred on him in the Public Audit Amendment Act, she asked if he is using those powers and when will the Committee see those powers being used fully? From the report, the status is regressing rather than progressing. What is the way forward with the outstanding audits? She referenced the Nelson Mandela and eThekwini metros where the auditors were threatened and prevented from doing their work. How does the Auditor-General report on this? What is the role of the Auditor-General with the COVID-19 relief package spending? Are they going to wait until audit season or do they have systems in place that address the COVID-19 spending?

Ms F Muthambi (ANC), Portfolio Committee Chairperson on Cooperative Governance and Traditional Affairs, agreed that the report represents a depressing state of affairs and that everyone at the meeting must be taken aback by what had been presented to them. There is a clear lack of consequence management, but the three Committees need to have a meeting on the report so that they can decide on the best strategy to detect problems. The COGTA Portfolio Committee would be meeting with the Oliver Tambo Municipality later that night to hold them accountable. Now that the Public Audit Amendment Act has come into effect, the accounting officer needs to be issued with a certificate to give AGSA the power to force government officials to comply when completing the audit. The Committee invited the municipalities who were serial offenders to appear before the Committee to be held accountable. She requested that the Auditor-General assist the Committee by providing a detailed report on whether those serial offender municipalities have improved. She requested further that the AG provides a previous financial statement analysis so they can make a comparison. She assured SCAG that they would take the necessary measures to hold the municipalities accountable. With the municipalities merged in 2016, has the merger enabled those municipalities to improve their outcomes or has the situation worsened? She asked if the AG had assessed why consequence management was taking so long to be effected. What is the Western Cape doing differently such that it has maintained its standard?

Auditor-General response
On the audit being after-the-fact and retrospective
He agreed with this observation and explained that although the audit report is retrospective, the audit report is a statutory process that happens every year so it represents an accumulation which can act as a predictor for the future. For example, if a municipality has been audited for five years and it receives the same poor outcome then that will be considered a red flag that what happened in the past is likely to happen in the future again. This is where the report is prospective. Looking at past expenditure plays a large part in our oversight role.

On making local audit outcomes a national imperative
He agreed that the poor audit outcomes need to be made a national imperative. With his 13 years of experience as Auditor-General and Deputy Auditor-General, one needs to confront the reality that the audit outcomes spark commentary, reflection and disappointment for two or three days but it does not last and government returns to other matters once the commentary has disappeared from the media and the analysts have stopped analysing the audit outcomes. For the audit outcomes to assume their rightful place as a national imperative, the key efforts to ensure the offenders are brought to account must be made a permanent feature of the oversight activity, instead of waiting another 12 months and hoping for the best when nothing is being systematically driven to effect change. It must become a permanent agenda.

Money spent on consultancy services
Money spent on consultancy services to assist with financial reporting is an example of an item that must become part of the permanent oversight agenda. There is a schedule in the report of municipal spend on service providers and how much they spend. To exercise proper oversight over consultancy services, there would need to be collaborative work with the Provincial Public Accounts Committee, MPAC and SALGA with a six month programme to assess what type of support is being provided and inviting those service providers to explain and engage with the Committee. These service providers should not have a problem with having to account to the Committee as they are providing services for which they are being paid.

Proposed solutions
Each Provincial COGTA could begin to engage with its Provincial Public Accounts Committee and MPAC to find a mechanism beginning with the financial service providers and work back into the institution. The accounting officers and chief financial officers should be invited to that engagement so they can explain to those performing oversight at the provincial level why municipalities have to spend millions merely for a service provider. These service providers will have to explain what they are being asked to do and what challenges they encounter when performing their job, despite the fact that the municipality employs people in the finance department to perform the jobs that the service providers are invited to do. This is the oversight activity he proposed the Committees should follow to have a systematic impact rather than have "feelings of disappointment" as a result of the audit outcomes staying the same over time.

If there is provincial collaboration, the outcome could be a discussion where the challenges are understood but the municipalities are then given a prescribed amount to spend on external consultants for a specific year. They will then be reviewed to determine if their outcomes change based on these consultancy services. This is a preventative control that would enable the municipalities to save money. There must be pointed engagement because accounting officers should have awareness that the decisions they make are being monitored according to statutory responsibility and as such limits are made on external service provider spending.

At a provincial level, each municipality can be monitored on how they are working through their audit action plans they has agreed to and to what extent the National Council of Provinces is working with the provinces and the other structures to ensure that it exercises the required monitoring of this activity. The comparative reports are available and can be provided to the Committee, but what will happen to the analysis once it is given over? What difference is it going to make to the outcomes of the financial reports if the information is presented differently, for example, as pie charts?

Repeat adverse opinions, disclaimers and outstanding audit findings
Information on these items as well as which municipalities have improved and regressed is provided in the General Report. Over 33 municipalities improved and 46 municipalities regressed over the three year period since the current administration took office.

Supplementary narrative to report
Mr Makwetu committed to adding a detailed narrative with additional insights to the report as they dig deeper into the accounts.

Lack of revenue generation and poor revenue recoveries
Mr Makwetu noted the comments Ms Van Schalkwyk made regarding these matters.

Internal audit function
In the report section that deals with internal audits, for example in the Free State, it was found that the internal audit recommendations are ignored once they scrutinize the books. The internal audit function is in a precarious position with where they are located in the entire set up of reporting. Firstly, the internal audit function is an internal resource whose responsibility is to enhance the ability of the accounting officer to minimize the financial risks. Internal audit will often be small units in the municipalities that are under the supervision and guidance of the accounting officer. The accounting officer is also responsible for making the resources available for the internal audit function to operate. If this internal audit function is to be effective in each independent assessment of the accounting officer’s operations then that internal audit needs to be much stronger if it has to report on things like deviation from supply chain procurement, lack of adherence to the internal control systems and internal policies or financial management. If the internal audit function is not strong enough, the accounting officer can be dismissive of them.

The internal audit function needs to be assessed to determine to what extent it can raise difficult problems despite it relies on the accounting officer for the allocation of resources for its operations. Does the internal audit function have regular interactions with an audit committee and is independent from some of the people about whom they report? It is also that relationship that is important for the internal audit function. It has a natural engagement with the Audit Committee. For an internal audit function to be effective it has to have an unrestricted access to various areas that it would need to interrogate. It may want to look into contract management, supply chain, the diligence applied to looking after the assets or if all the accounts are being reconciled regularly. Those are difficult areas to look at for someone who is positioned as an independent assessor over an accounting officer. The system needs to look carefully at whether there is an internal audit responsibility in the system that is likely to achieve its objectives if it continues to operate within the current confederation. Is there something different that can be done to enhance its capacity?

There are many witnesses in internal audits and part of this responsibility from an oversight and monitoring point of view is with National Treasury. It can be asked, how can National Treasury with its own systems assist in ensuring that the capacity of internal auditors in local government is enhanced to a level where an internal audit function can be a control instrument that is relied on?

Underspending of conditional grants
This matter also speaks to the overall management of conditional grants because if these are grants that are disbursed on the basis of certain conditions that need to be adhered to, it is being demonstrated through the inspection of these financial statements that some of these grants go towards operational expenditure. The conditions of the grant are not focused on. What happens is that the conditional grants are used to cover the shortfall for the things they wanted to pay for and in their accounts they claim that they have adhered to all the conditions associated with that grant. The engagement must first be on these grants. It must not only be about the underspending because in most instances it would be a reflection of poor planning. In other words, when the money arrives it comes in large chunks and when it has not been planned for properly, that money is sometimes used to sort out immediate problems instead of adhering to a plan that will take six months before it translates into what the money was needed for. There are two elements to this, firstly the underspending of the conditional grants and secondly the overall management of the grants.

MPAC needs to be stronger
He agreed with the sentiment that the MPAC needs to be stronger. The reality that they flagged in a few municipalities is that MPAC members have claimed they were placed in this committee in the municipal council but they are unsure of their role and they need assistance from the Office of the Auditor-General to understand their role. It is not an easy role to assume because there are a variety of things that need to be understood before assuming the role as an MPAC member.

Municipalities that were brought before Parliament
Some of them "did clandestine things to teach our staff a lesson". Many of them came forward to engage. The last time we engaged many of them produced results that showed no improvement, such as the likes of Nelson Mandela municipality whose audit ultimately got signed but it had outcomes that were not good but rather mostly the same as before the engagement. There are about 20 municipalities of the 257 that have a clean audit.

Type of interventions required
When the financial health risk is assessed, it is assessed in levels. One level states that there are good indicators to suggest that there is no real problem to worry about the financial health of that municipality. Where an audit states that an "intervention is required", for example Amathole District Municipality, it means that in addition to internal control weaknesses, it is in a situation that needs to be addressed and not to wait and just be left indefinitely until it does not have money. The type of intervention flagged is to make a plan to rescue the municipality from accelerating into an inevitable downward spiral it is heading towards. Such interventions in the past have included a section 139 intervention.

Corruption versus irregular expenditure matter
When speaking about corruption, it goes into the realm of intention. If the supply chain process was handled improperly in a particular transaction and there is a pronouncement that it was corrupt, this goes into territory that an auditor would find very difficult to provide evidence to substantiate. This casts itself not in the fact that there is an accounting system deficiency but it becomes a pronouncement on what the intention was behind the transaction. The auditor does not have the instrument to be able to distinguish if an irregular expenditure was the result of a person being incompetent to perform the transaction or if the person performed a transaction deliberately to be able to benefit from it. When irregular expenditure is raised, the point is to advise the municipal structures to take those items identified in the audit and subject them to further investigation and for the councillors of those municipal structures to determine if the irregular expenditure arose as a result of an unavoidable emergency or if it was a result of someone placed in a role where they do not possess the required competency or if it was a result of a person perpetuating corrupt activity. This may be easy for them to answer as they would have subjected that irregular expenditure to more substantive investigations than an auditor is able to do.

When evidence is brought forth to prove such then it can be concluded to be a result of corruption. An auditor would struggle to get to the real essence of whether it was corruption within the 60 day period of auditing as it requires a deep investigation. Further, much activity driven by corrupt intention would not naturally find it recorded in the books because the people committing corruption are too smart to make an entry in the books because it would lead to the answer they do not want to be traced. Often during the interrogation it is found that there are things that happened but they did not find their way into the permanent records. Corruption interrogations are handled in a complex manner that go beyond the sophisticated methods meant to hide it from someone who scrutinizes the books. In the Public Audit Amendment Act, there is a provision that should there be a transaction where the auditors are concerned about inappropriate activity in the books, they are required to refer that transaction to the agencies that have the appropriate tools and mandate to investigate matters to that level. The Public Audit Amendment Act dealt with the limitation of the Auditor-General in dealing with corruption.

Full implementation of Public Audit Amendment Act
The journey is ongoing at present. It sometimes takes quite a while for instruments like these to take effect in the system but there is sufficient pressure on the Office of the Auditor-General not to waste time on the matter. As an example, Ghana has a provision like that of South Africa [to issue a certificate of debt against accounting officers who fail to reclaim money]. It took them a number of years to apply that provision until civil society organisations took a stand and demanded that they implement the provision which they are now in the process of doing. It has had a wide reaching impact, to the extent that even senior Ministers have to answer to a charge certificate which is similar to the certificate the Member referred to. The Office of the Auditor-General is taking the early steps to ensure that they have an environment where if someone challenges a particular outcome of the audit that may result in a certificate being issued. The challenge must not be about process; it must not be about the principles of natural justice. It must be about the reasons the person disagrees with the substantive finding. The issue is not about why the person believes it is not they that must deal with the particular certificate of debt. Instead of saying it must be thrown out of court as the Auditor-General did not give the person enough time to navigate through the environment – since the accounting officer may not have been the person who carried out the transaction. It may be that their preventative controls failed and that is why they are being looked to. However, the accounting officers are given the time to go through their system because they may be managing a municipality with large departments and large budgets so they themselves as an individual accounting officer would not have been scrutinising every single transaction.

These are the factors that are an impediment when ensuring that when the plan is prepared for the implementation of the Public Audit Amendment Act, they do not find themselves having to be delayed. One needs to give the necessary credit to the Amendment Act for it is a very important development. Many laws are not seen to be implemented within 12 months of being introduced. There has been significant progress considering that AGSA is at the implementation stage and that many departments have been earmarked for this process within the PFMA environment, such as all education departments, all health departments, roads and transport, water and sanitation, infrastructure and state owned entities. In total the ones that have been selected are equivalent to 70% of the national budget. If the amended provisions are going to be applied to what amounts to 70% of the national budget within 18 months of coming into effect, they have exceeded themselves. The same can be expected to happen at the local government level. Once AGSA has done its part, the people in this conversation must be part of that engagement. For the Public Audit Amendment Act to be effective, it makes sense that the oversight committee supports it without reservation.

COVID-19 special audit
They are involved in doing some proactive audit work but it is a difficult territory to navigate in an environment where people are not at their work stations, which poses its own challenges. Once the bulk of the areas identified for the special audit of the COVID-19 relief package have been covered they will pronounce on it in the public domain. There is currently not much to say except that there is even some daily reporting that happens, such as the matter of the misuse of the R20 billion relief package by municipalities. When National Treasury is asked about how much of that R20 billion they have already disbursed to the municipalities, Treasury claims that they have not passed on a cent as yet. Whatever is being spent now is possibly being spent in anticipation of what still needs to be transferred to them.

Concluding remarks
Mr M Hlengwa (IFP), Chairperson: Standing Committee on Public Accounts, said that he was present to get a briefing on what the picture looked like and for it to be unpacked. He agreed with the Auditor-General that lamentation is the easy route out. It is all very well to react with shock and horror but this is a situation that has existed for a long time and it requires proactive action on the part of these three Committees. The initiative of interacting with municipalities who had received disclaimers for three years or more was a good initiative that was started but that needs to be followed up on. There is a need for introspection on the part of the oversight committees in Parliament and the provincial legislatures and the public account committees in particular, to determine if they are doing sufficient work exercising oversight otherwise they will continue lamenting and receiving the same audit outcomes. After this briefing, they need to get into the intricate details and deal with it bit by bit. There needs to be a constructive effort in dealing with the municipalities one by one. Of critical importance is they really need to crack the whip on COGTA because the section 139 interventions do not seem to be consistent in their application and reasons are varied. Even if an intervention has taken place, one finds that the situation does not improve unless concrete guidelines for the intervention are determined for financial management. Section 139 interventions will continue to be a political tool rather than a tool for redress and correction. We need a strategic focus on how COGTA is doing with interventions. One needs to ask if the legislatures have done enough oversight of monthly and quarterly reporting as opposed to lamentations at the end of the year. The report delivered by the Auditor-General should be viewed as a turning point and they should set into motion a programme of action.

Ms Muthambi, Portfolio Committee Chairperson on COGTA, agreed on the way forward as proposed by Mr Hlengwa.

The Chairperson noted that the Auditor-General was delivering the report for the last time. He commended the Auditor-General on his work in meeting the deadlines for accountability and in deepening the instances of ensuring they receive the pertinent information they need on municipalities. The problem is that although municipalities are audited, they still present slack financial management. The municipalities have to engage consultants but the results are not improving. It tells the story that there are serious problems in a number of municipalities. He agreed that as a way forward, the Committees would have to engage on the report outlook and tailor a way that keeps the three Committees present united. Their interest is that municipalities must improve as they are not where they are meant to be and there is a serious problem.

The meeting was adjourned.

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