2019/20 MFMA audit outcomes in WC & Covid 19 municipal expenditure

Local Government (WCPP)

17 August 2021
Chairperson: Mr D America (DA)
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Meeting Summary

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MFMA 2019/20
COVID-19 Special Audit 3

In a virtual meeting, the Auditor-General briefed the Standing Committee on Local Government on the audit outcomes of the Western Cape Municipalities for the 2019/2020 Financial Period.

The Auditor-General (AG) informed the Committee that there has been an improvement - with concerns remaining - in the audit outcomes compared to the regression of the previous financial years. 23% of the municipalities recorded an unqualified audit with no findings, while 75% achieved an unqualified audit with findings. Other municipalities scored qualified audits with adverse findings and qualified audits with disclaimers, 1% respectively. The Committee heard that all the auditees submitted financial statements in time as per the legislation requirements and the quality of the submissions were satisfactory. 4% of the municipalities that achieved an unqualified opinion did so because they corrected all the misstatements identified during the audit. 24% of the municipalities had no material findings because they corrected all misstatements identified during the audit. The cost of Financial Reporting has amounted to R809 million with 20 municipalities spending R30 million on consultants for financial reporting services. The cost of Consultants constituted 4% of the total costs of financial reporting.

Members noted that external intervention appeared not to have spoken to problems identified and the leadership at the top was not improving. The Committee asked for clarity on the Covid-19 findings about water tanks that had not been filled and the reason for the payment of inflated prices by the City of Cape Town; the extent of dependency of Western Cape Municipalities on other public bodies; a comparative picture of how Western Cape Municipalities fare compared with those of other provinces and if the AG tools on regulation have been used to action recommendations to fight irregularities.

The Committee heard that there was never an obligation to fill water tanks every day. As for the payment of inflated prices the area of contract management had to be explored. The City has to follow up on whether there was a contract involved to ensure tanks were filled. Members heard that procurement and contract management were the most common areas of non-compliance with legislation followed by unauthorised fruitless irregular and wasteful expenditure at 22%. 26 municipalities have incurred an irregular expenditure amounting to R1.4 billion. Members were informed that there was a new process in place for accountability and Material Irregularity (MI). The MI was implemented in entities with big irregular expenditure. The AG was continuously increasing this in all departments and entities with material irregularities. If Material Irregularity was identified during an audit, the AG communicates with the Accounting Officer for responses

The Committee was informed that the root cause of material irregularities in the Western Cape stemmed from the failure of senior managers and other Officials from taking reasonable steps within their areas of responsibility to ensure that contracts are managed efficiently. Members were disappointed to hear that the City of Cape Town paid exorbitant fees - to the tune of R18 000 per month - for the erection of a shelter in Strandfontein. This was paid to one service provider without checking quotes from other service providers.

With regard to Covid-19 relief funding, Members were informed that there has been a focus on infrastructure and PPE. Members noted that recommendations from the AG have not been implemented and people were not held accountable.  Irregular expenditure was standing at R1.4 billion.  Members heard that the Office of the AG has been on a mission to reduce fees in the province. There is a framework that provides guidance to the AG.

Resolutions of the Committee

  • The Committee resolved that it had to engage with the regressed municipalities including the City of Cape Town on the Covid-19 inflated prices;
  • Invite the Local Government Department to explain its support to the regressed municipalities;
  • When it has received the breakdown report from the AG on exorbitant fees paid by municipalities to consultants, it would either try to deliberate on the matter on its own or involve SCOPA because it is not clear why municipalities have to use consultants if they had CFOs;
  • it resolved that the AG should provide it with the breakdown on irregular expenditure from municipalities;  and
  • Finally, the Chairperson promised to would forward the response to the Committee from the Minister on auditing fees paid to the AG by municipalities when he questioned the matter.

Meeting report

Briefing by the Auditor-General South Africa (AGSA)

Mr Ashley Olkers, Acting Business Unit Leader: AGSA Western Cape, informed the Committee that there has been an improvement in the audit outcomes compared to the regression of the previous financial years, however concerns have remained. 23% of the Municipalities recorded an unqualified audit with no findings, while 75% achieved an unqualified audit with findings. Other municipalities scored qualified audits with adverse findings and qualified audits with disclaimers, 1% respectively.

Municipalities that have remained in the regression zone are Kannaland, Cederburg and Beaufort West. 21 municipalities have remained unchanged while six have recorded improvements. The AG has observed that Municipal debtors have not been recoverable and this has resulted in creditors having greater than available cash at year-end for three municipalities. 23% of estimated recoverable revenue and equitable share is being used for salaries and council remuneration. This means 13% of the expenditure went towards maintenance in relation to recoverable revenue and equitable share.

Mr Olkers reported that all the Auditees submitted financial statements in time as per legislation requirements. The quality of submissions has been satisfactory and those municipalities (4%) that achieved an unqualified opinion did so because they corrected all the misstatements identified during the audit. 24% of the municipalities had no material findings because they corrected all misstatements identified during the audit.

The AG indicated that the costs of financial reporting have amounted to R809 million, while 20 municipalities spent R30 million on consultants for financial reporting services. The costs of consultants constituted 4% of the total costs of financial reporting.

Concerning non-compliance with legislation, the AG has found that most common areas were in procurement and contract management (30%), and followed by unauthorised, fruitless, irregular, and wasteful expenditure (22%). 26 municipalities have incurred an irregular expenditure amounting to R1.4 billion. There are good financial accounting controls in place but there are inadequate preventative controls on compliance.

Mr Olkers pointed out that the root cause of material irregularities in the Western Cape stemmed from the failure of Senior Managers and other Officials not taking reasonable steps within their areas of responsibility to ensure contracts are managed efficiently. The estimated loss is around R9 million.

Mr Olkers, on Covid-19 relief funding, reported that the audit focused on infrastructure, PPE, and spending. The audit discovered that the City of Cape Town has spent R11.7 million that was allocated for Covid on a shelter for refugees at the Wingfield site even though the provision of services to refugees falls outside of the mandate of local government and there was no agreement entered into between the Department Of Home Affairs and the City for paying back the money.

Further, the provision of water to additional water tanks procured and distributed in response to the Covid-19 pandemic was not sufficient by the City of Cape Town. The water tanks were not filled up daily as originally planned and some tanks were empty for weeks.

Lastly, the City of Cape Town did not ensure the cost to establish that the Strandfontein temporary shelter was reasonable and cost effective. The City only obtained a quote from one supplier amounting to R18 000 per month.

(Slides were shown to illustrate financial management of Covid-19 relief funding to local government and nature of identified material irregularity (MI) nationally)

Discussion

Deliberations with the AG

Mr A Van der Westhuizen (DA) remarked that the work of the AG has been sterling in the last 25 years and members were continuing to take the reports seriously and learning from them. First, he commented he was surprised to learn that quarterly municipal expenditure amounted to R73 billion, while Stats SA reported the same quarterly expenditure to be R80 billion because the expenditure of municipalities was exceeding the income. He further pointed out that 1% of municipalities received qualified Audit Reports with findings, while another 1% got disclaimers.  This meant that 98% of the Municipalities got unqualified reports with or without findings whereas during 2019 COGTA identified 87 dysfunctional Municipalities and deployed teams to provide assistance to those Municipalities. External intervention, to him appeared not to have spoken to problems identified and the leadership at the top was not improving. He also asked for clarity on the Covid-19 findings about water tanks that have not been filled. He wanted to know if this was an obligation not carried out and what the standards of service delivery were; and wanted to understand the reason for the payment of inflated prices by the City of Cape Town.

Mr Olkers, on water tanks, stated they had indicated there was never an obligation to fill water tanks every day. The City of Cape Town had to oversee the process concerning contract management. A failure has been identified: the City has got to do a follow up if there was a contract involved to ensure tanks were filled every day, or if it was the City’s duty to do that, it has got to take action against responsible Officials for not carrying out the work. Concerning inflated prices, he said the AG has communicated with the City on this matter. The City undertook investigation. The AG would follow up on whether the forensic reports are available or if the City has instituted the recommendations coming out of the reports and taking action against officials. He also indicated that the R73 billion has got to do with expenditure reports of the Western Cape Municipalities. It is about expenditure and income.

Ms M Maseko (DA) wanted to find out what the AG has identified to send the message that municipalities are free from political interference because in her understanding accountability comes from Councilors in the sense that political representatives have to get information from officials who in turn see this as political interference. She wanted to know how the municipalities are going to get the balance right. She further wanted to understand the extent to which political instability has played a role in regressed municipalities, and if the work of the AG was helping the Committee to be proactive.

Mr Olkers stated that when it comes to political interference the legislation has been written in such a way to show that there are clear roles between those of the Administration and those of the Councilors. For example, procurement has to be free from political interference. In one municipality it was discovered that Councilors were members of the tender processes. That was an example of where it has been indicated that there has been political influence. There was an example of non-compliance and irregular expenditure mostly found in procurement. He went on to say that where there has been regular changes in administration, even though it is hard to prove/trace political and administration instability within the municipality, the audit outcome will show that the internal control environment has created space for internal control failures. On regressed municipalities, he said that media reports have been there for all to see and that he does not want to get into the specifics. There has been political instability that spilled over into the administration of the municipality and that eventually had an impact on the audit outcomes.

Ms Maseko wanted to understand the extent of dependency of Western Cape Municipalities on other public bodies dealing with information. She also wanted to know how the municipalities that are not giving joy to their communities are going to be empowered and this should be remedied in the future because the root cause for material irregularities is that Senior Managers and Officials are not taking reasonable steps in managing contracts.

Mr Olkers said he was not sure about the bodies Ms Maseko was referring to, but if it is for administration purposes this would refer to bodies that are involved in the preparation of financial statements. R30 million had already been spent on 20 municipalities for consultancy work. Also, he said steps are taken to keep municipalities accountable when it has been confirmed that the municipality has taken action against officials for contract mismanagement. Municipalities should draft action plans to be assessed at oversight level and be checked quarterly to see if progress has been made. If the processes are implemented, the oversight would keep Officials accountable. That is the kind of mechanism that is encouraged for Officials to implement on a regular basis.

Mr Van der Westhuizen asked the AG to give the Committee a comparative picture of how Western Cape Municipalities fare compared with those of other provinces.  

Mr Olkers stated that the AG published a general report for the entire country about the 250 municipalities’ audit outcomes as per the requirements of the MFMA.

Mr Van der Westhuizen wanted to know if the AG tools on regulation have been used to action recommendations to fight irregularities because it appears recommendations from the AG have not been implemented and people are not held accountable.

Mr Olkers explained that there is a new process in place for accountability and material irregularity. The MI process has not been implemented at all government departments and entities. It was implemented in entities with big irregular expenditure. The AG is continuously increasing this in all departments and entities with material irregularities. If material irregularity is identified during an audit, the AG communicates with the Accounting Officer for responses. The AG then issues a certificate of Material Irregularity so that an action is taken. If there is no satisfactory answer, the remedial actions and recommendations from the AG are given to the municipality. If the recommendations are not taken seriously by the municipality, the AG will take binding actions. But this is a long process because the AG has to follow all the necessary procedures to be fair to the Accounting Officer. It’s a time consuming process.

Ms Maseko wanted to establish the time it takes for the AG to issue a certificate for irregular expenditure and consequence management to the accounting officer after an audit outcome.

Mr Olkers stated the final determination on the issuance of the Certificate of Death is made by the AG if the Accounting Officer is going to receive it. The AG has to inform the Accounting Officer in time about the Certificate of Death. He said it is difficult to be exact on time-frames.

The Chairperson asked seven questions:

  1. Clarity on the equitable share that is being used for salaries of Councilors. He said the report presented by the AG was presented before the pandemic. Some debts are not recoverable because there have been challenges around paying for municipal services;
  2. He wanted to know what the impact of inward migration to the Western Cape is on service delivery;
  3. if there is quality work being done by consultants for smaller municipalities seeing that Consultancy Fees amount to R30 million;
  4. if there is seriousness on the part of Municipal Management to implement the AG recommendations because they had highlighted shortcomings;
  5. clarity on irregular expenditure which is standing at R1.4 billion because there is no context in which it occurs;
  6. Which municipalities had material irregularities and
  7. Clarity on the R18 million paid per month by the City of Cape Town for erecting a Covid-19 shelter in Strandfontein because this was an inflated price.

Mr Olkers made it clear there has been pressure on municipalities for debt collection long before the onset of the pandemic. Municipalities are struggling with debt collection and they use the equitable share to make up for this gap created by the failure to collect debt. This is impacting on other things municipalities are supposed to do. He also stated that municipalities would continue to feel the pressure of inward migration to the Western Cape but this depends on where the migration happens. There are no specifics around the issue and Stats SA might have the accurate details. A breakdown from the municipalities on Consultants’ Expenditure would be sent to the Committee. Some of the smaller municipalities do not have resources inside for the preparation of financial statements, and that was why they were making use of consultants for preparation of financial statements and other things. With regard to AG reports being given serious attention, most municipalities were continuing to take the recommendations from the AG seriously, but there were a few that had a “dit maak nie sak nie” attitude towards the reports. Even though that is the case, the AG still continued to engage with them to strengthen Internal Controls. About municipalities with Material Irregularity, he said the City of Cape Town has been singled out as one of those with an irregularity of R9 million. An investigation has been instituted and a follow-up would be done on processes implemented so far. The MI process has been implemented in the City of Cape Town and is being rolled out to other affected municipalities. In addition the funding for the Covid-19 Shelter in Strandfontein has been confirmed with management. The AG has reported only what it found on Covid -19 expenditure in the City of Cape Town, and is aware of the SIU investigation at the Matzikama Municipality. Concerning the R1.4 billion on irregular expenditure, the AG would forward the breakdown to the Committee because there are six municipalities that had bulk of expenditure in their statements.

Mr Van der Westhuizen expressed concern on the feedback he received from other public entities about financial costs of the audit process from the AG, stating that they are not allowed to shop around and the situation is monopolistic. Now he wanted to know the extent to which the AG has attended to their efficiencies and costs devolved to the administration it audits. There is a need to find a balance between the two processes because a cent spent on auditing could also be spent on improving the financial position of the company.

Mr Olkers explained as AG they are aware of the costs. These things are considered when they engage with the management of the auditees. He admitted that the AG is monopolistic and this stems from the Constitution. There are reasons for creating the office of the AG because independence and objectivity are paramount. The AG audits without fear or favour. The office of the AG has been on a trend of reducing fees in the province. There is a framework that guides the AG. Unfortunately, there have to be costs and value-add in the process.

The Chairperson thanked the audit team for the prudent work it has continued doing over the years, and praised the Department for its work to ensure municipalities are doing the work they are supposed to do.

Committee Resolutions

  • The Committee resolved that it had to engage with the regressed municipalities including the City of Cape Town on the Covid-19 inflated prices;
  • Invite the Local Government Department to explain its support to the regressed municipalities;
  • When it has received the breakdown report from the AG on exorbitant fees paid by municipalities to consultants, it would either try to deliberate on the matter on its own or involve SCOPA because it is not clear why municipalities have to use consultants if they had CFOs;
  • it resolved that the AG should provide it with the breakdown on irregular expenditure from municipalities;  and
  • Finally, the Chairperson promised to would forward the response to the Committee from the Minister on auditing fees paid to the AG by municipalities when he questioned the matter.

Minutes

The minutes of 3 August 2021 were adopted with no amendments

Quarterly Report

The Chairperson took the Members through the document, page by page.

Ms Maseko moved for the adoption of the report.

Mr Van der Westhuizen seconded the motion.

The Quarterly Report April 2021 – June 2021 was adopted with minor amendments.

The meeting was adjourned.

Audio

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