The Select Committee on Appropriations and the Select Committee on Cooperative Governance and Traditional Affairs, Water and Sanitation and Human Settlements sat for a joint meeting to discuss the Auditor-General of South Africa’s report on the 2019/20 local government audit outcomes and findings on Covid-19 municipal relief funding. Also present in the meeting were officials from the South African Local Government Association.
The Auditor-General said that local government finances continued to worsen and there remained serious weaknesses in financial reporting in 2019/20. Local government finances are under pressure, with municipalities relying on short-term and costly solutions, such as consultants, to compensate for lack of financial management and reporting skills. Supervision and monitoring is not taking place. Leadership and oversight should use the reports and briefings of the Auditor-General to identify key areas that need attention. There must be consequences for accountability failures.
Members said the report showed the dire situation municipalities are currently in. Whilst they were pleased that the number of municipalities that achieved a qualified audit with no findings increased from 20 in 2018-19 to 27 during this audit, they noted that poor audit outcomes remain prevalent in municipalities. Of particular concern to Members were the 57 outstanding audits – almost a quarter of all municipalities. Members asked about the effectiveness of the amended Public Audit Act and about the implementation of material irregularity process. What relationship does the Auditor-General have with the law enforcement agencies? How does it relay its findings to them? What role do the law enforcement agencies play when financial mismanagement and fraud has taken place.
The Committee expressed its concern that individuals who are unable to do the work were appointed to financial positions in the municipalities. This meant that a municipality has to appoint consultants to prepare its Annual Financial Statements, which is an unnecessary expense. Members called for municipalities to end the use of consultants.
The Committee indicated that the financial year under review had seen the worst audit performance of local government. There needs to be collaboration between the various stakeholders to reverse the fortunes of municipalities. Attention should be paid to the worst-performing municipalities, which were found in the North West, the Free State and Mpumalanga. Parliament has the responsibility to strengthen its oversight function over municipalities, to ensure all wrongdoers are held responsible for their actions. This should be its contribution to bring about stability in local government.
Co-Chairperson Mahlangu welcomed all officials to the sitting and asked if there were any apologies received.
The Committee Secretary indicated that the Committee received apologies from the Minister of Cooperative Governance and Traditional Affairs as well as the Deputy Minister and the Director-General of the Department of Cooperative Governance and Traditional Affairs (COGTA).
Co-Chairperson Mahlangu said that the only item on the agenda was the briefing by the Auditor-General on the local government audit outcomes and findings.
Mr J Mpisi (ANC, Gauteng Legislature) said he was concerned that more often than not, Members provided apologies without going into the details of their absence, whilst other Members did not attend their meetings. He asked how officials from government would take their work seriously if Members of Parliament did not.
Co-Chairperson Mahlangu agreed with Mr Mpisi and said that usually after meetings, Chairpersons will engage Members who do not tender an apology for missing a meeting, or if it is suspected that the reasons provided on the apology are untrue.
Mr Y Carrim (ANC, KZN) also agreed with Mr Mpisi. He informed the Committee that a Chairperson’s meeting had been set for 12:45pm and the Mid-Term Budget Speech would be discussed.
Co-Chairperson Mahlangu indicated that concerns have been raised on the attendance of representatives of provinces.
Briefing on the Local Government audit outcomes and findings on Covid-19 municipal relief funding
Ms Tsakani Maluleke, the Auditor-General (AG), thanked the Committees for the opportunity to share the AGSA report. The audit work was done to ensure that there is oversight. Feedback provided by the Committee will be important and will be incorporated in the AG’s future work, so that it can deepen its journey of facilitating efficient oversight and strengthening their systems of oversight. She clarified that the report related to the 2019/20 financial year.
In her introduction, she mentioned that local government finances are under pressure, with municipalities relying on short-term and costly solutions, such as consultants to compensate for lack of financial management and reporting skills. Supervision and monitoring is not taking place. Leadership and oversight should use AGSA reports and briefings to identify key areas that need attention. There must be consequences for accountability failures.
Key Findings [Please refer to the detailed presentation slides]
- R14.61 billion unauthorised expenditure
- R26 billion irregular expenditure incurred by 246 municipalities (But irregular expenditure is not complete due to weaknesses in reporting)
- Out of 257 municipalities only 27 (11%) achieved an unqualified audit without findings
- R1.027 billion spent on consultants
- 22 municipalities had disclaimed opinions
- 28% of Annual Financial Statements (AFS) submitted for auditing had issues with their quality
- Audits of 57 (22%) auditees are outstanding
- 96 Material Irregularities (MIs) issued, with estimated loss of R2.04 billion
- Procured Personal Protective Equipment (PPE) prices higher than market-related prices
- Required procurement processes were not followed when purchasing PPE
AGSA found that local government finances continue to worsen and identified serious weaknesses in financial reporting. There is significant doubt about the ability of over a quarter (27%) of municipalities to continue as a going concern. The AG also found that 46% of recoverable revenue and equitable share has been used for salaries and council remuneration, whereas only 2% of expenditure was utilised for maintenance.
The AG highlighted the recurring use of consultants for financial reporting, with 74% of municipalities doing so. In total, R5.594 billion was spent on financial reporting, with the salary cost of finance units amounting to R4.567 billion, whilst the cost of consultants amounted to R1.027 billion (which constitutes 18% of the total financing reporting cost). Lack of skills and vacancies in the finance units in municipalities were two key reasons identified for the recurring use of consultants.
Poor audit outcomes remain prevalent in municipalities. 22 municipalities (out of 257) had disclaimed opinions, meaning that the municipality could not provide evidence for most amounts and disclosures in financial statements so the AG could therefore not express an opinion on credibility of these financial statements. [See slides 7 to 11]. There were still 57 (22%) outstanding audits at the cut-off date of 23 April 2021. However, the AG was pleased that the number of municipalities that achieved a qualified audit with no findings increased from 20 in 2018/19, to 27 during the 2019/20 financial year.
Co-Chairperson Dodovu mentioned that whilst the presentation was long, it was necessary. It covered three important points, first, the audit outcomes of the municipalities, second, the report on the PPE expenditure patterns of the municipalities and the MIs. He thanked the AG for the work it has done over the years, and he indicated that the Committee has been left inspired.
He asked whether the AG had suggestions on how all relevant bodies and stakeholders can assist municipalities in overcoming the challenges they are facing. He suggested that national and provincial governments need to establish processes that will strengthen oversight and improve the situation afflicting municipalities. He opened the floor for discussion.
Mr D Ryder (DA, Gauteng) asked that in the future, the AG should present its local government audit outcomes and findings to the National Council of Provinces (NCOP) first, as it is mandated to deal with matters affecting local government. He added that much of the information presented was old news, as it had been presented to the Standing Committee on the AG, on 22 July 2021. Nonetheless, he praised the AG for the good work it has done, and he requested that it maintain its excellence.
He asked a series of questions:
First, has the use of overdrafts by municipalities through their banks, become a prevalent practice? If it had indeed become prevalent, it leaves room for the money to become undetected government debt.
Second, does the AG have oversight over the budgetary processes of municipalities, as it seems that unfunded budgets are becoming a recurring issue?
Third, did the AG note a benefit in comparing budgets to audit outcomes?
Four, has either Treasury or the AG seen a benefit from the Municipal Standard Chart of Accounts (mSCOA).
Five, the presentation had shown that 22% of municipalities had not submitted their audit outcomes [by due date], with both the Emfuleni Local Municipality (ELM) and the municipalities in the North West (NW) being repeat offenders. These municipalities are currently under Section 139 (5) (b) intervention [of the Constitution], which has clearly failed. He asked whether the municipalities should be [subject to intervention by the national executive].
Six, could the AG put a system in place where it red-flags certain consultants; and that it be made a requirement that there is a skills-transfer when a consultant is appointed. Much of the skills deficit in municipalities is due to both cadre deployment and the toxic working environment. Referring to slide 11 of the presentation, he said that the municipalities were in a sorry state, with many of them regressing.
Seven, he asked how the AG had used the powers it received through the Public Audit Amendment Act in 2018. What were the results? Did the legislation require further amendments? What assistance could the Committee provide?
Speaking to the key findings on contracts, he requested that officials from National Treasury provide comment on them. He suggested that the AG issue a memo, indicating how municipalities can prevent these findings from reoccurring.
He congratulated the Mayor of Midvaal, Mr Bongani Baloyi for having achieved seven consecutive clean audits and recommended that other municipalities learn from him.
Co-Chairperson Dodovu requested that Members be more concise in their questions.
Mr M Moletsane (EFF, Free State) said the Masilonyana Local Municipality had failed to submit its financial statements for three years, while the Maluti-a-Phofung Local Municipality had failed to do so for the past two years. He asked whether the AG has recommended consequence management be taken in both municipalities. If so, had it made follow-ups to ensure that the recommendations have been implemented.
Mr Bongani Baloyi, the Mayor of the Midvaal Local Municipality, on behalf of the South African Local Government Association (SALGA) said the organisation noted the AG’s general report for the 2019/20, which indicated an overall regression in the previous financial year results, mainly due to the 57 audits which were not finalised by the AG’s cut-off date (set for the general report submitted).
SALGA congratulated the municipalities that have maintained a consistent performance. It also noted better audit outcomes in thirty municipalities. The AG’s report showed that when there are challenges with financial management, local government is not completely dysfunctional in financial management, particularly if 77% of the local government-sphere expenditure budget is under the control of municipalities, who at the very least achieved financial unqualified audit opinions. These outcomes call for a concerted effort to intensify the application of good governance, accountability and consequence management, to set local government back on the upward trajectory; and to provide good quality service delivery.
SALGA noted the continuing deterioration in the financial health of municipalities, which has cast significant doubt on their ability to continue in 57 municipalities. He added that SALGA has engaged stakeholders, including National Treasury, on reviewing protocols and finding ways to improve the financial health of municipalities. SALGA’s National Executive met on 24 June 2021 and made the following recommendations on the report tabled by the AG:
- To communicate directly with the mayors and accounting officers of municipalities that have transgressed the law, to demand accountability and to ensure that consequence management is implemented;
- To advise them not to unnecessarily and extensively use consultants, and rather to look towards capacitating their own internal staff to execute the work
SALGA deemed it unacceptable that R1 billion was used by municipalities to prepare their AFS, yet the AFS contained material statements. He recommended that the money be paid back as municipalities received no value for the work.
On behalf of SALGA, he denounced all the acts of criminality found by the AG and called for law enforcement agencies to investigate and pursue charges against all wrongdoers. SALGA was pleased that the AG looked to improve the internal controls in municipalities, thus improving accountability. SALGA is doing what it can to ensure that municipalities are in line with the relevant legislation, and one its efforts included lobbying National Treasury to apply section 216 of the Constitution against municipalities who do not exercise accountability and consequence management [i.e. for Treasury to stop the transfer of funds].
Mr Mpisi welcomed the report. He said that the challenges faced by municipalities had gotten worse over time and if the officials continued acting in the same manner, things would not change.
He congratulated Midvaal Local Municipality for achieving seven consecutive clean audit outcomes, and indicated that the Gauteng Provincial Legislature has requested that the municipality share its lessons with the other municipalities in the province. One issue noted in the other municipalities is the lack of consequence management.
He raised his concern around municipalities struggling to collect revenue indicating that in some instances municipalities will choose to spend their revenue on appointing debt collectors instead of spending it on service delivery. He added that the rot in supply chain management (SCM) had become a culture. He asked, with its new powers, how the AG would ensure that individuals responsible for wrongdoing are dealt with accordingly. Until such time this occurs, the residents will continue to suffer, with no service delivery.
Referring to the interventions by the national and provincial COGTA’s, he said that municipalities do not have a clear understanding of the objectives of the interventions, and in other cases they do not accept the interventions. He added that there should be political accountability and efficient political leadership in municipalities.
He requested that the AG keep an eye on the municipal budgets, particularly as new political leadership will be elected later in the year. He made a plea for councillors to manage the resources well and spend them properly. In addition, if wrongdoing is identified, the mayors must take responsibility and institute consequence management.
Mr W Aucamp (DA, Northern Cape) said that the lack of consequence management is consistently referred to by the Select Committee on Appropriations. Whilst it is implemented in some instances, officials are not removed. He asked what action is being taken against officials responsible for wrongdoing.
He asked what the AG’s findings were on the sale of fixed assets in municipalities, and whether the correct procedures are followed when the assets are sold.
Mr V Dliso (ANC, North West Legislature) said that councils have failed to implement consequence management against officials accused of wrongdoing and this has become a culture. He said there is a culture within municipalities to appoint consultants, yet in some cases no work is done: with officials even failing to submit the AFS. He attributed this to the fact there are several officials that have been employed in key financial positions within municipalities who are not qualified. He recommended that there be a skills audit so that qualified and skilled individuals can be appointed. He said that one municipality in the NW was used as a pilot for the AG to test its powers on the issuing of MIs, however, no action has been taken to date.
Mr K Motsamai (EFF, Gauteng) said that in Hammanskraal sewage pipes have burst, with the waste water flowing in the streets. He asked how many municipalities are currently being investigated in terms of Section 106 of the Municipal Systems Act (MSA).
Mr A Motswana (ANC, North West Legislature) said that the NW Portfolio Committee on Cooperative Governance, Human Settlements and Traditional Affairs noted with concern the continuing deteriorating state of the municipalities in the province, with many of them currently under Section 139. He added that it seemed that municipalities deliberately chose not to act on the AG’s findings and recommendations: for instance, in the Madibeng Local Municipality councillors have been alleged to have used the municipal accounts to pay for clothing and their DSTV subscriptions. He expressed his concern that the NW is the worst performing province and he insisted that action should be taken immediately by municipalities against wrongdoers.
Ms N Nkosi (ANC, Mpumalanga) welcomed the detailed presentation. She said that it was of great concern that most of the municipalities in the country were not performing well, with several of them not accounting for the money spent whilst not providing services for the residents. She suggested that municipalities put an end to the use of consultants.
Co-Chairperson Mahlangu took issue with Mr Ryder’s suggestion and said that he had challenged her. She added that instead of challenging her, he should have come with a productive suggestion as the Committee must work as a team.
Referring to slide 8, she said that all the municipalities identified in Mpumalanga on that slide fall under one district, which was concerning.
She expressed her concern regarding the appointment of individuals who are unable to do the work to financial positions in the municipalities. Due to their inability to do their work, the municipality has to appoint consultants to conduct its AFS, which is an unnecessary expense. She asked what skills have been transferred to the officials.
She asked what the role of internal auditors are in municipalities, insisting that they have to play a greater role. In addition, she suggested that all municipalities should follow the example of those in the Northern Cape (NC), where after the completion of the audits they are then handed to the provincial government for further analysis, before being submitted to the AG.
Regarding PPE expenditure, she asked if it is not possible to establish a process where if fraud has been committed in a municipality, the AG can recommend its findings directly to law enforcement agencies to take action.
She asked what the AG is doing to make it possible that a clean audit outcome speaks to improved service delivery.
Co-Chairperson Dodovu asked what relationship the AG has with the law enforcement agencies, how it relays its findings to them and the role the law enforcement agencies play when financial mismanagement and fraud has taken place.
Ms Maluleke said the AG found that four municipalities had overdrafts by the end of June 2020. The real issue at hand is that expenditure is higher than the revenue available in several municipalities, which results in them registering a net deficit on their income statements. Instead of having an overdraft, a number of municipalities owe creditors money and cannot pay them. The municipalities receive their allocation from national fiscus and have cash on hand, so instead of having an overdraft they utilise creditors.
The AG does not have oversight over the unfunded budgets, as the audit process only occurs at the end of the year. In terms of the Municipal Financial Management Act (MFMA) and the Constitution, the municipality’s council must provide oversight over the budget.
She mentioned that the lack of transparency and accountability for expenditure is why the AG has raised its concern regarding disclaimer audit opinions, particularly consecutive ones. Hence it has issued MIs.
She said that the AG has not seen a big benefit from the implementation of mSCOA. She suggested that Members request National Treasury to provide comment on its perspective on mSCOA.
The ELM had submitted its AFS by 31 October (2020) as required, but the audit was completed after the cut-off date for reporting purposes. However, the audit has since been completed and the municipality received a qualified audit. Presently it is still under administration (placed by the Gauteng provincial COGTA). One of the difficulties of completing the audit was that the officials in the municipality did not have a good working relationship with the administrator, which made it difficult to obtain information.
She agreed that it is important for skills to be transferred from the consultants to the officials, however, one of the impediments to this process is the fact that in some instances the officials do not have a grasp of basic financial management and accounting principles. This makes it difficult for consultants to supplement their knowledge. As long as the people employed in the financial departments of the municipalities do not have the required skills and expertise, all the current issues will remain.
The Public Audit Act was effective from 1 April 2019. The 2019-20 audits had been the second phase of implementing the policies of the Act. In the first phase, the AG included nine municipalities into its pilot project, to test its powers. In the second phase (the current one), 57 municipalities were subjected to the AG’s expanded powers. Where a MI notification has not been acted upon, the AG refers the matter to the Hawks. For instance, in the Machabeng Local Municipality the AG received a response from the Municipal Manager that it deemed unsatisfactory. It then referred the issue to the Hawks, with whom the AG currently has a Memorandum of Understanding (MOU).
The AG also issued a MI notification to the Ngaka Modiri Molema District Municipality, which the Accounting Officer ignored. As a result, it issued a recommendation which stipulates the terms of what the district municipality should do and by when. She added that the district municipality has been given a deadline for 1 October 2021 to implement the actions, and if it does not, the AG will institute remedial action.
Citing another example, she mentioned that the AG issued a MI notification to the Mogalakwena Local Municipality after it found an overpayment of R13 million, due to a lapse in controls. In this instance the Accounting Officer responded well and has since investigated the matter, with a legal process to recover the money having also been instituted.
She said that the AG’s role is to use its powers not just to drive punitive measures but also to ensure that Accounting Officers correct issues identified in the system to stem losses, to recover the losses and to avoid wreckage. The AG is satisfied with its powers.
On the question of the AG monitoring municipal budgets, she said that the AG will do its part but the challenge it faces is that as an audit, by nature, only occurs after a financial transaction has occurred. The AG's ability to prevent a transaction from taking place is difficult. Whilst the AG will do what it can, it is critical that the leadership of the municipality execute their duty in line with the Constitution and the MFMA.
The AG has entered into MOUs with a number of investigative bodies and law enforcement agencies and it has agreed that it will share its work and other relevant information with them. For instance, regarding the investigations on irregular PPE expenditure, the AG shared risk assessments, the red flags it raised and handed them to the recently formed Fusion Centre.[This consists of the Financial Intelligence Centre, Special Investigating Unit, State Security Agency, National Prosecuting Authority, and South African Police Service.] From there the SIU took the matter forward and worked within their proclamations to look into PPE. She confirmed that the AG has seen an impact from the MOUs.
The AG has not seen any instance of the alleged sale of fixed assets occurring, but it will look into during its 2021 audit for local government. She added that the AG’s concern is whether each Council or municipal administration has followed the law regarding the use of municipal finances.
She had no answer for the question on how many municipalities were currently being investigated in terms of Section 106 of the MSA. She recommended that the question be posed to the Member of the Executive Committee (MEC) for COGTA in each of the provincial governments in the country.
The model of municipalities handing in their audits to the provincial government first is practiced in the Western Cape, and not the NC. She agreed that there should be internal auditors, and audit committees, that are functional in municipalities. Additionally, the MFMA is clear on the need for the accounting officer to set up a system of control and a functional internal audit and audit committees. Support from a provincial government does not replace what an internal audit committee can and should do during the year, which is to ensure that there is credible performance information, credible financial information and that there are adequate and correct controls to track financial information.
The AG does not audit whether services have been delivered in totality. A “clean audit” indicates that the first parts of accountability and transparency have been met, which include whether a municipality is able to show what it has done with its funds, its current asset base and what it is capable of doing with its funds in the future. She added that a clean audit is a component of the journey towards building an institution that is strong, that can deliver predictable outcomes, and can account for those outcomes.
Co-Chairperson Dodovu thanked the AG for the responses to the questions. He said that Parliament has the responsibility to strengthen its oversight function over municipalities, to ensure all wrongdoers are held responsible for their actions: this should be its contribution to bring about stability in local government. The financial year under review had seen the worst audit performance of local government. There needs to be collaboration between the various stakeholders to reverse municipalities’ fortunes—with attention paid to municipalities in the NW, Mpumalanga and the Free State.
He thanked the AG for always availing itself when required and for sharing information with the Committee that assists it in strengthening its oversight systems. He suggested that, going forward, Parliament needs to put up strong systems and structures so that it can hold wrongdoers to account.
The meeting was adjourned.
Dodovu, Mr TSC
Mahlangu, Ms DG
Aucamp, Mr S
Carrim, Mr YI
Mamaregane, Ms ML
Michalakis, Mr G
Moletsane, Mr MS
Motsamai, Mr K
Njandu, Mr EJ
Nkosi, Ms NE
Rayi, Mr M
Ryder, Mr D
Shaikh, Ms S
Sileku, Mr IM
Visser, Ms C
Zandamela, Mr S
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