2020/21 Local Government Audit Outcomes: AGSA briefing

Standing Committee on Auditor General

15 June 2022
Chairperson: Mr S Somyo (ANC)
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Meeting Summary



Audit Outcomes – Interactive Breakdown

In a virtual meeting, the Auditor-General of South Africa (AGSA) briefed three parliamentary committees on local government outcomes for 2020/2021, and expressed concerns about the financial health of municipalities and their inability to complete the most basic reporting functions.

The Auditor-General highlighted that 26% of municipalities had ended the year in deficit; next year's budget would pay for the expenditure of the previous year(s), and at 29% of municipalities, it would be more than half of their budgets. 166 (64%) municipalities had incurred unauthorised expenditure totalling R20.45 billion; credit-rating downgrades of some metros placed pressure on their ability to raise funding for capital expenditure, and internal savings from the operational budget were used to fund shortfalls. Insufficient funds impacted project completion and service delivery and 64 (28%) municipalities had disclosed, or should have disclosed, significant doubt in their financial statements about their ability to continue operating as a going concern in the foreseeable future.

AGSA had identified non-compliance and fraud resulting in material financial losses estimated at R3.9 billion, causing substantial harm to both municipalities and the general public. No action had been taken to address 81% of these matters until AGSA had issued notifications. Material irregularities could be resolved only when all possible steps had been taken to prevent any further losses and harm, the recovery of financial losses or removing/addressing the harm caused, and implementing consequences for officials and third parties involved. Resolution of material irregularities was often delayed by instability at the municipal management level, investigations and recoveries, and disciplinary process delays at the council level.

The Committees asked about relevant legislation available to assist the AG; the safety of the AG’s staff when conducting the audit reports; issues and concerns with municipalities that had undesirable audit outcomes; and the way forward to address these issues.

The three committees attending the meeting- the Standing Committee on the Auditor-General, the Standing Committee on Public Accounts, and the Select Committee on Appropriations- committed to continuing their engagement with the AG’s office and address issues that were relevant to their specific mandates.

Meeting report

Chairperson's opening remarks

The Chairperson wished Ms Tsakani Maluleke, the Auditor-General (AG), a happy birthday, and said that he and the other two chairpersons, Mr M Hlengwa (IFP), from the Standing Committee on Public Accounts (SCOPA) and Ms D Mahlangu (ANC, Mpumalanga), Select Committee on Appropriations, hoped the time at their disposal would be used well.

He commented that this briefing was confidential and was for those who led in areas related to the AG and the financial interests of both Houses of Parliament. The report had not been tabled yet. However, the AG was going to be meeting various media houses at 10 am to inform them of the finality of the report. The report would then be tabled for Parliament. Until the media engagement, the report would be considered confidential.

Local government audit outcomes and material irregularities
Ms Maluleke said the presentation would cover the audit outcomes for the financial year ended 30 June 2021, and the status of material irregularities on 15 April 2022.

The AG said the audits had been completed, and the annual reports tabled to the relevant municipal councils. Provincial leadership in every province had been consulted, and engagements had taken place with the national executives around these outcomes.

The work of compiling the general report had been completed, and this was done every year. This report comprised the outcomes of all municipalities in each province and at a consolidated level. In addition, the report included analysis and insights on the audit outcomes, the AG's recommendations and the commitments received from leaders.

Ms Maluleke said the AGSA website also included an option to navigate on a page which showed the audit outcomes and material irregularities in detail for each municipality. This was done to improve access to and transparency of the auditing process.

No improvement in provincial audit outcomes over administration term

Eastern Cape
Efforts to institutionalise preventative controls had not yielded the desired outcomes.
Leadership must take swift action to strengthen the control environment and instil accountability.

Free State
Inaction by political and administrative leadership continued to be a deliberate obstruction to municipalities' effective functioning.
Urgent action to strengthen controls was required to achieve the desired outcome.

Effective monitoring of preventative controls was critical for favourable audit outcomes.
Preventative controls, monitoring and timely consequence management must be embedded to improve audit outcomes.

The lack of enforcement of accountability and consequence management by leadership also persisted amid some improvements in audit outcomes since the previous year.
Preventative controls and consequence management must be further strengthened to trigger sustainable audit outcomes.

Improvement was driven by over-reliance on consultants and audit adjustments, with little to no improvement in the control environment.
Capacitation of officials in key positions was required for sustainable improvements.

Weak control environments and lack of decisive action to address transgressions persist.
Sustainable solutions were required by leadership to improve control environments and enforce consequence management.

Northern Cape
The weak control environment contributed to the undesired audit outcomes, negatively affecting service delivery.
Call to act by strengthening the basic control environment and accountability.

North West

Leadership instability resulted in a lack of accountability, general disarray, and little to no service delivery.
Establishment of preventative controls remained key.

Western Cape
Leadership tone and strong control environment contributed to positive outcomes.
Coordinating ministries' intervention and leadership stability were encouraged to address unfavourable outcomes.

Municipalities with disclaimed audit opinions showed little improvement
The AG said that a disclaimer audit opinion confirmed a lack of attention to basic things like basic record keeping, which comprised transparency and accountability. In addition, it was linked to poor service delivery.

Selected ten repeat disclaimer municipalities
The AG's observations covered payment profiles, service delivery-related infrastructure assets, use of consultants and disclaimer material irregularities.

Findings on ten repeat disclaimer municipalities included:

Infrastructure environment findings
Poor management of wastewater treatment works caused pollution in seven (70%) municipalities.
Substantial harm was caused to the nearby communities – a material irregularity notification was issued to municipal managers.

Maintenance of infrastructure
Eight (80%) did not have maintenance plans.
Less than 1% was spent on maintenance, with no impact.

Key projects visits
Delays in project completion resulted in overspending on contracts.
Contractors were being paid for sub-standard work,

Use of consultants
There was no need for analysis.
No transfer of skills.
Lack of full and proper records.

Disclaimer material irregularities
Disclaimer material irregularities were misidentified at all ten municipalities (substantial harm to public sector institutions).
Appropriate response at some municipalities.
Recommendations were focused on corrective action.

Ms Maluleke said implementing recommendations properly should result in a noticeable turnaround in the impacted municipalities, and was already evident in some of them.

She said municipalities had derived little value from investment in financial reporting. In-year financial reporting and monitoring were not credible; there were increased audit fees; continued dependence on consultants led to no skills transfer, which led to a high total financial reporting cost; there was no return on investment for costly national/ provincial interventions (including municipalities under administration), especially where finance units were fully resourced; increased risk of financial loss; and deteriorating financial health, resulting in service delivery delays.

The AG asserted that municipalities could not continue operating and providing services if financial health concerns remained. She highlighted that:
26% of municipalities had ended the year in deficit (expenditure more than revenue).
Next year's budget would pay for the expenditure of the previous year(s), and at 29% of municipalities, it would be more than half of their budgets.
166 (64%) municipalities had incurred unauthorised expenditure totalling R20.45 billion.
R13.25 billion (65%) was for non-cash items (including outstanding audits).
Credit-rating downgrades of some metros had placed pressure on their ability to raise funding for capital expenditure, and internal savings from the operational budget were used to fund shortfalls.
Insufficient funds impacted project completion and service delivery.
64 (28%) municipalities disclosed, or should have disclosed, significant doubt in their financial statements about their ability to continue operating as a going concern in the foreseeable future.

Poor performance planning and reporting
The AG said that poor performance planning and reporting impacted on service delivery. A performance report accounted for essential service delivery promises a municipality made in its integrated development plan (IDP).

Weaknesses in these areas meant in-year reporting for delivery management and monitoring (by the council) was unreliable; performance reports that were not useful or reliable as an accountability tool; service delivery achievements reported were not the experience of communities; there was an inability to compare or report on metro achievements; and quality services were not delivered -- what was not measured was not done.

Material irregularities
The AGSA had identified non-compliance and fraud resulting in material financial loss, estimated at R3.9 billion, causing substantial harm to both municipalities and the general public.

No action had been taken to address 81% of these matters until AGSA had issued notifications.
Material irregularities could be resolved only when all possible steps had been taken to prevent any further losses and harm (also through improved internal controls), recovery of financial losses or removing/addressing the harm caused, and implementing consequences for officials and third parties involved.

Resolution of material irregularities was often delayed by instability at municipal management level, investigations and recoveries, and disciplinary process delays at the council level.

Ms Maluleke said AGSA was making a "call to action" for all accountability role players:
Enable and insist on credible financial and performance reports for in-year monitoring and decision-making, as well as transparency and accountability on the finances and performance of the municipality.

Stabilise and capacitate the administration – recruit, retain and continually develop appropriately skilled and experienced officials in critical positions.

Maintain a robust financial management culture that ensures effective revenue collection, prudent spending, and prevention and speedy recovery of financial loss and waste.

Lead by example and ensure that consequences for accountability failures were effected swiftly, bravely and consistently.

The Chairperson said the briefing had highlighted what needed to be done and exposed weaknesses in the accountability ecosystem. This required a tailored response by Parliament based on areas that mattered regarding accountability. He asked Members for questions and comments related to the briefing.

Mr D Ryder (DA, Gauteng) appreciated that those who oversaw these matters were the first to be informed, instead of hearing it through the media. He thanked the secretariat for ensuring that this had happened.

Mr Ryder said that the AG indicated that the Committees had oversight over these matters. On the side of the National Council of Provinces (NCOP), there was a strong focus on the impact of legislation. He asked if the AG had seen any substantial benefits from the implementation of Section 139 of the Constitution, where the province of the municipalities took over the administration.

He said the Public Audit Amendment Act had been approved and was supposed to give the AG more teeth. Regarding the material irregularities and the nine municipalities that had not submitted or submitted late information, what were the consequences as per the Public Audit Amendment Act? Was the Act helpful, and were there any issues the AG had with the Act?

Regarding the impact of implementing the Municipal Standard Chart of Accounts (mSCOA), he asked if it had been substantially beneficial.

Mr Ryder asked if there had been any incidents concerning death threats, bribe offers, shots being fired at AG staff, or similar events. Regarding the environmental impact of sewage spillage, he noted a green audit trend in the audit practice. The environmental impact of businesses was becoming more critical, and even banks noted this. He asked if the AG had plans to include a green audit to ensure that those who dumped their sewage into the environment without appropriate treatment were penalised.

Mr F du Toit (FF+, North West) supported Mr Ryder’s comments on receiving the presentation before the media. He asked the AG’s opinion regarding financial audits done in under-performing or defaulting municipalities. These audits resulted in the circulation of documents to which political parties expressed discomfort, but no accountability took place. Communities felt the brunt of the lack of service delivery and financial misconduct. He asked if AG should support audits done in these municipalities, or if it would be more cost-effective if the money was spent on recouping the lost funds and preventing further mismanagement. Had the AG engaged with the Minister of Cooperative Governance and Traditional Affairs, Dr Dlamini-Zuma, on these issues, as she was the political head of local governments, and the municipalities with bad audit outcomes were ANC-led. If there were engagements, what had the reaction been? Have there been positive results regarding holding people accountable?

Mr M Moletstane (EFF, Free State) said most of his questions had been covered, but he wanted to know, from the sample of ten municipalities, what the names were of the six municipalities where money could not be traced, and the names of the four municipalities where money could be traced.

Ms B van Minnen (DA) agreed with Mr Ryder, and asked when they would be getting the more in-depth report. Although the report presented was a good assessment, the Committees needed to get the details of the actual municipalities involved. She had looked through the presentation slides, which covered the issues, but serious details were needed to ascertain what was happening.

Mr W Aucamp (DA, Northern Cape) touched on cadre deployment and consequence management, which he said were at the core of the issue of not receiving clean audits. He asked where the consequence management was, because they were not being held accountable. He commented that the AG now had more power to implement measures, and asked when the AG would implement measures to ensure the "rotten apples" were done away with in municipalities.

He said cadre deployment was the reason people were there to appoint unqualified or inexperienced people to do jobs. This should stop, and only fit-for-purpose people should be hired, as this was the only way to root out corruption. He emphasised the importance of implementing consequence management measures to ensure that only fit-for-purpose people were hired.

Mr N Singh (IFP) thanked the AG for the presentation and the Chairperson for organising the meeting. He said that speaking from the Standing Committee of the Auditor-General's (SCAG's) side, the AG had reflected on the negatives, with some of the municipalities regressing, but he wanted to look at the positives. There were positive changes in audit outcomes in many municipalities because of interventions by the office of the AG and other agencies. These interventions need to be highlighted and used to correct regressing municipalities. The SCAG had the responsibility to ensure that the office of the AG was adequately capacitated, as it was part of their oversight mandate to ensure the things the office of the AG was doing right continued to be done. This would ensure different outcomes in the next year.

He said the state of municipalities was depressing, and it was the responsibility of the sitting Committees to ensure in the third term that there was a collective plan for dealing with the office of the AG. He asked what the role of the Accountant General would be, now that an appointment had been made. He commented that the lack of an Accountant General was previously a concern, but this had been resolved.

Auditor General’s response
Ms Maluleke referred to the matters relating to section 139 of the Constitution that Mr Ryder raised, and said these interventions had happened too late and were therefore not geared for the type of success that the office of the AG would want to see. It was going to be critical that the interventions were done on time. Most importantly, they had been designed to deal not just with short-term solutions, but also with solutions that confronted the real issues that made it difficult for institutions to operate as they should. She believed there should be a rethinking of approaches taken, and much greater urgency was needed in the implementation to reach the desired results.

Regarding the material irregularities concerning non-submission, she said several material irregularities involved financials that were not submitted. They had found a combination of issues with material irregularities, and the escalation of the non-submission to the provincial leadership had had an impact. A number of these non-submissions had come through late, due to the AG’s office using its reach with the provincial leadership to call for submissions.

The material irregularities involved a matter of law, and not compiling or submitting financial statements was a failure to comply with the law. The AG believed this caused harm to institutions, and the accounting officer should be held accountable.

On the issue of material irregularities and the law put in place, she said the AG's office had found that the implementation of this instrument worked. However, it was limited when instability was found in an institution -- its impact could be limited by changes in leadership within an institution. Instability was a hindrance in driving the required type of institutional strength.

She said the report that would be tabled identified the material irregularities in local, provincial and national government. It included all the material irregularities and their status. Some of the impacts she had spoken about included that beyond a certificate of debt, as long one was able to get accounting officers acting on the identified material irregularities, an impact was being made. AGSA pushed for accounting officers to resend all audit issues, not just material irregularities, to drive systematic improvements in how institutions were run.

Other than the instability observed, the AG said she could not say anything was wrong with the instrument itself. The job of the AG was not to ensure people were being arrested but rather to ensure that everyone in the accountability ecosystem played their role.

The AG's office referred matters to the relevant institutions. For example, in the six municipalities where the AG's office could not trace where the money had gone, this had been referred to the Finance Intelligence Centre (FIC). The AG's office would continue to work in this manner. With the real-time audits of COVID-19 expenditures, the AG's office insights and databases had been advanced to the Fusion Centre -- including the Special Investigating Unit (SIU), Hawks etc -- who could then use the information to do their work.

Not much of an impact was seen through the mSCOA, because the basics of financial management were not in place.

They would not be able to deal with issues unless there were people in the budget offices doing what they were supposed to do. This was a not complex matter, and the AG's office had found that the basics were not being done in the finance units. For example, a municipality had spent R34 million on a consultant who had assisted them in claiming value added tax (VAT) from the South African Revenue Service (SARS). This municipality had a chief financial officer (CFO), so compiling VAT returns should not have required a consultant, who had been paid 20% of what came back from SARS.

There was a need to build instructional capacity in all municipalities. The lockdown regulations had been very helpful in combating threats against the AG's office staff members. The instance where staff were threatened was related to the pre-COVID period, and these instances did not occur anymore. However, they had not remained complacent and hoped that all South Africans continued to advocate for safeguarding the national audit office staff. She said they had had the benefit of provincial leadership supporting the safety of the AG's staff.

Ms Maluleke said financial audits must continue to be done, as they would not advocate for a scenario where those charged with managing funds on behalf of others could get away with financial audits not being done. She questioned the extent to which the readers of these audit reports acted on the information provided for them, and the extent the work of the mayors and councils impacted the reports' outcomes. The extent to which the Member of the Executive Council (MEC) of Cooperative Governance and Traditional Affairs (COGTA) looked at how municipalities were dealing with the AG's audit reports was the MEC's responsibility in law. It was essential to ask to what extent the provincial legislature held the MEC accountable for fulfilling their responsibility to ensure that municipalities had a proper and timely response to the AG's findings.

The AG said that they had engaged with all players, and the response was a recognition that urgent action was needed and differentiated support was needed for different municipalities. For example, a municipality with a repeat disclaimer audit would require different interventions than a clean audit. It would struggle with ensuring they delivered services in a balanced and consistent manner across all communities. There was recognition that approaches need to be rethought to result in appropriate solutions for specific institutions.

The names of the ten sampled municipalities and the substantive report would be made available on their website, as the report would be tabled later that day. Concerning the names of the ten municipalities in the Free State, they had looked at Maluti-A-Phofung, Masilonyana and Tokologo. Those municipalities fell within the six municipalities where the money could not be traced. In Mpumalanga, they had looked at Govan Mbeki, which fell within the four, so the office could see where the money went. In the Northern Cape, Kheis fell within the municipalities where money could not be traced, while Joe Morolong fell within the municipalities where money could be traced. The money could be traced in the North-West in Lekwa-Teemane and Madibeng, but in Mamusa and Ramotshere Moiloa, the money could not be traced.

The AG said one of the instances where binding remedial action was issued meant, if not implemented, it would lead to a certificate of debt. This action had been implemented in Ngaka Modiri Molema, which had several material irregularities ranging from environmental and public harm to paying for goods and services they had not received. The issue of binding remedial action was still being worked on because the new mayor required more time to work with the accounting officer to address the issue, and the AG's office would follow up on this. Therefore, even though there were no debt certificates, the office could provide the impact of several material irregularities in different parts of the country.

Ms Maluleke said they valued Mr Singh's input, as the AG's office needed to be funded and remain capacitated to ensure that it could fulfil its role. The office responded to every challenge, and she had the benefit of leading a team of patriots who always rose to the occasion. It was essential to work together, ensuring that the capacity and safety of the office were maintained, and they were allowed to do their job.

Co-Chairperson Hlengwa said from the side of the SCOPA, they would receive the report from the SCAG once it had been tabled to Parliament, and committed to bringing to light the work of the AG. The report would be processed accordingly. To ensure accountability, SCOPA would continue to interact with the AG and the Portfolio Committee on Cooperative Governance and Traditional Affairs around disclaimed municipalities and repeat offenders. The work of the AG was good, and its transparency was welcomed, as it enabled the legislative sector to fulfil its mandate.

He said SCOPA was committed to fulfilling its role to ensure that the work of the AG had meaning and value to the oversight process. The AG’s work would not end at the tabling, and SCOPA would be focusing in the third term on these municipalities. He knew the AG would also be available to them.

Co-Chairperson Mahlangu said she appreciated the approach taken to inform these Committees first. She asked what must be done with this information and what the way forward was. A select committee from the NCOP was directly responsible for local government, and would have to sit down and map out the way forward alongside other relevant committees.

She was happy they had been able to find an opportunity to be briefed on these troubling issues. As the Appropriations Committee, they could not just allocate but also had to follow the money, and that was what they would be doing. She thanked the AG, and asked for continued engagement with the AG's office.

As seen in the presentation, the Chairperson said the AG office's work had underlined the value of the technical processes used in auditing. The presentation had referred to assessments as to whether there was life in an institution, which was done through the audit process. The AG's office would appreciate the entrenchment of an accountability ecosystem which benefited from a coordinated engagement with various stakeholders. Lapses in the functions performed by stakeholders resulted in an impact on the outcomes of the audit process. Even though there were many municipalities, the system's success relied on how integrated operations were. The AG had emphasised that when this assessment was made, the actual improvement was not visible because little progress had been made where it mattered.

Efforts should be placed where it matters in local government. Where there was proper planning, improvements were realised and value was added, which led to stability, and this meant communities gained benefits such as service delivery. Financial health indicates an institution's depth and ability when facing challenges, and a lack of financial health weakens an institution's ability to respond to the most basic challenges. This was a glaring concern within an accountability system where performance was concerned.

The Chairperson said that the Committee would appreciate the AG reporting to Parliament on how the local governments were performing. There was a need to ensure that municipalities functioned better so communities could benefit from getting good service.

The Chairperson thanked the Committees for their participation and said that policy-focused issues must be dealt with within the various Committees, each of which should deal with issues and details relevant to their specific mandates.

The meeting was adjourned.



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