Local Government Audit Outcomes: Western Cape

Meeting report

Ms Sangeeta Kallen, Business Unit Leader, Auditor-General of South Africa (AGSA), Western Cape, said that the presentation sought to take the Committee through some of the salient aspects of the outcomes, with emphasis on the municipalities that did not perform well.

She said the overall audit outcome showed a regression. In the previous financial year, five municipalities had unqualified with findings. However, in the 2021/22 fiscal year, the number had increased to six municipalities.

Cape Town had improved, as it had received a clean audit compared to the "unqualified with findings" in the previous year.

AGSA assessed the information technology (IT) environment and performance reporting in municipalities, focusing on budget constraints, vacancies, automated control systems, performance indicators, project delivery, irregular expenditure, and consequence management. The evaluations revealed that while adequate automated control systems were in place for certain processes such as water and electricity meter readings, leave management and supply chain management changes; there were shortcomings in other areas. Performance indicators were found to be poorly defined and often unverifiable, hindering effective measurement of service delivery outcomes. Project delivery exhibited deficiencies in planning, record-keeping, monitoring, and consequences management, resulting in delays, increased costs, and quality defects. Furthermore, irregular expenditure remained a concern, with a significant amount yet to be resolved, and incomplete reporting on these matters was observed.

AGSA recommended enhancing performance reporting by establishing clear and verifiable indicators, conducting regular testing of market prices, and strengthening project delivery through improved planning, monitoring and consequence management. Prompt action was also required to address irregular expenditure and complete consequence management processes.

(See attached document for details).

In conclusion, the AGSA's report highlighted the need to activate the accountability ecosystem in municipalities to improve governance and service delivery. The report outlined four key calls to action for municipalities and stakeholders:

• Firstly, it was recommended that leadership lead by example, embedding a culture of compliance and ensuring accountability failures were addressed in underperforming municipalities.
• Secondly, it was suggested that performance reporting be enhanced by establishing clear and verifiable indicators, which would pave the way for improved service delivery and positively impact citizens' lives.
• The third call to action emphasised the importance of investigating cases of irregular expenditure and holding officials accountable to maintain a culture of accountability.
• Lastly, addressing skills shortages and monitoring budgets were identified as essential measures to strengthen municipal capacity and financial stability. By implementing these recommendations, municipalities were expected to enhance governance practices, achieve improved audit outcomes, and deliver better services to their communities.

Discussion

Ms C Murray (DA) raised a question regarding information communication technology (ICT) compliance, seeking clarification on how the requirements were established and whether departments were meeting their obligations. She also requested more information about the overall decline in service items and their delivery.

Ms M Maseko (DA) inquired about the AGSA’s role in empowering municipalities and whether they effectively supported oversight. She also sought recommendations on addressing the issue of leadership instability in several municipalities, including Cederberg, Beaufort West and Kannaland, and the performance of debt collection and borrowing from financial institutions. She questioned the loopholes in financial compliance and how oversight could be improved to prevent non-compliance and service delivery from being impacted. What could be implemented to deal with that problem? Could the AGSA provide information regarding municipalities that were supposed to have received debt letters?

Mr C Dugmore (ANC) emphasised the significance of capacity building for political leadership, officials, and local municipal public accounts committees (MPACs) to ensure efficient utilisation of funds for service delivery. He posed a question regarding the responsibility of municipalities and individuals in complying with new legislation, specifically focusing on the qualifications required for chief financial officers (CFOs). He also sought the AGSA's perspective on the training initiatives for councillors responsible for overseeing finances. He requested more information regarding the recovery of funds and inquired about the targets set for such recovery. The previous government had campaigned hard to ensure reporting matters were susceptible to consequences.

There had been a zero percent in recovering some funds. R750 million had been written off. What was the possibility of recovering the money? Had the AGSA's office made any recommendations for potential action, whether of a criminal or civil nature, against officials from local government in the Western Cape?

AGSA's responses

Ms Kallen responded to the questions and comments made by the Members as follows:

IT environment testing and general controlled environment

When assessing the IT environment, AGSA considers not only the specific requirements but also the overall controlled environment surrounding financial and performance reporting. This includes examining the automated processes and ICT governance to ensure the presence of official procedures for managing the IT environment, user access and changes. AGSA's testing aligns with the established processes and policies within that environment, focusing on performance and financial reporting requirements at the municipal level. The municipality was responsible for adopting and implementing policies and controls that support credible financial and performance reporting.

Explaining audit outcomes

To illustrate the audit outcomes, AGSA could refer to the net decline in the environment. While there were two improvements, with some municipalities, including in the City of Cape Town, achieving a clean audit status, there were also five regressions (see slide 5). The net decline in the environment was a result of these changes. The decline could be better understood by examining the outcome slide, which demonstrates the movement from the previous year and highlights the overall audit outcome trends.

Enabling oversight and supporting MPACs

AGSA actively engages with the MPACs by delivering its messages and audit outcomes to them. It presents individual messages regarding the audit outcomes and conducts root cause analyses to identify areas that require improvement. These analyses inform its recommendations, which AGSA believes are directly linked to addressing the root causes. Additionally, AGSA participates in MPAC sessions where it collectively discusses the outcomes and provides further explanations and support. Through forums such as the Chief Financial Officers (CFO) Forum and the Municipal Money Management (MMM) Forum, AGSA empowers CFOs and the MPACs with knowledge on topics like control environments and the complexities of compliance.

Utilisation of financial consultants

In the Western Cape, the utilisation of consultants was assessed. AGSA found that consultants were used in financial reporting, reviews, asset management, and other reporting purposes. The reasons for consultant usage varied, including the need for specialised skills that were not readily available internally. AGSA encouraged municipalities to consider the cost-effectiveness of utilising consultants for specialised services and evaluating the potential transfer of skills internally. While some municipalities used consultants but did not achieve the desired audit outcomes, it was attributed to inadequate records, documentation and project management. Ms Kallen said it was crucial for accounting officers to manage financial consultants effectively to ensure the desired outcomes are achieved.

Debt management and financial health of municipalities

There was an overall material concern regarding the debt book and the financial health of performing municipalities. Adequate support and budgeting were essential for managing debt and planning for effective service delivery. Leadership stability plays a significant role in financial sustainability, and municipalities need to prioritise creating an administration that fosters good financial management and discipline. Competent staff, proper implementation of policies and procedures, and efficient monitoring were key elements in achieving financial sustainability.

Consequence management and certification of debt

In the 2021/22 fiscal year, the AGSA was in the recommendation phase and had not issued any certificates of debt. When material irregularities were identified, AGSA followed a process that involved issuing notifications, receiving responses from accounting officers, evaluating the responses, and determining whether the recommendations were adequately addressed. If a council failed to act on AGSA’s recommendations, immediate action could be taken, which carried binding consequences. Certification of debt was the subsequent phase if recommendations were not heeded. AGSA focused on ensuring compliance, monitoring, and understanding the complexities of adhering to regulations.

Non-compliance and procurement management

Non-compliance issues were identified in areas such as procurement and contract management. Proper monitoring at every step was crucial to ensure compliance, including adequate contract management and expenditure control. AGSA emphasised the importance of discipline in monitoring compliance and implementing robust procurement practices. By adhering to the necessary regulations, municipalities could minimise the risks associated with non-compliance and avoid irregularities.

Amendments and competency criteria for CFOs

The competency of key personnel, especially CFOs, was critical. Municipalities needed to ensure that the criteria for these positions were properly defined and aligned with the required competencies. Municipalities should have taken responsibility if the personnel could not meet the criteria and determined the necessary actions to meet the desired standards. Recruitment and development efforts should have focused on acquiring and developing competent individuals.

Recovery of irregular expenditure

Regarding irregular expenditure, AGSA focused on activating the necessary processes for investigating and addressing potential instances. It expected accounting officers to investigate all identified irregularities, determine the root causes, take disciplinary actions if required, and assess the potential for recovery. The accounting officer was responsible for evaluating the recoverability of funds based on the root causes and the requirements of relevant legislation. Prevention through proactive control and monitoring processes was crucial for minimising irregular expenditure.

Further discussion

Ms Maseko asked if the AGSA could allow the Members to be observers when it engaged with the MPAC. She said the opportunity would be greatly appreciated.

The Chairperson expressed concern regarding two municipalities in the province that were under Section 139, Subsection 5. He questioned when the financial recovery plan (FRP) was supposed to be initiated and if the Department was fulfilling its obligation to support these municipalities as required by Section 5(4) of the Constitution. Despite assistance being provided to one municipality, Kannaland, it was observed that there had been regression. He asked the AGSA about the underlying problem when departments fulfilled their constitutional obligations, but failed to show improvement or instead regressed.

He then raised a second concern about the lack of investigation into unauthorised, irregular, fruitless, and wasteful expenditure (UIFW). He pointed out the contradiction of advocating for more funding for local government when there was a failure to account for previous expenditure. He questioned the consequences for those responsible for oversight, such as the MPAC chairpersons, when they failed to fulfil their duties. He emphasised the need for accountability and asked what actions could be taken by Members of Parliament to ensure decisions condoning UIFW expenditure were properly scrutinised.

Mr T Klaas (EFF) inquired about the role of the MPACs in ensuring correct expenditure and questioned what actions the audit team could take when expenditure was not submitted for auditing. He raised concerns about instances where the audit report indicated the expenditure was correct, but the documentation was not submitted. He also raised questions about budgeting rules when the audit did not detect any problems, but there were still issues with compliance. He sought clarification on the role of the audit team in such cases.

AGSA's response

Ms Kallen responded to the Chairperson's questions by discussing the root causes of regressions in the environment. She highlighted the importance of discipline in monitoring controls related to compliance with legislation, procurement, contract management, and expenditure management. She explained that although financial statements were considered credible and received unqualified audit opinions, regressions occurred in compliance areas. She emphasised the need for action plans to address weaknesses and ensure stability at the municipal level. She drew attention to the role of the Council and MPACs in investigating irregular expenditures and recommended training and support for these entities.

Further discussion

The Chairperson acknowledged the questions raised by Ms Maseko and requested the Department, provincial Department, or Treasury to respond.

Ms Maseko expressed concern about the Kannaland Municipality and questioned why Section 139 was not being actioned. She pointed out the presence of bloated political office staff and the indication of an inadequate collection rate and deteriorating infrastructure noted during oversight visits. She highlighted the municipality's underfunded budget, stating that they lacked sufficient funds to cover their budgeted expenses. She emphasised the need for intervention to address the challenges the municipality faces and ensure the well-being of the communities in that area.

The Chairperson acknowledged Member Maseko's comments, and invited the departments to respond. He also encouraged her to add any additional remarks or address the issues raised during the discussion.

Mr Klaas asked about the correlation between a clean audit and good governance. He questioned whether compliance with key legislation and the absence of material misstatements in financial statements always guaranteed improved living conditions, poverty eradication, and effective service provision. He specifically mentioned the Kannaland Municipality, citing the AGSA's findings of unauthorised expenditure amounting to billions of rands. He emphasised that such misappropriation hindered the municipality's ability to allocate funds for essential services like housing, diverting resources towards unnecessary expenses. He sought clarification on the action taken regarding the misused funds.

Ms Murray raised a question in response to assumptions made in a previous query. She asked the AGSA about the role of clean audits in contributing to basic service delivery and the well-being of residents.

The Chairperson acknowledged Member Murray's question, and expressed interest in hearing the AG's perspective on the link between clean audits, good governance and improved service delivery.

AGSA's response

Ms Kallen began her response by explaining the three focus areas of their audit. She clarified that a clean audit did not automatically translate to improved service delivery, but rather indicated a municipality's ability to implement effective controls and systems for financial reporting, performance measurement, monitoring, and accountability. She stressed that a clean audit provided a transparent platform for municipalities to communicate with their communities about the status and timing of service provision. She highlighted the importance of accurate records in facilitating informed decision-making. While a clean audit served as a foundation for service delivery, it was not the sole determinant and should be complemented by further efforts to enhance service delivery.

Provincial Treasury's response

Mr Aziz Hardien, Western Cape Accountant-General, addressed several points raised by Members. He explained that the MPAC plays a crucial role in evaluating expenditure, including irregular and unauthorised expenditure. He had personally been involved in training MPAC members, along with the South African Local Government Association (SALGA) and the Department of Local Government, to ensure they understand their roles and responsibilities. He emphasised that MPAC members received training throughout the year at specific times, and were provided with a national trade circular that outlines their duties.

He reiterated that it was the council's responsibility to accept the MPAC's recommendations after they investigated irregular or unauthorised expenditure. The MPAC members had been empowered, and while additional training sessions could be conducted, it was ultimately their responsibility to comprehend the rules and regulations surrounding the condonation of irregular expenditure.

He further explained that not all irregular expenditure resulted in losses, or was due to fraud or corruption. Sometimes irregular expenditure occurred due to administrative non-compliance, such as a municipality's mayor obtaining two quotes instead of the required three. He acknowledged that the lack of a fully automated supply chain system contributed to irregular expenditure, and highlighted the extensive training provided by the provincial treasury to service providers and municipal officials, particularly procurement managers, to enhance contract management.

Mr Hardien said that investigations into irregular expenditure could take up to 90 days, as determining accountability and following proper processes was crucial. Regarding interventions, he said that the provincial treasury had already implemented measures in the Kannaland Municipality, but the extent of an intervention depended on whether a municipality met the legal requirements. He discussed triggers for intervention, such as an unfunded budget or receiving a disclaimer or adverse audit opinion.

He offered to provide detailed information on the actions taken by the provincial treasury for struggling municipalities and those with clean audits. He highlighted the significance of a clean audit as a standard for good financial governance, assuring users that the municipality had complied with regulations and accurately reported financial statements and predetermined objectives. He emphasised the need for greater emphasis on examining performance indicators and targets to improve service delivery. He acknowledged the need for further interventions and expressed readiness to provide information on the actions taken by the provincial treasury and the Department of Local Government in the province's municipalities.

Responses by Department of Local Government (DLG) and SALGA

Dr Sandra Greyling, Director: Municipal Support and Capacity Building, Western Cape DLG, referred to the comments made regarding Section 139, and said there were Section 154 support plans in place for Laingsburg, Beaufort West, and Kannaland. SALGA was progressing with the implementation in Laingsburg and Beaufort West, and they anticipated starting the implementation in Kannaland from July onwards. She said discussions had been held with the administration, and emphasised the need to understand the specific competencies and responsibilities of each type of government. The presentation by the AGSA was welcomed as it provided an opportunity to review the Section 154 support and consider strengthening support to local government. She confirmed that there were specific triggers for Section 139 and the ongoing monitoring of municipalities, and assured the Committee that further information would be provided in the future.

The Chairperson expressed gratitude to the DLG, and invited SALGA to raise questions or provide comments.

SALGA's comments

Mr Nkosinathi September, Programme Manager: Municipal Finance, SALGA, mentioned the request from one of the Members to be invited to the MPAC session during the provisional audit, and expressed the intention to extend an invitation through the Committee's Secretariat for the session scheduled in July. He also discussed the absence of the AG at their previous session, and said there was a need to check with the office responsible for the MPAC engagement.

He mentioned the municipal audit support programme, and the challenge of lacking a legislative mandate. He stressed the importance of responsive municipalities, and said that out of the eight municipalities, three actively participated in the programme. He emphasised the committee's role in supporting member municipalities and their commitment to audit improvement.

The Chairperson thanked Mr September, and gave an opportunity for other political principals to contribute.

Alderman Paul Swart, Mayor of Bredasdorp and SALGA Provincial Executive Council (PEC) member, provided his input regarding the communities they serve. He emphasised the responsibility of political heads and administrations to address the needs of the poorest and most vulnerable communities. He stressed the importance of political capacity and its influence on communities. He urged the Committee to take leadership seriously, implement consequence management, and develop effective solutions and plans to bring about positive change in municipalities.

Chairperson's summation

The Chairperson conveyed the Committee's sincere appreciation to the Auditor General (AGSA) for graciously honouring the Committee’s request to provide a comprehensive briefing on the audit outcomes of the previous financial year. He extended gratitude to the provincial treasury, the Department of Local Government, and SALGA for their unwavering commitment to attending the Committee’s meetings.

This engagement signified not the culmination, but the initiation of an enduring collaborative effort. It highlighted the focus on comprehending the current financial state of the Western Cape municipalities. Each query posed during this session was directed towards the betterment of the specific municipalities under discussion. The intention was never to disadvantage any municipality, but rather to fortify and support these entities.

Considerable attention had been drawn to the top three underperforming municipalities in the province, particularly in relation to their financial matters. The Chairperson emphasised the Committee’s duty to boost their capacities and provide the necessary guidance. The Committee was resolute in its commitment to exert all the efforts within its authority to ensure these municipalities effectively addressed their challenges. This report served as an invaluable foundation for identifying and rectifying the issues currently impeding progress.

The Chairperson extended appreciation to the presenters and all those who contributed to this insightful session. Their responses undoubtedly enriched the Standing Committee’s understanding.

Adoption of minutes

Minutes of 25 April

The Chairperson asked the Members to check if their names had been written and spelt correctly.

Ms Maseko moved for the adoption of the minutes, and was seconded by Ms Murray.

Committee actions/resolutions

During the discussion, Ms Murray expressed her interest in obtaining a more comprehensive explanation regarding the major compliance with IT. She emphasised the need for a holistic understanding of how departments handled their dealings with IT clients, particularly concerning the requirements placed on communities and the increasing phenomenon of cyber attacks. She questioned whether the existing requirements adequately addressed the demands of the digital age they lived in.

Ms Maseko proposed the inclusion of an item in the Committee's programme to seek information from the DLG, the AGSA or SALGA. This advance knowledge would enable the Committee to prioritise its participation as observers or active participants in the engagements. She also requested written information regarding the staff component in the political offices of different municipalities. She sought details on the number of political appointees and their distribution across the municipalities. The Chairperson acknowledged the request, and expressed the need for clear written information on this matter.

The Chairperson directed attention to slide nine of the presentation, highlighting the impact of irregular expenditure incurred by municipalities. He requested more detailed information on the specific figures presented, such as the amounts associated with the 19 municipalities.

The meeting was adjourned.