Induction workshop: AGSA Mandate and support to Parliament

Meeting report

Ms Zizipho Makalima, AGSA Executive, briefed the Committee on the mandate of the Auditor General of South Africa (AGSA) and its work as it related to Parliament. The AGSA audits and reports on accounts, financial statements and the financial management of government institutions. It must prepare audit reports reflecting an opinion, a conclusion or a finding. It may refer any suspected material irregularity identified during an audit to a relevant public body for investigation.

She said AGSA shares insights on root cause of audit outcomes, recommendations on corrective actions needed for improvement and sustainable outcomes through briefings to the committees. It provides support to committees during public hearings and oversight visits, and engages committee chairpersons before public hearings to share insights. It provides training and capacity-building initiatives to parliamentary staff and Members to enhance their understanding of auditing processes.

Ms Makalima said the AGSA was aspiring to have stronger, more direct and consistent impact on improving the lived reality of South Africans. They plotted the course of their auditees along the continuum from doing harm to doing good, and provided insights that could be used to influence a shift across the continuum towards public sector culture characterised by performance, accountability, transparency and institutional integrity.

She also talked about weaknesses in performance planning and reporting. The AGSA had found that reporting on service delivery had not always been credible. Key performance indicators relating to mandates were not always included in performance plans, and poor-quality performance indicators and targets were not usually included in performance plans. The AGSA observed that unreliable reporting disempowered the ability of the accountability ecosystem to assess performance and take action, and significant changes after an audit meant that in-year reporting was also not reliable.

She said the AGSA attributed the root causes of this to inadequate systems to collate and report on performance information, insufficient understanding/appreciation of performance planning, management and reporting requirements, and inadequate record-keeping and processes which were manual and prone to error. Unreliable performance reporting added to the challenge of poor service delivery and accountability. Adequate consequence management processes had to be implemented to hold relevant persons accountable for non-performance.

Submission of financial statements by the legislated date had slightly improved, from 92% to 93% on the Public Finance Management Act (PFMA), while on the Municipal Finance Management Act (MFMA), the submission of financial statements by the legislated date had slightly improved from 91% to 94%.

Root causes for stagnation and regression were due to vacancies and instability in key positions; slow responses to implementing recommendations for sustaining the outcomes; and inadequate oversight and monitoring. Good practices for clean administration were a result of stability in leadership and governance structures; leadership tone that drives ethical culture, integrity and accountability; and sound financial and performance management disciplines.

Ms Makalima, reflecting on financial and compliance with the PFMA, stated that unauthorised, irregular, and fruitless and wasteful expenditure had remained concerningly high. More auditees had submitted poor-quality financial statements for auditing. Information in financial statements was not reliable for accountability on financial performance.

Regarding the MFMA, the AGSA had found that 42% of the budgets were unfunded budgets; unauthorised expenditure amounted to R24.12 bn; and revenue losses were due to consumers not being billed, debt not collected, distribution losses, and inadequate indigent management processes. All these were caused by a lack of institutionalised financial management and procurement processes; vacancies and a lack of financial management skills; the value of audit committees and internal audit units not being realised; instability and political uncertainty; and limited consequences for unreliable information in financial statements and in-year reports.

Fruitless and wasteful expenditure over the term of the Sixth Administration amounted to R7.62 billion, while R14.34 billion was the estimated financial loss from 240 non-compliance and suspected fraud material irregularities identified since 2019. Over R386.47 billion in government guarantees had gone to the state-owned enterprises (SOEs) borrowing programmes. SOEs had reported poor growth, unsustainable operational challenges and high debt-servicing costs, and several appeared to be at risk of defaulting on their debts. R113.63 billion was owed for claims made against departments, with R68.01 billion in claims against health sector. The government was self-insured and did not budget in full for claims, and payments had been made from funds budgeted for service delivery.

Concerning the status and impact of material irregularities (MIs) on the PFMA, she reported that 266 MIs on non-compliance and suspected fraud had resulted in material financial losses estimated to be R14.34 bn, with misuse of material public resources, and substantial harm to the general public. 79 MIs had been resolved, appropriate action had been taken to resolve 75, and 58 internal controls had been improved to prevent recurrences. Fifty responsible officials were identified and disciplinary process were completed or were in the process of completion. Fifteen fraud / criminal investigations had been instituted, and four supplier contracts were stopped where money was being lost. R1.29 billion had been recovered, while R560 million was prevented from being lost.

Regarding the status and impact of MIs on the MFMA, 360 MIs on non-compliance and suspected fraud had resulted in material financial losses estimated to be R7.34 bn, and substantial harm to the general public. 103 MIs had been resolved, while appropriate action had been taken with respect to 117. There had been 116 internal control improvements to prevent recurrences. Eighty responsible officials had been identified, and disciplinary processes were completed. The MIs had involved 26 fraud/criminal investigations being instituted. There had been 23 overdue annual financial statements submitted, and six supplier contracts were stopped where money was being lost. R261.68m   had been recovered, while R218.11m was prevented from being lost.

Ms Makalima said it was important to professionalise and capacitate the government to address skills and capacity gaps across the three spheres of government; to support all spheres of government through coordinated and collaborative efforts to promote strong governance and effective use of audit committees and internal audit units; and to instil a culture of ethics and accountability, because a shared vision of responsiveness, consequence management, accountability and ethical behaviour would ensure that actions were taken promptly and that individuals were held accountable.

(Diagrams were shown to illustrate the accountability ecosystem; planning, budgeting and reporting cycle of the government; and overall audit outcomes – see attached)

Discussion

Mr K Ceza (EFF, Mpumalanga) remarked the AG had a responsibility to empower the committees to be able to hold the executive to account and indicated members should not celebrate unqualified audits, and have got to delve deep into irregular and wasteful expenditure. He then wanted to know about the number of outstanding material irregularities across all the provinces the AG has found; indicated that MSCOA should be a standardised measure for the reporting by municipalities and this also should apply to the reporting of financial statements; and wanted to understand the point at which the AG though corruption needed intervention of law enforcement bodies.

Ms Makalima said the AG had a breakdown of the number of MIs, and would forward it to the Committee. The AG has also pressurised provincial governments to ensure the percentages decrease and make less use of consultants and employ more competent people.

Regarding the Municipal Standard Chart of Accounts (MSCOA), she said enough attention should be paid to the basics of financial management, and that the responsibilities of Members of the Mayoral Committees (MMCs) were provided in the PFMA.

Mr J Majola (MK, KZN) commented when it came to audit outcomes, there had been progress between the PFMA and MFMA, even though the MFMA was still declining. This showed that government departments were still facing challenges, because the conditions in state hospitals and schools were still the same. He hoped the AG had been empowered to act, given the powers it had been given, and wanted to know if these powers were assisting the AG in intervening in the declining MFMA.

Ms Makalima responded on the PFMA doing better than the MFMA, and said not enough had been done to build capacity in municipalities to do what they were supposed to do. Achieving an unqualified audit was not the only thing municipalities should focus on -- service delivery should be their priority. There should be penalties applied to service providers abandoning projects. Auditees in essential services like health and regulators or entities, rarely achieved clean audits, except in the Western Cape.

There had been a lack of discipline when it came to reconciling the finances. One might not be able to see the money saved by the AG because it refers to work done by other law enforcement bodies. In checking value for money, the AG usually goes to the ground for assessment and looks at transactions and what was done on the ground. The AG was working collaboratively because there was a case of one municipality that had overpaid by R27m, and the matter had been reported to the Hawks to be resolved.

She added that the AG has been concerned about people running public institutions, because the ecosystem had different role players. By the time the AG identified issues, people had closed up shop. The accounting officer had to deal with matters because senior management reports to the accounting officer, who has to apply discipline and consequence management. What was important was to quickly know how to respond. If the accounting officer was not doing his work, Parliament had to make that person account.

Threats to AG staff still existed, but the AG had been collaborating with law enforcement to keep staff safe and look at early warning systems. There should not be any pressure because of threats on the staff.

Mr B Radebe (ANC, Free State) enquired about the kind of support the AG needed to prevent and intervene in cases of audit outcomes that had been declining in the country.

Ms S Nxumalo (ANC, Mpumalanga) wanted to find out if there had been any punitive measures for those municipalities that had failed for three years to submit annual financial statements; she commended the AG for encouraging members to focus on service delivery and not to celebrate an unqualified audit opinion, because many times there had been incongruency between audit outcomes and conditions on the ground; and proposed there should be punitive measures like shaming and naming for service providers who abandon projects.

Ms Makalima said only two municipalities had not submitted annual financial statements. The AG has engaged with the provincial departments and government. The main issue was politics, not the lack of skills. There should be political consequences. Regarding service delivery and clean audits, she said those who had been doing harm were part of the conversation on how to deal with it. There was a different conversation with those with clean audits, but the focus had been on the completion of projects. There were no clean audits with no projects completed. The AG was concerned about the service delivery reports, but would never penalise one for not completing all the projects. The blacklisting of contractors was the responsibility of the Treasury.

Mr J Britz (DA, Eastern Cape) remarked that the AG had changed its mind about audits because the presentation had been an eye-opener, and it reinforced the idea that human behaviour in the public service could not be predicted. The AG had given Members confidence in what they had been hoping for.

Mr P Swart (DA, Western Cape) remarked that there should be a will to achieve a clean audit. As an ex-mayor of the Cape Agulhas municipality, he stated the municipality had not had a clean audit for a very long time, but it had achieved clean audits for the last ten years. He had heard about the status and challenges faced by municipalities, and asked how the local government sector could be professionalised. He also wanted to know how the membership of municipalities in the South African Local Government Association (SALGA) could be valued, what would happen to municipalities that had been failing to pay for the audits; and what steps could be taken by the executives of the municipalities to address the root causes of poor planning and implementation.

Ms Makalima replied that having competent people in critical roles was important. An analysis had been done on municipalities with clean audits into the tenure of the municipal managers and chief financial officers, compared to those with bad audit outcomes. The analysis found that good audit outcomes came from stable municipalities, while bad audit outcomes emanated from municipalities with instability. If stability had not been sorted out, problems would persist. There was a guideline about professionalising the administration and councils of municipalities which focused on ethics, stability, and accountability.

She said outstanding audit fees were continuing to be a problem, and that had been putting pressure on the AG's office and impeding it from doing its work. She said the AG can not audit without funding. If the culture of non-payment was perpetuated, it would lead to a crisis.

An executive from AGSA explained that the ecosystem had identified that the role of SALGA was to assist the municipalities. The AG empowered the SALGA through the audit processes to convey the information to the administration and council.

Mr D Ryder (DA, Gauteng) remarked the AG team had been a shining example of a competent team. He asked if the existing discrepancy in the level of reporting between the local government and national government was an excuse; whether the AG's powers had proved to be sufficient, or if there was anything that needed changing; if there was a simpler way of reporting on the expanded public works programme (EPWP) by the Department of Public Works and Infrastructure  (DPWI), because the EPWP was not getting a clean audit because it was being defunded; if the AG was assessing the value for money where a municipality bought many laptops; and enquired if the Municipal Systems Act was putting an extra burden on the AG.

Ms Makalima responded that they had not felt the impact or become aware of it, but if something was missed this year, it would be fixed next year. They would continue to misfire if they did not get the other partners in the ecosystem to play their part. All parties should play their role and collaborate. She said the AG had never used to audit value for money, because it was not the core part of its work. The AG had only tried to make an impact on poor financial management.

An executive from AGSA explained there were no problems with the way EPWP had been structured. The Department had an oversight role to monitor those receiving the funds, and how things were facilitated. The DPWI had removed the indicator from the APP, and that had not been the solution. The AG would see if there was more information it could share with the Committee.

Ms S Ndhlovu (ANC, Limpopo) commented that there had been unethical behaviour in municipalities, especially when it came to finances, because it had been alleged there were AG officials who had been conniving with municipal officials to produce clean audits that were not there. She asked how the AG was ensuring that each municipality had its own internal audit unit before the AG came to do its work.

Ms Makalima replied that ethics were a concern, if their staff were colluding with municipal officials. The AG worked as a team to collect and collate evidence, so it would be impossible to bribe someone. There were ethics management processes in the system and internal quality control units to check the reports. There was also a whistle-blowing platform where people could call and complain about AG executives colluding with chief financial officers (CFOs) and doing financial statements for municipalities instead of doing the audits. There was a very high cost for anyone doing something like that. The people the AG employed belong to different bodies, and any wrongdoing or unethical behaviour would result in them losing their licences. She added that the law required that every institution should have internal audits done. Internal audit in the ecosystem was there to ensure proper controls were implemented.

An AGSA executive added that the internal audit function was there for quality control processes for the accounting officer.

The Chairperson asked if it was possible to present audit outcomes to the Committee before going public. She also wanted to know the views of the AG on its recommendations to municipalities, because no results were being seen.

Ms Makalima said the AG could come to Parliament and present findings before they went public, but that should stay with Parliament until the AG discusses the findings with the auditee.

Mr Ryder asked if there was a mechanism in place to use whistleblowers.

Ms Makalima said there was an address on the AGSA website that could be used, and it included preventative control guides.

The meeting was adjourned.