Auditor General on municipalities with outstanding annual financial statements

Meeting report

Opening remarks

The Chairperson said that the Auditor-General of South Africa (AGSA) was present in the meeting to present to the Committee on the municipalities that had outstanding annual financial statements. This included the challenges. This would help the Committee to determine what the way forward would be. He believed that the decision that the previous administration had taken to make the business of the municipalities a part of this Committee was the correct decision. Municipalities were at the cutting edge of service delivery. If municipalities failed, people felt it immediately. It was not a situation where one would say something may or may not go wrong -- if a municipality failed, something would go wrong. Some people lived in those municipalities.

He thanked the AGSA for responding so quickly, because the Committee did not get the letter from the AGSA on the submission of annual financial statements long ago. The Committee had received both a presentation and a briefing document. The briefing document contained a lot of the substance that the Committee needed.

SCOPA on municipalities with outstanding annual financial statements

Ms Bongi Ngoma, Head: National Audit, AGSA, took the Committee through the presentation.

Overall financial statements submission and audit conclusion rate

The submission and audit conclusion rate had improved over the term of the current local government administration. The submission and audit conclusion rate had increased from 91% in the 2021/22 financial year to 95% in the 2023/24 financial year.

Overall submission of annual financial statements for audit

The submission rate across provinces had shown a slight overall improvement. The Free State remained the most challenged province for annual financial statement submissions. However, notable progress was observed in the Northern Cape. Meanwhile, the Eastern Cape and KwaZulu-Natal maintained a 100% annual financial statement submission rate by the legislated deadline.

Impact of non-submissions on financial accountability, governance, and service delivery

The delays in audits undermined municipalities’ ability to effectively plan, budget, and deliver critical services, which negatively impacted the lives of the citizens. The reduced accountability and transparency undermined trust and weakened public oversight. The persistent non-compliance indicated weak governance structures and inadequate internal controls.

Common reasons for delays and interventions by AGSA

The common reasons for delays included senior management vacancies, financial system failures, asset management issues, incomplete supporting documentation, labour unrest, and audit disputes.

The AGSA had proactively addressed instances of non-compliance and audit delays through several targeted interventions. The non-compliance had been escalated to provincial executive leadership for prompt attention and resolution. In certain cases, notification of material irregularities was issued to accounting officers, specifically for failing to submit annual financial statements within the statutory deadlines.

Call to action

The accountability ecosystem had to be activated to address the current realities. Parliament should reinforce oversight mechanisms to ensure the timely submission of high-quality financial statements by accounting officers in local government. Strengthening financial discipline at the municipal level was key to preventing audit delays. Parliament should continue exercising its oversight responsibilities under the Rules of the National Assembly, and take proactive steps to address the current concerns. The report on late annual financial statement submission and audit completion delays should be referred to the relevant parliamentary committees for scrutiny.

(Please see the presentation attached for further information)

Discussion

The Chairperson assumed that the AGSA worked with the Municipal Manager and the Chief Financial Officer (CFO). Had there been an opportunity to interact with the audit committees, such as the Municipal Public Accounts Committee (MPAC) and the Mayoral Committee for Finance? If so, what had AGSA’s experiences been with these interactions? What had the experiences been in the different municipalities? The AGSA only had to provide some information for the Committee to get a sense of the responsiveness. It was clear sitting in this meeting that there was something broken across the institutions. What had the experience been interacting with those bodies and accounting officers?

Ms Sharonne Adams, Head: Portfolio Regularity Audit, AGSA, said trends had been picked up during the engagements. The AGSA had noted a lot of instability from a leadership perspective.

The Chairperson asked what instability meant.

She replied that this meant that there would either be an accounting officer who had been there for only a short time, or a new accounting officer had been appointed. There were issues of system failures and the CFO having left. These were some of the things that had an impact on the engagements. The AGSA would first determine where the accountability rested. The Municipal Manager had a responsibility to submit the annual financial statements. The second line of defence would be with the Mayor, where those engagements would be about the non-submission of financial statements. The Mayor had a responsibility to submit Municipal Council reports if financial statements were not submitted on time.

The AGSA would also engage with the Internal Audit and Risk Committee, because it had a role to play from an oversight perspective -- in some instances, with the MPAC itself. The audit committee had a responsibility as a sub-committee of the Municipal Council. In a lot of cases, these municipalities were not functioning appropriately as members of the MPAC. She recalled that when she came to the Free State in 2021, financial statements had been outstanding from 2016/17. This demonstrated a clear discipline issue regarding the submission of financial statements. As a result, the engagements started at the Premier level. The Premier of a province would be alerted about the issue of non-submission of financial statements. There would be engagements with the Member of the Executive Council (MEC) of Finance and Cooperative Governance and Traditional Affairs (COGTA) within the provinces to see what role the MECs had to play in the accountability ecosystem. The AGSA wrote letters to the provincial legislatures that indicated that financial statements had not been received, and requested an intervention. Material irregularities had also been issued.

In 2021, the submission of annual financial statements had been 56%. When the AGSA started issuing material irregularities and activating the accountability ecosystem, there were some good disciplines in the prior year. She recalled that these good disciplines had happened in the Free State and the Northern Cape. In the Free State, the Premier had called the Municipal Managers and the Mayors to come to the meeting by 31 August with a set of financial statements. If there were no financial statements, reasons had to be provided. This was accountability-driven. There had now been some improvement in the submission rate. In the Northern Cape last year, the Finance MEC called all the Municipal Managers and Mayors to present the annual financial statements. If there was one layer not doing its part, one had to think about the next line of defence for raising the matter of non-submission of financial statements.

Further discussion

The Chairperson said that the presentation was short enough for the Members to ask questions and receive responses.

Mr C Dugmore (ANC) observed that there had been some improvement in the submission of annual financial statements, from 91% to 95%. Municipalities must submit financial statements -- it was non-negotiable. There were comments that audit disputes and senior management vacancies were common reasons for delays in the submission of financial statements. Could the AGSA try and elaborate, without fear or favour, on why the Free State was having such a problem? He suggested that the Committee should have an engagement with the MEC. The Western Cape had a 97% submission rate, with one municipality outstanding. He asked for the name of the municipality and what the problem there was. The Committee had to decide on what to do about this issue.

Ms Adams said that the outstanding financial statements in the Western Cape had come from the Laingsburg Local Municipality. There had been a late submission, but the audit had been finalised. The outcome was an adverse opinion for the year under review. Some of the challenges included skills and competencies in the Laingsburg area. This was one of the municipalities where there had been no change. The audit outcome had been an adverse opinion for the last two years. It was a relatively small municipality, and should be easier to control. She emphasised that the key challenges were attracting proper skills and competencies. There have been some interventions, such as hiring consultants. This intervention did not show the desired impact on the audit outcome. These were things that were festering from a controlled environment that was not operating effectively.

In the Free State, there was a disciplinary issue involving the Municipal Finance Management Act (MFMA). When the AGSA report was tabled, it showed that the majority of the audit cases were in the Free State. There had been late submissions. As a result, it had impacted the accountability cycle. If financial statements were not submitted on time, accountability did not take place at a Municipal Council level from an oversight perspective. The accountability of the legislature could not happen. The MEC of COGTA in the province had a responsibility to report on the status of the performance of the municipalities at a specific time. A lot of the areas were in the disclaimer zone. This meant that the areas had received the money, but the auditors could not confirm what the money had been spent on. All the municipalities had received grant funding. A common trend showed that the AGSA could not confirm whether the grant funding was spent on its intended purpose. A lot of the municipalities in the Free State had financial health issues. From a revenue management perspective, proper systems were not in place to identify all the customers and bill them appropriately. This was due to the meters not operating properly.

There was a programme that the AGSA planned to roll out, especially in the Free State, to deal with the financial health issues. There were revenue enhancement programmes on how to improve collections from customers and have more cash available for services. The programme had started with some of the municipalities, and there had been a refusal to do anything about it. During the valuation roll, municipalities were able to see the customers that were supposed to be billed. An expert would normally be appointed to identify all the people that had to be billed. There was a reluctance to do the right thing. The AGSA looked for solutions to help and support the municipalities. When it looked at the financial statements of the disclaimer and qualified zone municipalities, the auditors could not confirm how the money was spent. If an amount of money was spent on suppliers or salaries, the auditors could not confirm whether the money was used for its intended purposes. In the majority of cases, the grant funding was allocated for infrastructure assets. There was a disconnect in some instances because there were no improvements in the infrastructure assets, and all the money was spent on operations. This was the trend that the AGSA had picked up.

Ms V Mente-Nkuna (EFF) asked about the performance audits. If the annual financial statements were not submitted, did the AGSA get the full picture of the performance audit? Did the AGSA have a sense of how far the municipalities' achievements were, or how it looked? What had been done so far where there were material irregularities? What measures had been put in place? The current system allows for people to be removed when things go wrong. There would be a new Chief Executive Officer (CEO), Municipal Manager or CFO. The law was there, and the issues of material irregularities were within the powers of the AGSA. There should not be a culture where people are allowed to get away with murder. In municipalities, there were specifications for tenders, but there were also unexplained capital expenditure (capex) projects. As a result, a lot of money was lost -- and the Municipal Manager or the CFO had left. Had there been material irregularities identified which had not been taken care of? The problem was that nothing had happened to the responsible parties. The Committee had to do something. She suggested that the Committee start by holding the responsible parties to account before dealing with the non-submission of financial statements.

The issues involving compliance with the MFMA in the Free State had gone on for far too long. Some municipalities had not paid Eskom. Arrangements had been made, but those arrangements were not being respected. Thaba Chweu Local Municipality in Mpumalanga had been named in every wrong aspect. This was related to the non-submission of financial statements to AGSA, and not paying Eskom. There were matters that had to be isolated and dealt with thoroughly. What was the state of the province when recommendations were reported? Before the next tranche of the division of revenue was dispersed, there would be a consideration of the performance of the previous financial years. If the funds were dispersed without this consideration, who would receive this money? What kind of programmes would there be? Some of the municipalities had already been under section 139. What were the outcomes of this? Which grant funding had been utilised? When it came to the division of revenue, municipalities were already disadvantaged, because their projects represented merely about 10% of their budgets, but this did not justify the fact that it was misused. During an engagement with Lusikisiki municipality, one could see it had many workers compared to the ratio of the community. Where was the salary bill coming from for such a small municipality?

In some instances, grant money was taken to pay for salaries. A grant was applied for by the municipality through a business application. A business plan should be clear on the kinds of projects that would be done. If a business applied for electricity, it should be an electricity-related business. If a business applies for water, it should be a water-related business. It would be ring-fenced like this. Which grants were being applied for? Services did not come to people, yet grants had been dispersed. These basic details were needed to determine how to move forward with the challenges.

Ms Ngoma responded to the questions that Ms Mente-Nkuna had asked about the performance audit and section 139 interventions. This was an area that the AGSA was interested in. The AGSA had invested significantly in the area of performance auditing, and several projects had been audited. Coincidentally, most of the projects that were not completed fell into these areas, which had received a lot of attention and interest. The report that would be tabled in May would indicate the disclaimers around areas of fraud and projects that were not concluded.

There was a common trend in the environment where the whole value chain of a project was breached. This breach was found on the management and supply chain management (SCM) side. The compliance was not adhered to when a particular supplier was appointed to perform a service. There was a breach in the implementation pillar. One supplier would come in to implement a particular project, but the project was not implemented. There was no one to monitor that supplier for adherence to the milestones of the projects. The payments were made by the local municipality to the supplier for a project that did not adhere to the milestones. The implementation pillar was not adhered to. At the end of the value chain was the delivery of the project. The outcome of that project was that it was not delivered.

These were the issues that the AGSA saw when looking at projects that started years ago but were not delivered. There was a lack of consequence management in all of these projects. No one was being held accountable. No contractor was being held accountable for not concluding the projects. The officials in the local municipalities were not being held accountable for the non-performance of the projects.

The performance audit team had consistently highlighted issues around infrastructure for roads, water, school, or health care facility buildings. These issues were identified when looking at both the MFMA and the Public Finance Management Act (PFMA). There was no discipline around project management. There was no discipline around consequence management. There were instances where a first contractor did not conclude a project, and a second contractor was appointed for the same project. As a result, the fees were more than the initial budget. If the second contractor did not complete the project, there were no consequences. A third contractor would be appointed to complete the projects. Most of the material irregularities raised were in the area of projects that had not been concluded.

Section 139 was something that the AGSA was interested in. It had been working closely with the provincial treasuries around this. There was a trend where a Section 139 intervention was introduced, but there was no improvement on the ground. There were cases where there was a Section 139 intervention each year, but that particular municipality did not come out of the dire situation. The AGSA was working closely with the provincial treasuries to ensure that the Section 139 interventions addressed the root causes of the problem. In many cases, during interrogation, the AGSA had found that the section 139 interventions had not taken the particular municipality out of its dire situation. The AGSA was working closely with National Treasury. There were other interventions, such as withholding the equitable share. However, the law required the equitable share to be released before the end of the financial period. If this was not done, the local municipality would lose the benefit of that share.

Ms Adams said that a lot of material irregularities had been raised for wastewater treatment plants because they were not functioning appropriately. This was an area that needed urgent attention, and had been reported to the Department of Water and Sanitation (DWS). Criminal charges have been put forward against municipal managers in some of the municipalities. There was a list that would be shared with the Committee. In the previous year, there had been a material irregularity where one of the municipalities had not paid over the pension funds they were supposed to, as required by the law. Material irregularities were also issued where the grants had not been spent for the intended purpose. The AGSA would provide the Committee with a list of those municipalities where the specific findings had been identified. In the Free State, a material irregularity in the Matjhabeng Local Municipality had been referred for investigation. There had been some progress, and an individual had been arrested. The case was still ongoing.

If the municipalities did not play their part, the AGSA would move to the next steps. It would make recommendations, and if they were not implemented, remedial action would be taken. If there were no financial losses in the case of wastewater treatment plants, or landfill sites not being fully licensed, a section 11.2 would be issued. This was where key role players across the board in the accountability ecosystem would come into play to assist with material irregularity. This would be raised with the legislatures in the provinces to get traction.

The AGSA was looking at other coordinated efforts to ensure that action was taken. When a material irregularity was issued, the state of the municipality was already dire. A material irregularity was not issued without warning. There would be findings issued before, but there would be no improvements. There was an instance where a municipality had received grant funding for the upgrading of the wastewater treatment plant, but there had been a pause, and there were no proper systems for payments. As a result, the money had been paid back to National Treasury, despite some work having already been done. If basic systems of internal control were not in place, one would not be able to account for anything.

A five-year plan must be submitted. The Integrated Development Plan (IDP) should indicate the amount of money needed for a project. If the IDP indicated that it would deliver something to residents in the next five years, it translated into a service delivery budget implementation plan. This would be where a municipality would indicate which projects would be delivered, how they would be delivered, and which funding would be used. It would involve either own funding or grant funding.

There were instances where municipalities had not submitted performance information. The AGSA had issued material irregularities for those provinces that had not submitted the information and did not have a system in place. There were instances where information could not be confirmed -- for example, if there was a project to build ten houses, and the AGSA could not confirm the ten houses. This was due to the information and evidence not correlating. The control of record management was not in place and therefore confirmation could not take place.

She agreed with Ms Mente-Nkuna that it came down to the money being used for salaries and wages, and not for the intended purpose of service delivery. The grants were usually for upgrading human settlements, such as water and sanitation. There were conditions attached to the five-year plan to deliver on these projects. The AGSA could not confirm whether some municipalities used the grants for the intended purposes. There were instances where the grant money was paid back, and there was no service delivery for the citizens. When the AGSA tried to connect the dots, there would be a disconnect from the performance information. If one of the projects was to build a dam, it would be placed under work in progress until the project was completed. The total amount that was needed for the dam had to be disclosed. The AGSA found that year-on-year, there would be an amount sitting for work in progress for ten years. During the confirmation stage, the AGSA would find that the dam was non-existent. If R10m was spent, there were times when the AGSA could not see the real representation of that money.

Many actions could be implemented. The legislation was clear that if there was a financial issue, the Mayor and the province had a responsibility. A lot of times, the Section 139 interventions did not have the intended impact. There were times when the action plan was not clear enough to get the municipality out of the state that it was in. At times, there was malicious compliance. Municipalities were not supposed to prepare unfunded budgets. This was clear in the applicable legislation. To comply, some municipalities prepared the budget but did not show the true expenditure for that budget. This was the reason for the large amounts of unauthorised expenditure. An assessment had to be made when disclosing both cash and non-cash items in the budget process. For example, if an assessment was made for a desk, one had to determine whether the value of the desk was R100 or R50. There was an assessment every year. If the desk was no longer R100 but R50, the R50 would have to be disclosed. This was depreciation. A lot of times, amounts were not calculated appropriately. If a municipality said it would collect R10m from its customers, but collected only R2m, it had to be written off. The municipality did not collect what it had projected to collect. There were authorised expenditures for bulk purchases.

The Chairperson asked if there were instances where budgets were prepared to go over the line, and then reorganised after the budget had been passed. He asked specifically if any of these patterns had been picked up. Were there any instances where the budgets were aligned with the performance plans, and then moved to different areas after the budget had been passed? He was trying to understand what a CFO or somebody would be thinking in this situation. Did the AGSA have a sense that something like this had happened?

Ms Adams said an initial budget would be presented, but there was also an adjustment process. For a budget to be approved, it had to be unfunded, but there were other processes in place. Section 71 of the MFMA required a monthly comparison report on "budget versus actual." The reports would be submitted to the Provincial Treasury and the National Treasury. Section 71 gave the MEC of Finance the responsibility to do a consolidated report on "budget versus actual." The first budget would be submitted, and after six months, there was an assessment. The unauthorised expenditure would be growing, which indicated that the budgets were not prepared appropriately. She said that items may be repositioned in the performance information and spent on things for the prior year in the current financial year. This would have some impact.

Ms Mente-Nkuna asked AGSA to elaborate on certain aspects. After it had identified all the shortcomings, what steps were taken to pinpoint those people to the material irregularities? How would it avert a Municipal Council resolution that clears the material irregularity? Material irregularities were the biggest problem for municipalities. There should not be a pretence of investigating material irregularities. The system had to be designed to deal with these issues. The grant funding and unauthorised expenditure should be dealt with. There was now a culture that had been cultivated in municipalities to access new money with old performance indicators. At the end of the day, that same unauthorised expenditure in the following year was zero. This was despite the fact that new money had been used to pay for old expenditure, but there was zero service delivery. The next year that same material irregularity of zero performance gets subjected to the Municipal Council. There was a problem, because the AGSA had no say in the investigation of the municipality or on the legislators or councillors that were sitting there passing an irregularity under false pretence of there being an investigation. She made an example of R10m being paid for a dam that was not built, and nothing was done to the service provider or to the CFO who had signed for the continuous payment for the project.

Money for any project came in tranches. In phase one, invoices would be presented and money would be allocated. Thereafter, no monitoring was done. A second service provider would be appointed to start with the foundation, but nothing would happen to the first service provider. The investigation would then pass at the Municipal Council. This was a dilemma. The AGSA would present what it had done to the Committee, but the Municipal Council would then undo everything. The Municipal Council would pass a resolution and condone R7b, for example. As a result, more money would be allocated because the Municipal Council had condoned the investigation. How could one bridge this gap? This was where the problem was in municipalities.

She asked for a list of the municipalities where there were pension fund issues. This was something that could not condoned. If a municipal worker had to die, the worker’s children would find that there was no money in the pension fund. The CFO would have taken the money to pay for ‘spooks’ on the payroll. She felt it was a shame that nothing could be done. The AGSA could not perform miracles. The money had to be found.

Emfuleni Local Municipality in Gauteng had been under section 139, but nothing was happening there. It did not spend money, but ended up getting a better audit because the balance sheet was balancing. What happened during the section 139 intervention? Administrators had come, and everything had shifted to the province. In the end, nothing was done, and the budget was untouched. The money would be sent back. It did not look like the worst criminal offence. She said that taking money from people that was meant for service delivery and giving it back to the National Treasury was the worst form of treason. There was a perception that the money was not stolen, but was given back. This was another dilemma that involved the section 139 administrators -- nothing was touched and nothing was delivered.

She suggested that there should be a way to break down some of the village municipalities that did not do trash collection, did not have sewers, and did not do water reticulation. It was only the district areas that did this. In the rural areas, there were no basic services. These municipalities did not do electricity, fix potholes, or do gravel roads. At the end of the day, the money was being spent because the municipalities were employing people. There was no trash, sewage, water reticulation or electricity. What was it that these employees did? What was being measured? Everyone received money for a salary, but what were the employees doing? Employing people was a good thing, but what was the output?

Ms Ngoma said that the Committee would be provided with a list of municipalities involved in the pension fund issues. Accounting officers had a responsibility to investigate irregular expenditure and deal with it by improving the control environment, doing investigations, and implementing consequence management. There was a new trend, where there was a write-off or condonement of irregular expenditure by the Municipal Council. The AGSA had spotlighted where an investigation had not been satisfactorily done, but there had been condonement. This particular matter had been referred to National Treasury. Once the Municipal Council condoned it, it was only the courts that could reverse that decision. The AGSA has consulted on this matter significantly and has done an internal technical consultation. The outcome was that once a condonement was done, the decision would have to be reversed by the courts. The AGSA had performed its responsibility by referring the matter to the National Treasury. She was not sure if the matter had been referred to the Special Investigating Unit (SIU). This was a new trend that was of concern for the AGSA, specifically with respect to irregular expenditure. Material irregularities involved a long process and could not be written off at the Municipal Council level. Only irregular expenditures could be written off or condoned. She liked the question about the rural municipality raised by Ms Mente-Nkuna, and asked Ms Adams to respond to that.

Ms Adams said irregular expenditure or unauthorised fruitless and wasteful expenditure write-offs bothered the AGSA. This trend was present in the Northern Cape. Section 32(2) of the MFMA articulated that the Municipal Council must investigate before something is written off. As part of consequence management, the AGSA would ask for evidence of the investigation. In some instances, no substantial work was done during the investigation. The AGSA would raise non-compliance issues in the report as a result of the non-compliance with section 32 of the MFMA. The matter would be reported to National Treasury. Clear guidance would be issued on how to deal with unauthorised irregular expenditure. If things were technical, such as receiving a tax clearance that was not previously there, it could be dealt with. When there were instances of clear fraud and corruption, it could not simply be written off.

One of the challenges was that something could be written off in a particular year and non-compliance would be raised, but the next year it would fall away. The AGSA was looking into those matters for referral. Section 32 also referred to incidents where there was criminal conduct. There was a responsibility to refer to these matters. The AGSA was reporting to National Treasury. These were things that had to be looked at from a deeper level. Otherwise, the problem would perpetuate itself year on year.

The AGSA had not received the 2023/24 annual financial statements from the Mafube Local Municipality in the Free State. When looking at the root causes of the problem, there was nothing wrong with the legislation. The legislation was clear -- when documents were put together, there was a process that had to be followed from the Municipal Systems Act 32 of 2000. From a performance information side of things, if systems were not in place when deciding what should be delivered, then the planning had not been done properly. It was difficult to measure the targets and indicators that were supposed to be delivered. It was not clear what was supposed to be measured. For example, there would be an indicator of refurbishing a gravel road, but there was no indication of which gravel road this was, or the street name. The AGSA would not be able to confirm the gravel road. This came down to processes not being in place to collect the information. The municipalities were responsible for indicating it would deliver an item, but if the item was not delivered, reasons should be provided. A lot of times, there was information that could not be confirmed. There were times when the budget was reprioritised. For instance, the money that was supposed to go to refuse removal went to water and sanitation. Even the explanations that were given for the non-delivery of items or underperformance could not be confirmed by the AGSA.

The MEC for Cooperative Governance and Traditional Affairs (COGTA) in the province had a key responsibility for the performance information of the municipality, as the MEC had to approve its plans. Service delivery from one municipality to another was similar in nature. The MEC of COGTA had to support the municipalities better and had to assist with formulating targets and indicators. The AGSA believed that this was the key fundamental role that the MEC of COGTA had to play in their oversight process with the performance information. Section 72 deals with the Mayor’s responsibility to report every six months to the Municipal Council on what was supposed to be delivered and what had been delivered. A lot of times, the AGSA found that the credibility of the report that went to the Municipal Council was not credible. Decisions were made based on information that was not credible. During the auditing of the performance information, the AGSA did not have the evidence. There were non-compliance findings for human resources. There was a Municipal Staff Regulations of 2021 and in that document, minimum competencies were listed for the different levels of skills that were required in the municipalities. Performance agreements were not signed. If those performance agreements were not signed, how would it ensure that the performance of the municipality would be delivered? There were no clear job descriptions. An official did not know what their responsibilities were, and they were getting paid for not doing what they were supposed to do. There were no performance management systems entrenched throughout the municipality to keep people accountable for what they were supposed to do and deliver. This was where the AGSA saw a direct correlation from a service delivery perspective.

The Chairperson said that he, the research team and the Committee Secretary, had gone to a meeting with the provincial account committees. He reflected on the deliberations that took place and the various perspectives of the different provinces. It was unsurprising to see the provinces that had big problems. Where a province appeared to have people with a strong oversight mentality, there were few problems at the municipal level. He was not surprised when the letter from the AGSA came through.

Mr A Beesley (Action SA) said that the municipalities did not care. This was evidenced by the service delivery. When there was financial chaos, it meant that there was corruption and fraud. There was no incentive to stop. The only way to provide an incentive to stop was through the AGSA issuing a certificate of debt. How many certificates of debt had been issued? There had been criticism around the lack of a certificate of debt. When people’s pockets started to hurt and other people saw this, it would set an example that people would not get away with this chaos. If there was no responsibility, people would keep doing these things. There was a lack of consequence management. Key role players had their skeletons, and would not institute disciplinary hearings. Previously, it was briefly touched on having independent hearings with the Special Investigating Unit (SIU). How many disciplinary hearings had taken place? How many people had been dismissed? He was happy to see that KwaZulu-Natal had submitted all the annual financial statements. However, he was confused that a different slide indicated that the Msunduzi Local Municipality had not submitted annual financial statements. Was this a mistake? Were there any engagements with the Minister of COGTA about these issues?

AGSA's response

Ms Ngoma said that there had been a full submission in KwaZulu-Natal. There had been a delay in the conclusion of the audit of the Msunduzi Local Municipality. However, 100% of the annual financial statements had been submitted. Some material irregularities were raised in the past around the Municipal Finance Management Act (MFMA) environment. Several material irregularities had been addressed, while others were in the process of being addressed. Several material irregularities had been elevated by the AGSA from the notice to the recommendation stage. If an accounting officer did not respond to the notice, the AGSA was allowed to invoke its powers to elevate the notice to the recommendation stage. The audit report would show that a material irregularity had been elevated to a recommendation upon no response or action by the accounting officer. Several issues were in the remedial stage. She could not pre-empt what would be presented on the certificate of debt, but it would be presented in a future session. This was a process that had to be respected. Once a certificate of debt materialised, it would be presented by the AGSA.

She asked that a slide from the previous financial year be presented to show what disciplinary actions and investigations had taken place. This was not part of the presentation, but she wanted to show the overall impact and the actions that had taken place.

Ms Adams said that the AGSA was still waiting on financial statements from Thaleda and Mafube local municipalities. Kopanong Local Municipality, Mohokare Local Municipality, Masilonyana Local Municipality and Kheis Local Municipality had all submitted financial statements, but the auditing processing was ongoing. Matjhabeng Local Municipality and Msunduzi Local Municipality had received a qualified audit. Maluti A Phofong Local Municipality had received a disclaimer. Kagisano-Molopo Local Municipality had received an adverse findings audit opinion in the Northwest. Four municipalities' audits had been finalised, and four municipalities' audits were ongoing. Two municipalities' annual financial statements were outstanding. This made up the ten auditees.

Mr G Skosana (ANC) said that the presentation was quite depressing, but appreciated the good work that the AGSA had done.

He asked if the internal audit and audit committees of these municipalities were fully capacitated in terms of their understanding of their roles. These challenges would not have arisen if these committees were doing their work properly as expected. Unlike state entities, municipalities had internal audit and audit committees, including Municipal Public Accounts Committees (MPACs) to assist with financial statements. Some municipalities had more than 40 councillors and full-time chairpersons of the MPACs. These chairpersons were there full-time to play an oversight role on the issues of annual financial statements, annual reports, audit processes, and all issues relating to good governance. There were still municipalities that found themselves in these situations, despite having full-time chairpersons for the MPACs. A full-time chairperson of an MPAC would receive more remuneration than other chairpersons of section 79 committees. A full-time chairperson was there to play an oversight role, provide administrative support and appoint external expertise to assist.

What type of special support was given to municipalities that were unable to submit annual financial statements for a long time? There should be a programme that would provide support to these municipalities. How many notifications of material irregularities had been issued? Was it for all ten auditees, or only the two that were mentioned -- Mafube Local Municipality and Thaleda -- that had outstanding annual financial statements? The Thaba Chweu Local Municipality submitted their annual financial statements on time and was able to finalise all the other corresponding audit matters as scheduled. Thaleda did not have a board or a chief executive officer (CEO), which was an accounting officer. The financial manager had resigned. What was the role of the Thaba Chweu Local Municipality to assist Thaleda? The Thaba Chweu Local Municipality was a parent entity of Thaleda. However, only the Thaba Chweu Local Municipality was able to submit its financial statements. The Thaba Chweu Local Municipality was doing nothing to help assist Thaleda. What had been Thaba Chweu Local Municipality’s response to that during the interactions? Was Thaleda still functional? An entity without a board or CEO could not be functional. Was it just an entity that was created a few years ago that had collapsed but remained in the books?

Ms Ngoma said that both the internal audit functions and the MPACs had been elevated in the accountability ecosystem. They had a critical role to play in ensuring that there was transparency and accountability all the way up to performance. There were various things that the AGSA had seen on whether they were capacitated adequately or not. In most instances, there were vacancies in the internal audit departments that ended up crippling the assurance function that it had to play. This function included reviewing the financial statements and performance information, as well as ensuring there were basic controls in place. This would help mitigate the issues of non-compliance with supply chain management. Slide eight of the presentation indicated which municipalities had been issued a material irregularity that spoke to the non-submission of financial statements. Msunduzi Local Municipality information was not concluded on time. Material irregularities were issued due to the late submission of financial statements for Mafube, Kopanong, Mohokare, Masilonyana, and Kagisano-Molopo Local Municipality, including Thaleda.

Ms Adams said that the AGSA had deliberately visited some of the municipalities in the disclaimer zone, especially in the Free State. It engaged with the internal audit, audit committee and the chairpersons of the municipal public accounts committees (MPACs). There were a lot of capacitation challenges, and a lot of work would have to be done. From a National Treasury perspective, guidance had been sent out for the MPACs to draft terms of reference. These were things such as the role and responsibility that had to happen. The AGSA did provide training, and also advised on the matters that were present in the audit report. If an MPAC was not able to sit because the financial statements were not submitted, an oversight role on the annual reports could not be performed. This would have an impact on these municipalities.

There has been a trend of late submissions over the years. As a result, the oversight role of the MPACs happened much later. Due to the timing issues, sometimes issues that had happened two years ago were still being dealt with. Ms Adams agreed that a lot of capacitation still had to be done. The AGSA had seen with the new administration that a lot of new councillors were coming in. These new councillors still had to understand the system and be capacitated, and it took time to do this. There was a capacitation issue that needed to be addressed.

If financial statements were not submitted, the roles in the accountability ecosystem had to be activated. The provincial treasuries and National Treasury and the provincial and national COGTA were responsible for providing a supporting mechanism. These were things in their performance plans to support municipalities, especially the ones that were struggling. A lot of the challenges had been elevated to see how their support programmes could better assist the municipalities.

There were instances where the AGSA would do a status of records review. It would go to a specific period of time and do specific work around record management. However, it would have to wait for a set of financial statements to be submitted for audit purposes. She agreed about the current situation in Thaleda, which has no board or chief executive officer (CEO). There was not much happening at Thaleda. In the prior audit report, it had received a qualified audit opinion. It was small amounts, such as R2 000 and R3 000, on which it had been qualified. From an activity perspective, this indicated that not much was happening at Thaleda. The AGSA had escalated this to the Thaba Chweu Local Municipality and the province to deal with the submission of financial statements. Not many operations were happening, so it should not have taken long to complete the statements. The process of closing Thaleda was underway, which could be the reason for the delay in submitting the financial statements. In the 2021/22 financial year, there had been ten material irregularities. In the following year, there were 15, and in the current year, there were about 13. There had been responses based on the material irregularities that had been issued. The municipalities would, in that case, submit the financial statements.

Mr Skosana said that as much as the MPAC played an oversight role, it should know the deadline for when annual financial statements should be submitted. The MPAC should know when the audit process was taking place and when an oversight role should be exercised on those statements. The MPAC should not wait for its turn to come around. If statements were not submitted on time, the MPAC did nothing. The MPAC should be vocal during the audit cycle process so that no inconveniences are caused. The MPAC should play its oversight role so that statements could be ready to be submitted on time.

Mr P Atkinson (DA) was concerned about consequence management. If something bad happened in the municipality and the Municipal Council condoned it, there was not a lot that could be done other than going to court. He thought that when the legislation was enacted, everyone assumed that people would be operating in the country's best interest. In councils, there might be people who had vested interests in particular projects and might be implicated, and therefore pushed for condonement. There had been a suggestion to have an engagement with COGTA and the National Treasury to look at the legislation and change the condonement provisions, which should allow the AGSA to overturn a municipal council's decision. He suggested that another method should exist apart from just going to court for the decision to be investigated. There appeared to be a gap in the law. Evil people could get away with bad deeds. There was a suggestion that there should be a way for the AGSA to pick up some of the nefarious deeds that the Municipal Council had condoned. Further action could be taken, and there would be consequences against those members of the municipal council. It could be something like the King Report on Corporate Governance for companies and board members. There should be a way to hold councillors to account for condoning illegal actions. This was something that the Committee could address with COGTA and National Treasury.

The Chairperson said that he would discuss the next steps after all the Members had had a chance to ask their questions.

Ms T Bila (ANC) commended the KwaZulu-Natal and Eastern Cape provinces for maintaining the submission of annual financial statements at the legislated time. This would encourage provinces to do the same so that there could be 100% submission of annual financial statements. The AGSA had presented the reasons for the delay of the submission of annual financial statements. Was it not possible for the AGSA to bring these municipalities all under one roof to encourage them more? The chairpersons of MPACs in Mpumalanga and Limpopo were all full-time in the office. There must be 100% compliance of all the municipalities in the country.

Mr N Maduna (ANC) commented on the issue of applying for a grant for a specific project that ended up being used for something else. It had always been said that South Africa had good policies for oversight. A particular project would be identified which the Municipal Council would prioritise. There would be an application for funding for the project. The SCM processes would start, and a person would be appointed. When there was a project, there had to be a payment certificate. The contractor would provide an invoice. The municipality would employ a consultant to verify the work that had been done. The first person that would be corrupt had to be the consultant. The payment certificate was received by the municipal technician for sign-off. The consultant and the technician would say that the payment was correct. The manager would sign the payment certificate before it was sent to the province. The provinces would sign the payment certificate, and the payment would be made. It was confusing because during that process, no one would pick up that the project was no longer happening.

In South Africa, the notion that politicians were corrupt was told too much. There may have been some corrupt politicians, and some administrators were corrupt. There were collaborators in the corruption that happened. It was not possible for one person in the process of payment certification not to have picked up that something was wrong. An internal audit would have been done to verify that the payment was made properly. There were many local municipalities where the budget was finished, work was still in progress, and the balance sheet was stagnant. The problem with accounting was that what happens on one side affects what happens on the other side. The one side was continuously decreasing, but the work in progress was not increasing. This meant that no work was happening.

It had previously been said that moral regeneration was needed. There were so many people involved in the payment certificate. There was a narrative that politicians were corrupt but it was time to look at the officials. There had to be a discussion about government administrators and the culture in general. This issue could no longer be ignored. It had always been easy to just push the blame on to politicians. However, the politicians did not know the tenders. He felt that it was important to raise this sharply. In future, there should be a discussion around moral regeneration and changing the culture in government to ensure that there was a clean government that delivered adequately. Did the senior managers of the municipalities which had not submitted financial statements or submitted them late, get performance bonuses?

He thought that financial statements were prepared as soon as there were transactions taking place. Municipalities should not wait until the last day, because it would end up with financial statements not being submitted. The municipalities should prepare as the transactions were happening. This would assist in ensuring that the information was collected, accurate and completed. The AGSA had been given new powers and these were some of the things that had to be looked at. There could not be a performance bonus if financial statements were not submitted. After a Municipal Council had written something off, the decision could be reversed only by the courts. As much as the process was there in the MFMA, this was something that had to be looked at.

He said that things differed from municipality to municipality. Some municipalities had an MPAC researcher to assist the MPAC in dealing with these issues. In other municipalities, the internal audit units were the ones doing the investigation. In some municipalities, the SCM official who was being investigated was the one who appointed a person to come and investigate. There was a regulation where one could take the SCM process from a sister entity or municipality, and use it to make an appointment in another municipality. He was not sure which regulation it was. The Municipal Council would write things off. There may be too many red flags. What was the tolerance level in the process to say that there were too many red flags, or that there was corruption or fraud involved?

Ms Ngoma welcomed the comment on the capacitation of various role players in the ecosystem so that their duties would be discharged effectively. The issue of capacitation came up strongly when the AGSA drilled deeper into the understanding of the root causes. The AGSA had called upon the chairpersons of the MPACs to collaborate with the internal audit functions to address these issues. This would help the MPACs to effectively discharge their responsibilities. A bigger role had to be played in capacitating the various role players. The capacitation was a major problem statement in South Africa. She agreed with Mr Maduna about the issue of ethics. If one looked at the National Framework towards the Professionalisation of the Public Service in South Africa (also known as the Professionalisation Act), it spoke about skills and competencies. It also spoke about the need to ensure that the officials employed by the public sector were ethical and performed their duties with integrity. This spoke to the pillar of institutional integrity. It would take the capacitation, ethics and skills pillar to get the environment right. This included the existence of basic controls in the environment.

She said that Mr Maduna had been spot on when it came to the issues around the payment certificates. She referred to the payment certificates for goods that had not been received. There were a lot of these incidents in the material irregularities. The statistics showed that 20% of the material irregularities in the MFMA space were squarely in the area of procurement and payment for goods and services that had not been received.

She asked the AGSA to revert back to the question regarding performance bonuses for senior managers when there was no submission of the annual financial statements. The AGSA had picked up a trend where there were no performance contracts or performance management systems in place that indicated what had to be delivered to the citizens.

Ms Adams said that there had been some piggybacking of contracts over the years. This meant that one municipality would use the contract of another municipality to get involved in the procurement process. There had been instances where the process had not been followed appropriately. If there was piggybacking of a contract, a municipality had to ensure that the service was similar. For example, if a municipality was piggybacking on appointing an individual for accounting services, one could piggyback only if there was a difference left on the other side because certain things were already allocated. This was how the AGSA would have audited it. There were instances where the AGSA had reported non-compliance because the proper processes had not been followed. This would result in the non-compliance with the SCM processes. During the assessments, the AGSA would look at the specific contracts. Specialists would form part of these processes, which included performance auditors and individuals from the investigating business unit. If there were fraud or risk indicators, they would have been highlighted to management. These concerns would have been included in the management report. The AGSA would have highlighted things that had changed with the payments or things that had been scratched out. There would be a follow up on these concerns that had been raised.

Mr F Essack (DA) said that there were a number of municipalities that had been declared dysfunctional. How was the AGSA approaching these dysfunctional municipalities?

Ms Ngoma said that the AGSA was working closely with the Minister of COGTA. There was a ministerial committee that the President had formed consisting of various members. These members included COGTA and National Treasury. The AGSA was also part and parcel of that committee to ensure that there were interventions. COGTA was responsible for identifying the dysfunctional municipalities in line with section 47 of the Municipal Systems Act. If the dysfunctional municipalities had been identified, the next step was determining what interventions had to be implemented. There had been close collaboration within the new government to ensure that there was a solution. The AGSA had its internal process, a continuum model. The model was part and parcel of the culture shift strategy, where the AGSA categorised local municipalities. There were various categories. The was the 'doing harm' category, the 'basic' category and the 'doing good' category. There had been municipalities in the doing harm category. There were different action plans to ensure that the AGSA worked closely with these municipalities. Work has been done with the COGTA to track these dysfunctional municipalities. There was a correspondence list for the dysfunctional municipalities and those municipalities that had been categorised. There was a close collaboration between the role players to ensure that the recommendations spoke to the root causes that had been identified.

Mr K Madlala (MK) said that enough information had been generated from the sample size of municipalities that had been presented. He thought that the Committee had to listen to more of these individual cases. The problems could easily be generalised once there was a sizable sample. An individual would be able to see the patterns and issues which could simply be generalised as the problem. There were underlying sources for it.

A national discussion about a radical policy shift was needed. There had to be a discussion with the Minister of COGTA on the plans to address these issues which could simply be stratified and quantified properly. There were similar issues. A number of the issues had been moral ones. He maintained that it was not possible to regulate the restoration of moral authority and conduct. It was also not about capacity. He believed that it was an issue of institutionalised corruption of people engaged in full-time jobs to find strategies to evade doing the right thing.

The hierarchy of governance was that the power was with the people. The people were the arbiters because they voted for the political party to govern a particular environment. The people did not vote for the municipal or city managers. A political party could not be detached from the failures of a municipality, the non-compliance with the submission of financial statements, or the non-delivery of projects. For example, at some point, there had to be a clear statement of whether it was a DA or ANC municipality. This would give the arbiters who deployed these political parties to decide on the conduct.

At the end of the day, what capacity did the Committee or Parliament have to change the entire moral fibre of the environment? Leadership was at the centre of it. If leadership had no willingness, not much could have been done. He suggested that the problems had to be packaged across the local government sphere. There were a lot of conferences where money was being wasted. There had to be a space where all the parties could get into one room to establish the moral issues and non-compliance issues. There was a big appetite for consequence management, but a low appetite for performance. How should the policies be changed to ensure that there is punishment for these behaviours while promoting good behaviour in a manner that has a sense of urgency? He had a feeling that this type of discussion had happened over the last decade, and would do so for more decades to come.

This was the culture of the country. For example, oversight would be done next week and issues would be identified. However, three months down the line, that person would be fired but someone else would come in and do the same thing. The people on the ground would continue to suffer because not enough was being done to create awareness of the effects of these issues on people’s daily lives. People would see those talking on television, and think that poor people would be fine. These people would go out and vote for the same organisation, which was what the people in the Eastern Cape had done. The society had not moved forward.

There had to be a radical approach to this matter which had to be measurable within a space of a year. There could be an agreement in 2025 for the Seventh Administration of Parliament to change the areas of policy with the public’s participation. The public must assist with the punishment of these municipalities and the political parties that were leading these municipalities where an oversight role was not played. If people embraced these kinds of leadership, what could be done to change it? There should be enough awareness for people to know what had been done. People should be able to see what the people they had trusted with their lives had done with their money. If these people went back and voted for the same organisations, there would not be much that could be done. There was no dictatorship, and these people would not be coerced into changing their views. The Committee could give people all the information and people would be able to decide if there would be punishment. This may have an impact on the approach going forward. It seemed as if things were going around in circles, and it was quite exhausting.

Closing remarks

The Chairperson said one was not allowed to make party political conclusions in the context of Parliament. He understood the point that Mr Madlala was trying to make. The whole purpose of these proceedings being public was for people to see for themselves and ask questions about who was in charge at the Laingsburg Local Municipality or the Thaba Chweu Local Municipality. He had tried to break down the jargon and ask for clarifications so that people could make their own conclusions accordingly. The substance of what Mr Madlala had said was important.

He thanked the AGSA because it had been a rich discussion for the Members of the Committee. Often, slide presentations did not have colours, meaning that there might not be a clear context. The AGSA would then come in and give the Committee a sense of what was going on and the benefit of their experiences. This had given the Committee some thoughts on what could be done in collaboration with the other arms of government to tackle these problems. It must be frustrating for the AGSA to deal with the same issues year after year. It was almost like a recording could just be played to the officials, because the problems were the same. Despite this, he believed that the AGSA could make all the difference to intervene.

As Mr Madlala had indicated, people were elected to make decisions and account for those decisions. When improvements needed to be made, those people had to do the work with the assistance of the AGSA. Ultimately, it was the elected representatives who must do their work, and this applied to the Committee. The Committee could not keep asking what was going to be done but must rather indicate what needed to be done.

The Committee would have a strategy session soon, in line with the plans of Parliament. The strategy session would help in dealing with some of the systemic issues through the government. The Committee should not just be seen as doing something, but should be doing something substantive. He asked that the Members think about this so that there could be a discussion during oversight.

There appeared to be a failure at several levels. There were failures at the municipal level, both at the political institutional level, which was the Municipal Council and the administrative level. There also appeared to be failures of different degrees, at the level of the MECs for Local Government and  Finance. This had escalated to National Treasury, already going sideways. As a start, the Committee had to avoid trying to do the work of the MECs for Finance and Local Government at the various levels. There was an opportunity to hold them to account for the specific issues of financial management, mismanagement, and the loss of money to the state. He invited Members to discuss this during oversight. There would be some time to think through what needed to be done.

Before the end of the next term, there had to be a meaningful interaction in this Committee with the provincial executive members and the Municipal Councils concerned. There had to be a formula for how this would be done. The Committee could ask Parliament for assistance, because there were not a lot of municipalities. There was another workload on the agenda, but the Committee would find a way to have these discussions with those entities. This would allow the Committee to go back to Parliament and report to the Speaker. He would inform the Speaker that the Committee was actively responding to the AGSA’s letter. The Committee would set out a plan to deal with the issues that had been raised. This would help the situation to look better next year.

The second aspect was that the Committee had to look at the important matters that had happened over time inside and outside of the Committee. There had been several discussions, including discussions with the Presidency. There had been a discussion around performance, monitoring and evaluation issues. These discussions had not been forgotten. There had been a discussion to bring National Treasury, national government, provincial government, and local government to the Committee to give a detailed review through the Government Technical Advisory Centre (GTAC). The Department of Planning, Monitoring and Evaluation (DPME) and the Presidency could also be part of the discussion to look at those detailed expenditure reviews. He had looked at some of the underlying information. The report was not ready, but he had asked for some of the information to get a sense of what was going on. A detailed sampling across the departments, local government and provinces had been done. The report would indicate where the government had lost money and the problems with executive accountability. It seemed that even the executive authorities were unaware that they could change what was going on. If a travel agency was too expensive and too much money was spent on flights, the executive authorities could change it.

The Chairperson said he had had a discussion with Professor Somadoda Fikeni, Chairperson of the Public Service Commission, about coming to the Committee with the School of Government to speak about the issues that Mr Atkinson, Mr Madlala, Mr Skosana and Mr Maduna had raised. This would speak to the quality of the people that were in the government. Prof Fikeni had said that it involved the concept of common ethos right across government. There were countries where if a person had not gone through a school of government, they could not be appointed. One could not take someone off the street who did not understand the Constitution, the PFMA, the MFMA and the political system as a whole. An individual who did not understand why and how it needed to be accounted for could not be appointed to the board of a state-owned corporation. There were skills and people who were lawyers and accountants, but the system that held the government together and accountable were things that these individuals did not understand.

He had spoken to the AGSA about the aggregated information sets. This would help the Committee to know which patterns had to be targeted, and which areas to focus on. It would help to place the Committee in a position where it was able to have different strategic conversations with the Presidency and Ministers. It would also help the Committee to make specific legislative proposals to Parliament and the executive. These discussions would take place during the strategy session.

These were the issues that the Committee was seized with regularly. In this instance, the Committee would leave this meeting and go out and do things. It was important that when the AGSA sent a letter to Parliament, action was taken quickly. Thereafter, there could be a report to the Speaker on what had been done. In this instance, the people of South Africa could see that the Committee was dealing with the problem of restoring confidence in the democratic system and the work of Parliament. The Committee would look at its programme to see where adjustments could be made. The Committee would be sending a letter to the AGSA to indicate what was being, or had been, done. There would be an update along the way.

The meeting was adjourned.