Auditor-general laments 'dysfunctional' councils and lack of consequences

The auditor-general has decried the failure of many South African municipalities to account for public finances entrusted to them to safeguard and spend effectively.

The problem is compounded by a deliberate lack of accountability by the political and administrative municipal leadership in many of these struggling municipalities, where there are no consequences for maladministration.

This is according to deputy auditor-general Tsakani Maluleke, who presented a document entitled "Not much to go around, yet not the right hands at the till" to the National Council of Provinces (NCOP) on Wednesday about municipal audit outcomes for the 2018/19 financial year.

Maluleke noted that audit outcomes continued to regress as irregular expenditure in municipalities increased to R32bn in that financial year - up from R25.2bn in 2017/18. Wasteful expenditure was at R2bn.

“There has been very little movement in audit outcomes and what movement there is, it's mostly negative,” she told NCOP delegates.

Only 20 municipalities of the country's 257 municipalities have been able to attain a clean audit - down from 33 in the two financial years before the one under review. Thirteen of the 20 clean audits are in the Western Cape, two in Mpumalanga, one in KwaZulu Natal, one in the Eastern Cape, one in Gauteng, one in Limpopo and one in the Northern Cape.

There were no clean audits in the North West and Free State. The two are also those provinces where a number of municipalities were unable to submit financial statements for audit and also where there was a high prevalence of disclaimer and qualified audit opinions - a profile similar to previous years.

“This is a story of many dysfunctional municipalities at which those that have been entrusted with the safe and effective management of public finances are simply not doing so,” said Maluleke.

'Clean administration is indeed possible'

Accountability failures include the improper use of conditional grants to fund operational expenses, which result with infrastructure development and maintenance falling behind and which ultimately affects the delivery of key services.

“The good news is that there are a few municipalities that demonstrate that clean administration is indeed possible - especially where there is political will, where there is diligent attention to key controls, which are ever so critical to our ability to build and sustain institutions,” she said.

Maluleke also highlighted how municipalities across the country spent R1.26bn on consultants for the purpose of helping them put financial statements together for the purpose of audit, and yet only 14% of those municipalities that used consultants actually improved their outcomes.

“Most of them either stayed the same or they regressed.”

She said this was raised in the context that if a municipality is unable to put together financial statements that are credible at the end of the year, they most probably do not have credible information for decision-making purposes during the course of the year.

Of the Eastern Cape's 39 municipalities, two did not have completed audits at the time the auditor-general finalised its analysis. One of those was Nelson Mandela Bay, whose audit was only finalised after deadline and which received a qualified audit opinion, a second in succession. The other was the Enoch Mgijima municipality, which had an adverse audit opinion.

Three of the province's municipalities improved their audit outcomes and 13 regressed.

“The reason behind the regression is due to the widespread lack of financial controls and poor project monitoring,” said Maluleke.

“In many municipalities across this province, vacancies and instability ... [have] had a detrimental impact on the ability of municipalities to establish preventative controls over three audit areas: financial statements credibility, usefulness of performance information and compliance with laws and regulations.

“We've noted that there's been a culture of poor performance and a lack of consequence management.”

Eight municipalities in that province had disclaimer audit opinions.

“We found that the lack of basic control was evident in many municipalities. Many of them who ultimately had a qualified or even an unqualified audit opinion spent significant amount of money (R117m) on consultants, simply to help them put together financial statements for audit.”

She said the financial health considerations in the province were starting to get more concerning, with:

• R11bn of irregular expenditure;
• 83% of municipalities having cash-flow constraints;
• 38% of municipalities having expenses that exceeded their revenue; and
• in some municipalities, the conditional grant that enables municipalities to provide basic services to poor households was not enough to even cover the family bill of a municipality.

“What we see here is that years of problematic financial management has exacerbated the financial standing of municipalities in this province,” she said.

“The economic environment within which they operate highlights the urgency with which we've got to act to ensure that the scarce financial resources that we have are adequately stretched so that we can meet the basic services especially to the most vulnerable in our society.”

'Deliberate lack of accountability' in the Free State

This was the situation in other provinces as well.

“In the Free State, we found that there is a deliberate lack of accountability by the political and administrative municipal leadership,” said Maluleke.

Out of 23 municipalities in the province, eight audits were not completed by the cut-off date due to either late or non-submission of financial statements for the auditor-general to audit. She said only three municipalities in the province were able to provide credible financial information at the end of the audit.

“We've seen high levels of non-compliance. In fact, all of the municipalities in this province had key non-compliance especially in the area of procurement management.”

Free State municipalities reported a figure of R1.4bn of irregular expenditure, but that could be understated because of the audits that remain incomplete or those that received a disclaimer.

“The reason we keep seeing this growth in irregular expenditure and instances of poor procurement practices is because there are no consequences for officials that don't look after public finances,” said Maluleke.

She said the financial health of the province had deteriorated over many years and now 80% of municipalities in the province were in a vulnerable financial position.

The poor financial discipline in the province was also impacting the country as some of its municipalities owe Eskom and the water boards significant debt (R3bn), she said.

In Gauteng, the AG found good financial accounting but that the province needs to improve the monitoring of preventative control. Many of the municipalities and the municipal entities attained unqualified audit with findings.

Maluleke noted that a number of municipalities in Limpopo had registered a R1.2bn loss relating to the VBS Bank failure in the previous financial year.

She said the impact of that “significant” financial loss was still being felt in many of these municipalities, for much of that money had been designated to be used as conditional grants to develop and to maintain infrastructure.

“The result of that loss is having a direct impact on the service delivery that is being rendered to the residents of those municipalities,” she said.

'Blatant disregard for compliance' in Mpumalanga 

In Mpumalanga, there is deteriorating accountability and lack of financial management. This is coupled with weakened oversight, said Maluleke.

She said there has been a regression in audit outcomes because of a breakdown in internal control across many municipalities, with a number of municipalities having no basic record keeping, no reconciliation of key accounts and no verification of assets and as a result the ability to produce reliable and credible financial information was compromised.

“A key feature in many municipalities in Mpumalanga is that there is blatant disregard for compliance. There are no consequences for people when things go wrong.

“The levels of irregular expenditure continue to grow and very little is done to either recover or hold people accountable,” said Maluleke.

“There has been no municipality that was able to account faithfully, credibly, transparently on how they've used public funds,” he said about the municipalities in the North West province.

Maluleke said this picture of no credible financial information exist in a context where R180m was spent on a combination of staff employed to run finances in municipalities and consultants that were brought on board to help put together financials.

“If you consider that R180m could not get us one set of credible financial information, it highlights that yes indeed, there has been a systemic breakdown in financial administration and in financial reporting within the province.”

Western Cape municipalities were again the ray of sunshine in the deteriorating picture, with the AG saying it is the one province where they have seen the strongest financial health indicators.

“The Western Cape is testament to an environment where there is the appropriate tone at the top ... where there is consistent attention to audit findings and to recommendations arising from the internal auditors, as well as us the external auditors, where there is diligence in putting together the action plans that then inform how those municipalities improve their control environment,” said Maluleke.

Not only is the province boasting the largest concentration of clean audits, 93% of its municipalities published “credible” financial information and eight municipalities retained their clean audit status.

“It's often recognised that it's easier to attain a clean audit and more difficult to retain it because that which you achieve you must find a way to sustain.”