Councils spent R1bn on consultants but numbers still don't add up: AG

South African municipalities spent R1bn on consultants in a single year, paying them to compile their financial statements for audit — but in some cases these statements were still not credible.

Auditor-general Tsakani Maluleke has raised concerns about the use of consultants by municipalities who employ finance people without the requisite skills.

Maluleke told a meeting of parliament's standing committee on public accounts and the standing committee on the auditor-general that local government finances and accounting disciplines have continued to deteriorate.

She was briefing the committees on the municipal audit outcomes for the financial year from July 2019 to June 2020.

“It’s never been more urgent for us to deal with the financial management disciplines in local government, such that the diminishing resources that are available can then be used in the most optimal way. Unfortunately, we are still seeing that these financial management disciplines are pretty weak across many municipalities,” she said.

A major indicator of the weak state of internal controls and financial management disciplines was the quality of financial statements submitted to the AG for audit purposes, she said.

Only 28% of municipalities submitted quality financial statements at the beginning of the audit period, said Maluleke, meaning that the vast majority didn’t have the critical disciplines to prepare and present quality financial reports.

She said municipalities relied on the audit process to compile financial statements to fix the mistakes that the auditors found throughout the auditing process.

“In too many instances, the key disciplines of how we manage financials and how we manage performances are not in place. Another worrying indicator in local government is the continued reliance on consultants to help municipalities put financial statements together.”

Maluleke said municipalities spent about R1bn on consultants to help them compile their financial statements for audit, but still they did not improve.

In a whopping 68% of the instances where consultants were brought in, the people hired did not have the required skills to compile financial statements.

The Chris Hani district municipality in the Eastern Cape, for instance, received a combined total of R1.043bn in equitable share and conditional grants. At the end of the financial year, they had R42m in the bank — but there was little information on what the R1bn had been spent on, said the AG.

She said the municipality had spent R66m on its finance division but still went out to hire consultants to the tune of R24m for compiling financial statements. The municipality received a disclaimer opinion.

A disclaimer audit opinion means auditors could not offer any opinion based on the information submitted to them. “Essentially we say those financials are completely unreliable,” said Maluleke.

The Chris Hani municipality was one of 10 that spent an aggregate R105m on consultants to compile their financial statements, yet still got disclaimer audit opinions.

Five municipalities spent R53m among them on consultants compiling financial statements and received adverse opinions, which means the auditor-general did not agree with their financial statements.

In too many instances the books do not add up due to a lack of records or documents to support what is presented in financial statements, said Maluleke.

“This confirms for us that a quick fix at the end of the year doesn’t work. If the disciplines of maintaining records — making sure that the payments that go out of the bank account are known and documented — are not in place for 12 months of the year, by the time we compile financials at the end of the year it really becomes extraordinarily difficult to get credible financial statements,” she said.

Overall, 22 municipalities received disclaimers. Because the auditor-general could not rely on the information prepared by these municipalities, auditors went to third parties such as the National Treasury for information.

They found that the 22 municipalities were allocated a combined total of R6.49bn for equitable share and conditional grants, which are allocated from the national revenue fund to municipalities for specific purposes such as human settlements, public transport and bulk infrastructure — but when the AG checked their bank accounts there was less than R1bn.

“In between, nobody is reporting, nobody is accounting and nobody really knows for sure what has happened to this money.”

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