Newsletter 275 - Reports on Municipalities - The Auditor-General of SA - PART 8
Auditor-general flags lack of accountability as the major cause of poor local government audit results
PRETORIA – The auditor-general (AG), Kimi Makwetu, today released yet another set of municipal audit results that show an overall decline in audit results for the 2017-18 financial year.
Reasons for the accountability failures
The AG’s report highlights the following as some of the major contributors to the accountability failures and the regression in audit outcomes:
B. The audit outcomes at a glance
Total local government expenditure budget in 2017-18
- The expenditure budget for the municipal sphere in 2017-18 was R376,49 billion.
- Municipalities with clean audit opinions represent R9,51 billion (3%) of this amount, while those with unqualified opinions with findings represent R237,44 billion (62%).
- Municipalities with qualified audit opinions make up R77,48 billion (21%) of the total budget, while those with adverse and disclaimed opinions represent R23,62 billion (6%).
- The municipalities with outstanding audits constitute R28,44 billion (8%) of the total expenditure budget.
Movement in municipal audit outcomes
- Only six of the nine provinces had municipalities with clean audits, as illustrated below: The summary below highlights how the various provinces, in alphabetical order, performed in the year under review:
- The province’s audit outcomes show a net regression, made up of five regressions and four improvements.
- The number of municipalities receiving modified (qualified, adverse or disclaimed) opinions increased from 39% in the prior year to 47% in the year under review.
- The overall financial health of municipalities in the province regressed, as 76% of the municipalities had concerning financial health indicators or required intervention, compared to 66% in the previous year.
- Of these municipalities, 29% (2016-17: 21%) faced significant cash flow and viability challenges, which were emphasised in their audit reports.
- The AG commended municipalities in the province for spending 96% of the conditional grants that were allocated for infrastructure development.
- For the province to improve its outcomes, Makwetu advises that the “political and administrative leadership must strive to create a culture that will result in a responsive and accountable local government.
- The tone at the top must be focused on ethical leadership and good governance, supported by a well-capacitated administration with an emphasis on filling the municipal manager and chief financial officer roles with competent individuals in order to promote stability”.
- The AG has again raised his concern about the state of municipalities in the province noting, in part, that: “The Free State local government environment displayed a total breakdown in internal controls as the province’s political and administrative leadership, yet again, exhibited no response to improve its accountability for financial and performance management.
- “The leadership did not implement our recommendation to ensure stability and the filling of vacancies in key positions, despite their commitment to do so.
- This resulted in the significant deterioration of municipal audit outcomes, service delivery and financial health. The required level of oversight by all assurance providers in the province was non-existent at most municipalities and we doubt if there is political will to do the right thing for the right reason, mainly due to political interference to the detriment of good governance.”
- Makwetu says the financial crisis in the province is becoming a critical concern.
- “Although some municipalities had been placed under provincial intervention, this was not effective, as these municipalities’ financial sustainability did not improve.
- Several municipalities in the province qualified for mandatory intervention by the provincial executive, which is applicable when a municipality is in a serious financial crisis and is in material breach of its obligations to provide basic services or to meet its financial commitments; however, no decisive action was taken by the provincial leadership to implement the constitutional prescripts.
- Consequently, municipalities’ financial health continued to deteriorate from a net current liability position (where current liabilities exceed current assets) of R4,8 billion in the prior year to R6,1 billion in the current year.”
- The Gauteng local government sustained its audit outcomes in 2017-18 with one municipality obtaining a clean audit.
- The analysis of audit outcomes excludes Emfuleni, of which the audit outcome had not been finalised by the legislated date due to safety concerns in the municipal area, which resulted in a temporary suspension of the audit process.
- The AG commended Midvaal for sustaining a clean audit outcome for the last five years. “As highlighted in previous years, this was as a result of the municipality institutionalising a number of best practices, such as timeously monitoring the implementation of action plans to ensure that internal control deficiencies are addressed and effectively applying consequences. Should such practices be replicated across the province, audit results are likely to improve even further.
- Makwetu also commended the province’s municipalities for obtaining a 100% financially unqualified opinion for the past three years. Gauteng also remains the only province without any qualified or disclaimed opinions. However, the quality of financial statements as initially submitted for auditing regressed, as only 30% of the municipalities (2016-17: 40%) submitted financial statements without material misstatements.
- The audit outcomes continued to deteriorate in the second year following the election and appointment of the new political and administrative leadership in the province.
- The outcomes indicate a net overall regression of nine municipalities since the previous year, comprising 14 regressions and five improvements. There was a substantial decrease in the number of municipalities with unqualified audit opinions without findings (clean audits) from six to one; and an increase in the number of municipalities with modified audit opinions (qualified, adverse and disclaimed) from 14 to 18.
- “We again identified and reported that the leadership along with management was slow to respond, or did not respond at all, to the early warning risk signals and recommendations that we regularly communicated during our engagements. Vital internal controls were ignored.
- It is also worth noting that the levels of tension, intimidation and threats, as well as pushback and hostility, increased during the execution and reporting phases of our audits, as the leadership and management were under pressure to achieve better audit outcomes.
- These factors coupled with surges in service delivery protests made the audit landscape complex and challenging for our audit teams,” reveals the AG.
- “Many of the challenges across local government are vast and require attention and a long-term solution.
- Equally, there are basic lapses that are sometimes overlooked, which can be fixed easily and quickly by addressing the building blocks of a sound system of internal control,” Makwetu advises.
- Municipalities in Limpopo registered a slight improvement in the overall audit outcomes in 2017-18 with a net improvement of two municipalities.
- However, this improvement was consultant-driven rather than as a result of a concerted effort by the leadership to address internal control deficiencies.
- “Following the improved audit outcomes in 2015-16, which was also consultant-driven, we warned against the over-reliance on consultants that put the sustainability of improved audit outcomes at risk.
- Our warnings were not taken seriously and consequently in 2016-17 this improvement was not sustainable, as the overall audit outcomes regressed.
- “We once again encourage the leadership in the province to ensure that a culture of accountability is cultivated and that all levels of management and leadership accept responsibility for improving audit outcomes. It is critical that the municipal public accounts committees and municipal councils are adequately capacitated, especially in the area of compliance, to exercise their oversight roles effectively to prevent a situation where municipalities incur unnecessary financial losses, such as making unlawful investments.
- The tone has to be set at the top (by senior managers, municipal managers and mayors) that there is zero tolerance for poor performance and transgressions.
- This will not only improve audit outcomes but will have a positive impact on service delivery as well.”
- Mpumalanga was unable to sustain the improved audit outcomes from 2016-17 and instead experienced a significant net regression in 2017-18.
- Only one municipality improved its audit outcome from unqualified with findings to a clean audit.
- Nine municipalities regressed from the prior year. The main driver of the regression was the lack of sufficient and effective institutionalised internal controls, which resulted in an unstable control environment.
- “Despite our strong message in the previous years, calling on both the local government and the provincial leadership to deal decisively with the accountability failures by stabilising local government (i.e. filling vacancies and capacitating local government) and implementing consequences for those who transgress governance laws, the province did not heed this message, resulting in these regressed audit results,” notes the AG.
- The audit outcomes regressed, with three municipalities moving from an unqualified audit opinion to a qualified audit opinion, and two municipalities moving from a qualified audit opinion to a disclaimed audit opinion.
- Financially unqualified financial statements: 42% (2016-17: 46%)Clean audits: 3%(2016-17: 3%) No findings on performance reports: 27% (2016-17: 23%) No findings on compliance with legislation: 4%(2016-17: 4%)Irregular expenditure: R586 m(2016-17: R283 m)
- The overall regression confirms that the AGSA’s message of accountability that has been conveyed consistently to the province during the past two years has not been heeded yet.
- This message entailed, amongst others, mayors, municipal managers and senior managers holding each other and their subordinates accountable. “As this did not happen, similar findings are reported year after year in many instances, confirming that accountability for financial and performance management continues to deteriorate.”
- The province’s downward spiral continued with another significant regression in audit outcomes.
- Not a single municipality attained a clean audit opinion, while the number of financially unqualified opinions decreased from two to only one and the number of disclaimed opinions increased from eight to 13.
- The audit outcomes of seven municipalities regressed, with only two municipalities improving.
- “These audit results, the worst since 2012-13, are a clear indication of the deteriorating accountability, a blatant disregard of our messages and recommendations, complacency and a lack of commitment to decisively address key areas of concern as well as a lack of political will to effect consequences.
- Despite the commitments made by the leadership to address root causes and control deficiencies, they did not respond with the required urgency to our messages about addressing risks and improving internal controls. The political instability in the province and the tone of those charged with governance have created an environment that is not conducive to accountability, good governance and the effecting of consequences.”
- While the province still has the largest concentration of municipalities with clean audits at 40%, its latest results reflect a significant regression compared to 2016-17 (70%).
- We have observed that the lapses in controls in certain municipalities in this province were largely non-adherence to statutory submission dates of financial statements for audit, non-adherence to supply chain requirements in confined areas already identified and actioned by management only after the audit.
- For these reasons we do not believe that these lapses or control deviations are indicative of a systematic breakdown in the systems of internal control, however, the report had to reflect the occurrences to prevent management complacency.
- Former Cooperative Governance and Traditional Affairs (Cogta) Minister Dr Zweli Mkhize had echoed the AG’s central message of declining accountability in local government.
- He told an audit indaba on local government held in Durban that “municipalities have not learnt anything from past negative audit outcomes” as they continue to be plagued by the same system failures that the AG has constantly flagged with them, including making recommendations on how to remedy these shortcomings.
- The AG says he is encouraged by these pronouncements that are part of financial management interventions designed to assist poorly performing municipalities.
- Makwetu says his office fully supports any initiative aimed at improving governance systems at municipalities “to arrest the reversal in audit outcomes we are currently witnessing”.
- He points out that: “As we have maintained for years now, most of the municipal problems we continue to highlight every year can be turned around through strong, ethical and courageous leadership in the administration and council, with the support of provincial government.
- “Also, those charged with local governance and oversight should ensure that the basic principles of accountability, built around strong internal control and good governance, are in place. When these fundamentals are institutionalised, municipalities should be well geared to live up to the expectations of the communities that they serve.”
- The tabling of this report takes place in the context of three interrelated developments which include the role of leadership in addressing weakening accountability; the expanding mandate of the office of the AG and the intended impacts of these amendments in local government.
The role of leadership in addressing the deteriorating accountability in municipalities
- Makwetu unequivocally asserted that the current governance relapses besetting local government could only be turned around if the leadership was to take the lead in the drive towards wholesale clean administration in the public sector.
- “The leadership sets the tone at the top at any organisation.
- If an organisation’s leaders are unethical; have a disregard for governance, compliance and control; and are not committed to transparency and accountability, it will filter through to the lower levels of the organisation. Inevitably, a culture of poor discipline, impunity and non-delivery will develop, leading to the collapse of the organisation.
- “The leaders in local government should therefore steer their municipalities to success. They should take responsibility for the deteriorating accountability in municipalities and it is their duty to turn the situation around.”
- The AG says local government leadership includes the municipal managers and their senior managers who are responsible for the administration and service delivery of the municipality; the political leadership (the mayor and council members) who oversees the functioning of the municipality and takes key decisions; and the provincial leadership (premier, members of the executive council, and heads of provincial departments that support local government).
- The provincial legislature, he adds, also has a leadership role to play as part of its oversight function.
- Makwetu is confident that if the leadership at all three of these levels were to focus on the following key matters, the current state of governance at municipalities could be turned around:
- Tone at the top – ethical leadership, good governance and accountability
- Capacitate and stabilise administration – free from political interference
- Enable and insist on robust financial and performance management systems
- Consistent, appropriate and swift consequences for irregularities
AG’s expanded mandate to help improve accountability in the public sector
- Makwetu says his office, as the country’s supreme audit institution, has always understood that it has an important role to play in the public sector accountability chain, and that the new powers given to his office by parliament will ensure that they continue to contribute to the drive towards wholesale clean administration.
- “The accountability mechanisms in local government are not working as they should, and there have been continued calls for more to be done – particularly by the audit office.
- Through the support of our parliamentary oversight committee, the Public Audit Act was amended to provide us with more power to improve accountability in the public sector.
- “The intent of the amendments is not to take over the functions of the municipal manager, the mayor or the council, as their accountability responsibilities are clear in municipal legislation.
- It is rather to step in where those responsibilities are not fulfilled in spite of us alerting leadership of material irregularities that need to be investigated and dealt with.”
How the amendments will help improve accountability in local government
- The AG says the amendments provide his office with an expanded mandate, which includes the power to refer material irregularities to appropriate public bodies to investigate; as well as with the power to issue binding remedial actions to ensure that material irregularities are addressed, including the recovery of money lost as a result of the irregularities.
- “We have been engaging with mayors, municipal managers and council members on the amendments and its impact as part of our roadshows.
- We have highlighted that the introduction of the concept of material irregularities was not an attempt to bring in another punitive measure but rather a complementary mechanism for strengthening financial and performance management, which in turn will contribute to improved accountability in the public sector.
- “We also shared with them that by identifying material irregularities, we will support municipal managers by bringing to their attention the irregularities that could have a significant impact on municipal finances, resources and delivery as well as empowering them to take the appropriate steps timeously in terms of legislation.
- This will lessen the negative impact of such irregularities on municipalities, set the right tone for accountability, and highlight the need for consequences. We will report the material irregularities in the audit report, which will also enable councils to perform their oversight function – focusing on the most material matters affecting municipalities.”
- If the municipal managers, supported by their political leadership, adhere to their legislated responsibilities and commit to taking swift action when we notify them of a material irregularity, there will be no need for us to use our remedial and referral powers. Municipal managers also need to respond to the initiatives we have implemented to assist them in preventing material irregularities. They should act on our recommendations for strengthening their internal controls and the early warning signals we share with them as part of the status of records review.
- “The extension of our mandate will assist in restoring public confidence, solidifying accountability, and entrenching the ethical behaviour that is expected of entrusted officials and elected representatives.
- It will also mean that our reports will be taken seriously – we could start to see an improvement in the audit outcomes and a definite shift towards municipalities living up to the expectations of the communities they serve,” concluded the AG.
Issued by: Auditor-General of South Africa