Purple Tod Consulting

D. National and provincial audit outcomes

At national level, there was a regression in outcomes, with the number of clean audits decreasing to 23% of the total population.

Provincially, the Western Cape and Gauteng continued to produce the best results – with 83% and 52% clean audits, respectively. Common to both provinces, the AG said, “was the role of the leadership and the legislatures in instilling a culture of accountability and transparency, setting goals for clean administration, and working systematically towards that goal in spite of facing similar challenges as the other provinces”.

The outcomes in the Western Cape showed a slight regression over the four years as a result of isolated cases of incorrect accounting and non-compliance.

The financial statements of all the auditees in Gauteng were unqualified, but credible performance reporting and compliance with legislation were not yet evident at all auditees, resulting in high levels of irregular expenditure.

The AG said it was regrettable that the improvement in audit outcomes in the Eastern Cape over the past few years could not be sustained –

• the audit outcomes regressed in 2017-18 as a result of the slow pace of addressing the root causes of the findings raised by his office every year.
• Similarly, the improvement trend in Limpopo did not continue, with more auditees regressing than improving in the year under review. Despite the provincial leadership committing to implementing his office’s recommendations, “that was not done timeously and decisively, with auditees trying to resolve the previous year’s findings only at year-end or during the audit process”, reported Makwetu.
• Makwetu recognised Mpumalanga as the only province where the audit outcomes improved. However, the outcomes have been erratic over the past four years, with auditees not sustaining their outcomes as strong internal controls have not been institutionalised, resulting in unstable internal control environments. He said those auditees that improved did so by following through on their action plans, guided by leaders that set the right tone. 
• In contrast, the outcomes in the Northern Cape and KwaZulu-Natal were erratic over the past four years – improvements in the one year were offset by regressions in the following year. The AG cited a lack of urgency from the leadership in responding to the root causes of the audit outcomes in these provinces.
• In North West and the Free State, Makwetu singled out “lack of accountability and commitment towards clean administration” as factors that influenced the poor showing of these provinces. Their audit outcomes continued to worsen and they were the only provinces with disclaimed and adverse opinions.
• “These provinces were in a very bad state – their financial health was the worst of all the provinces, no auditees, except one in North West, could comply with legislation, and the inability to reliably report on the performance of auditees and key provincial projects was common. Delays in the completion of projects, poor quality work and payments without evidence of delivery (especially in the Free State) resulted in poor service delivery and allegations of fraud.
• “In spite of the commitments made to us in the past, it has become clear that the political and administrative leadership is disregarding our messages and recommendations – choosing rather to contest the audit conclusions, instead of addressing the weak control environment at almost all of the auditees in the North West,” he revealed.
• He said in the Free State, “instead of addressing the root causes of poor audit outcomes, strategies were changed to continue circumventing key internal controls. Moreover, it was common in both these provinces that the oversight structures were not proactive, which hindered the effecting of consequences as members of the executive council were not held to account”.

E. Uncompleted audits

• By 31 August, 41 audits had not been completed – an increase from the 26 audits that had not been completed at the same time last year.
• The main reasons were the late or non-submission of financial statements and outstanding information.
• A total of 18 of the outstanding audits were a result of SOEs attempting to resolve their going concern status.

F. Financial health of auditees

• The financial health of auditees continued to deteriorate.
• Departments, in particular, were struggling to balance their finances.
• The report indicated that the financial health of departments regressed further in 2017-18, continuing on a downward spiral since 2014-15.
• Those auditees with a good financial health status represented only 28% of the expenditure budget of departments.
• Overall, 16 of the departments that were identified as requiring urgent intervention disclosed in their financial statements that they may not be able to continue delivering services if additional funding was not provided. Although these departments will continue with their operations, they were reporting that they were in a particularly vulnerable position at the end of the financial year.

G. Supply chain management

• The non-compliance with supply chain management (SCM) legislation increased.
• The status, Makwetu stressed, “was even worse than in 2014-15, in spite of all the reporting we have done in this area, the red flags we have raised, and the many recommendations we have made.
• Uncompetitive and unfair procurement processes and inadequate contract management were common”.
• Makwetu cautioned that for a country whose economy has recently been officially declared to be in technical recession, “government cannot afford to lose money because of poor decision-making, neglect or inefficiencies” such as in the failure to follow up on audit recommendations or the high fruitless and wasteful expenditure, which is effectively money lost.

Irregular expenditure increases

• Irregular expenditure continued to remain high at R51 billion.
• This total includes the irregular expenditure of those auditees where the AGSA completed the audits after the cut-off date for this report (R5,4 billion).
• The AG also anticipated that this amount could be even higher, as 27% of the auditees disclosed that they had incurred irregular expenditure but that the full amount was not known.
• In addition, 28 auditees were qualified as the amount they had disclosed was incomplete. Furthermore, the AGSA could not audit R6,5 billion worth of contracts due to missing or incomplete information.
• The top 10 contributors to irregular expenditure were responsible for 52% of the total amount of irregular expenditure. Makwetu noted that 17% of the irregular expenditure was expenditure in previous years only uncovered and disclosed in 2017-18, while the remaining 83% (R37,9 billion) was expenses in 2017-18 – representing 4% of the total expenditure budget. “It included R16,8 billion in payments made on ongoing contracts irregularly awarded in a previous year – if the non-compliance was not investigated and condoned, the payments on these multi-year contracts will continue to be viewed and disclosed as irregular expenditure,” he explained.

“The irregular expenditure does not necessarily represent wastage or means that fraud was committed – this needs to be confirmed through investigations to be done by the accounting officer or accounting authority. However, losses could already have arisen or may still arise if follow-up investigations are not undertaken. Auditees have a poor track record in dealing with irregular expenditure and ensuring accountability. The year-end balance of irregular expenditure that had accumulated over many years and had not been dealt with (through recovery, condonement or write-off) is R161,8 billion,” remarked the AG.

Unauthorised expenditure increases

Unauthorised expenditure of departments 

• The unauthorised expenditure increased by 38% from the previous year to R2,1 billion – 86% was a result of overspending.
• The status of unauthorised expenditure also provides a view of the financial health of auditees, as it mostly represents their overspending their budgets, and the AG is concerned that this expenditure increased from the previous year.
• He said the rise in unauthorised expenditure “paints a picture of departments that are unable to operate within their budgets – resulting in deficits and overdrafts”. In total, 82 departments (52%) technically had insufficient funds to settle all liabilities that existed at year-end if the unpaid expenses at year-end were also taken into account.
• This means that these departments started the 2018-19 financial year with part of their budget effectively pre-spent.
• While this will have a minor impact at most departments because the amounts are low, 15 departments had already spent more than 10% of their 2018-19 operating expenditure budget if the budget for employee cost is not taken into account.
• “Some departments did not pay their creditors when their budgets started running out and thereby avoided unauthorised expenditure, but the payments were then made in the following year, effectively using money intended for other service delivery priorities. This continuing ‘rollover’ of budgets had a negative impact on departments’ ability to pay creditors on time and to deliver services,” said the AG.

He also reported that claims were made against departments through litigation for compensation as a result of a loss caused by the department – the most common claims are the medical negligence claims made against provincial departments of health. Departments do not budget for such claims, which means that all successful claims will be paid from funds earmarked for the delivery of services, further eroding the ability of these departments to be financially sustainable. 

Fruitless and wasteful expenditure increases

• The number of auditees with fruitless and wasteful expenditure increased by 10% from the previous year.
• A total of 181 auditees incurred fruitless and wasteful expenditure in both the current and the previous year, 157 of which had incurred such expenditure for the past three years.
• Makwetu cautioned, “government cannot afford to lose money because of poor decision-making, neglect or inefficiencies. However, we continue to see a rise in fruitless and wasteful expenditure.
• This expenditure, which is effectively money lost, increased by over 200% from the previous year. The overall increase was mostly a result of the R1 022 million loss by the Water Trading Entity, where payments were made without resultant progress on water infrastructure projects”. 

H. Findings on managing and delivering key programmes

The AG’s report also included findings on the management and delivery of key government programmes with a combined budget of R47,9 billion. These programmes are:

1. water infrastructure development

2. expanded public works programme

3. housing development finance.

The AGSA also audited the management and delivery of key programmes in the education and health sectors and will table reports on its findings early in 2019.

Makwetu revealed that since his first report on these three programmes last year, “there has been little improvement” as not all audit recommendations by his office have been implemented.

• In total, 98% of the total budget allocated to deliver on these programmes was spent in 2017-18; however, departments achieved only 12% of the related targets.
• The AG further reported that neither the Department of Public Works nor the Department of Human Settlements reported in a reliable manner on the performance of their programmes, as information on the achievement of the projects funded at provincial and municipal levels was not always gathered in a consistent manner or was not credible.
• This, the AG noted, will make it difficult for government to assess whether the intended targets of these programmes had been achieved at the end of the current five-year medium-term strategic framework term.
• Irregularities in procurement processes and inadequate contract management were recurring findings on the water and housing projects. Some of the projects displayed serious weaknesses in terms of delayed delivery, poor quality work, waste and mismanagement. 

I. Contestation of audit findings

Makwetu revealed that the trend of contestation of his office’s audit findings continued and intensified in 2017-18, leading to the delay of some audits.

• “It is acceptable for those we audit (auditees) to question and challenge the outcome of audits, based on evidence and solid accounting interpretations or legal grounds. We also acknowledge that many of the accounting and legal matters dealt with in the audits are complex and often open to interpretation,” he clarified.
• Makwetu asserted that at some auditees, pressure is placed on his office’s audit teams to change conclusions purely to avoid negative audit outcomes or the disclosure of irregular expenditure – without sufficient grounds. He appealed to the leadership to set the tone for accountability emphasising that “if audit outcomes are not as desired, energy should be directed to addressing the problem and not to coercing the auditors to change their conclusions”.

J. Conclusion

1. “The limited improvement in audit outcomes in particular and governance in general, over the years, indicates that accountability mechanisms are not working as they should.
2. This in turn has resulted in continued calls for more to be done – particularly by our office. Through the support of our parliamentary oversight committee, the Public Audit Act has now been finally amended and will provide us with more power to ensure accountability in the management of public funds.
3. “It is worth re-emphasising that the intent of the amendments is not to take over the functions of the accounting officers or accounting authorities, as their accountability responsibilities are clear in legislation. It is rather to step in where those responsibilities are not fulfilled in spite of us alerting the leadership to material irregularities that need to be investigated and dealt with.
4. The amendments will provide us with the power to directly impact on these audit outcomes,” concluded Makwetu.