Auditor-General (AG) Kimi Makwetu released the audit outcomes for local government for the 2018/19 financial year, wherein 257 municipalities and 21 municipal entities were audited.

This report is Makwetu’s last as his fixed seven-year term as AG comes to an end on November 30.

The report, published on July 1, includes the audit outcomes of 229 municipalities, as the audits of 28 municipalities were not completed by the cut-off date of January 31.

During a webinar, Makwetu painted an “undesirable picture” of billions of rands in funds allocated to municipalities being managed “in ways that are contrary to the prescripts and recognised accounting disciplines”.

Titled 'Not much to go around, yet not the right hands at the till', the latest report shows that the system has been generally unsuccessful in converting debt into cash over a number of years, meaning that those who render services on behalf of the municipality or provide administrative and other functions, continue to receive their income, largely from the national purse.

The ultimate outcome of this, Makwetu explains, is the “inevitable downward spiral” to a financial cul-de-sac that many municipalities and districts have already reached across South Africa, fundamentally characterising the outcomes of the audit of financial statements.

While there are some exceptions to this, he warns that the value of the report should therefore be about “how firm steps are going to be taken to restore the integrity of these institutions and place them in a position to manage their finances towards the achievement of citizens’ needs”.

There was again a regression in the audit outcomes under the current local government administration, now in its third year. Over this three-year period, the audit outcomes of 76 municipalities regressed, while the outcomes of only 31 municipalities had improved.

There were various weaknesses found in the financial management of local government, which had not been addressed over the past three years. Some of these weaknesses include the poor quality of submitted financial statements and performance reports, Makwetu explains, noting that credible financial statements and performance reports are crucial to enable accountability and transparency in government.

Most municipalities continued to fail in these area, he adds, noting that “not only did the unqualified opinions on the financial statements decrease from 47% to only 43%, but the quality of the financial statements provided to us for auditing showed no improvement from the previous year”.

Only 18% of the municipalities could submit financial statements without material misstatements.

The performance reports of 67% of the municipalities that produced such reports had material flaws and were not credible enough for the council or the public to use.

Overall, 34% of the municipalities disclosed a deficit, which amounted to R6.2-billion.

The financial woes of local government also weighed heavily on municipal creditors, where the average creditor-payment period was 1 80 days during the audited period. At year-end, R53.5-billion was owed to municipal creditors but the cash available amounted to only R43.2-billion.

The money owed to State-owned Eskom by year-end stood at R11.3-billion, of which R9-billion had already been outstanding for more than 120 days. The water boards also struggled to collect money owed by municipalities, and their accounts were R6.2-billion in arrears, of which R5.3-billion was outstanding for more than 120 days.

Further, the audit office continued to see a rise in fruitless and wasteful expenditure, with 200 municipalities losing R2-billion in the current year. Over the three-year period, R4.2-billion of government expenditure was fruitless and wasteful, and there was a high level of noncompliance with key governance laws.

In total, 91% of the municipalities did not comply with legislation, the outcome of which is similar to the previous year and slightly higher than the 85% in 2016/17.

The AG’s office also found that compliance with supply chain management legislation had regressed since 2016/17, and Makwetu says he “remains concerned” that only 2% of the municipalities are fully complying.

“This is 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,” he explains.

Irregular expenditure increased to R32-billion from the R25.2-billion reported last year, and includes the irregular expenditure of those municipalities of which the audits were completed after the cut-off date for this report as well as the unaudited amounts disclosed in the financial statements of the municipalities whose audits were still outstanding.

The AG cautions that the amount could be even higher, as 55% of the municipalities were qualified because the amount they disclosed was incomplete and/or they disclosed that they had incurred irregular expenditure but that the full amount was not known.

PROVINCIAL UPDATE

The AG’s report on the Eastern Cape “tells a story of a widespread lack of financial controls and project monitoring, an ongoing culture of a lack of accountability as well as a tolerance of transgressions”, which he says resulted in a further regression in audit outcomes in the province.

Improvements in this region were rare and the general trend over the past three years remained negative.

Eight municipalities were unable to adequately support the information reported in their financial statements and received disclaimed opinions, and instead of having the responsible and diligent financial management of the limited resources available, there were dysfunctional control environments; extensive disorder in accounting records; prolonged vacancies in key positions and instability in councils; poor procurement processes; no consequences for poor performance and transgressions; and unreliable reporting on municipal finances and programmes.

The report indicates irregular expenditure of R2.5-billion incurred during the year under review.

A further R4.2-billion was flagged for audits finalised subsequent to the cut-off date for this report. The province spent a total of R118-million on consulting costs for financial reporting. Of this, R2-million was spent by municipalities whose audits had not been finalised by the cut-off date of the report.

The audit outcomes in the Free State continued to regress for the third consecutive year.

Ten municipalities did not submit financial statements on time, even more than in prior years, which resulted in eight audits not having been completed by the time of the AG’s general report.

Additionally, three municipalities received disclaimed opinions, which means that almost half of the municipalities in the Free State have not yet accounted for the manner in which they used taxpayers’ money in 2018/19 or did it so poorly that their financial statements cannot be trusted.

The outcomes were characterised by a lack of basic financial disciplines, an unwillingness to comply with legislation, and a general disregard for internal controls and accountability.

The province’s irregular expenditure totalled R1.4-billion for the year under review.

A further R341.6-million in irregular expenditure was identified in audits finalised subsequent to the cut-off date for this report. The province spent a total of R46-million on consultants to assist with financial reporting, although this had little impact on the quality of financial statements submitted for auditing, the report says.

Of this amount, R17-million was spent by municipalities whose audits had not been finalised by the cut-off date of the report.

“The lack of skills transfer from consultants to municipalities was evident by some officials not even being able to provide the most basic of financial information without the help of a consultant.”

The picture in Gauteng held steady with all municipalities again maintaining their good audit outcomes. According to Makwetu, Gauteng was the only province in which all the municipalities had unqualified audit opinions, but as in prior years only Midvaal obtained a clean audit opinion.

Clean audit opinions continued to elude the other municipalities owing to good financial accounting but inadequate monitoring of the preventive controls necessary to ensure compliance with legislation and accurate reporting on service delivery achievements.

Municipalities that have both attracted and retained staff with the right skills have benefited from this continuity and managed to maintain good audit outcomes. By contrast, municipalities characterised by instability in political or administrative leadership, such as the City of Tshwane and City of Johannesburg metros, were unable to improve their outcomes, the report laments.

Irregular expenditure in this province amounted to R1.7-billion for municipalities, and a further R3.3-billion was reported for audits finalised subsequent to the cut-off date for this report, with the City of Tshwane Metro, accounting for R2.9-billion of this amount and Emfuleni R358-million.

Municipal entities in this province incurred R1.8-billion of irregular expenditure in the period of review.

The province spent a total of R341-million on consulting costs for financial reporting. Of this, R312-million was spent by municipalities whose audits had not been finalised by the cut-off date of the report.

There was little change in the audit outcomes of KwaZulu-Natal, whose “accountability was not adequately practised and enforced by leadership, and the failure of key controls continued".

Most district municipalities continued to struggle with basic financial and performance management processes, displayed a lack of responsiveness to implement and monitor action plans, and had weak governance structures that did not enable effective accountability, according to the report.

Leadership did not always influence robust systems of internal control to drive good governance and discipline – more focus must be placed on exercising political oversight and addressing the aspirations of citizens.

The impact of this is evident in the increasing irregular expenditure, reported at R6.5-billion for the period under review, with eThekwini Metro incurring R2.3-billion of this amount.

A further R17.2-million in irregular expenditure can be attributed to audits finalised after the cut-off date for this report.

Consultants continued to be used in many instances to assist with the preparation of financial statements and financial reporting, with the province spending a total of R95-million in this regard; this while officials were in place to execute these functions.

Of this, R1-million was spent by municipalities whose audits had not been finalised by the cut-off date of the report.

Six municipalities in the Limpopo province improved their audit outcomes and three regressed. The improvements were mostly consultant-driven, but despite the province having spent a total of R249-million on consultants for financial reporting purposes, many municipalities continued to receive qualified opinions.

Of this, R127-million was spent by municipalities whose audits had not been finalised by the cut-off date of the report.

There was also a high reliance on consultants, and skills were not transferred, meaning that some officials became complacent when consultants were appointed and did not perform the jobs they were appointed to do, raising questions about municipalities paying for officials and consultants to do the same job.

Millions were spent to improve the outcomes, the report says, but notes that there were no consequences for poor performance.

The impact of the R1.2-billion loss following the liquidation of VBS Mutual Bank is still being felt by the municipalities concerned, where service delivery has been affected.

The province’s irregular expenditure totalled R1.5-billion for the year under review, and another R594-million in irregular expenditure was reported for audits finalised after the cut-off date for this report.

Meanwhile, deteriorating accountability and financial management coupled with weakened oversight is at the centre of the significant regressions in audit outcomes in Mpumalanga, where six municipalities regressed and only two improved.

There was a breakdown in internal control across various municipalities, which included basic financial disciplines such as record keeping, reconciliations and verifications. Only two municipalities that made use of consultants improved their audit outcomes despite consultants being used to do the work of employed staff.

The province spent R98-million on consulting costs for financial reporting. Of this, R3-million was spent by municipalities whose audits had not been finalised by the cut-off date of the report.

A trend of underspending on conditional grants reflects poor planning by municipalities, leaving a total of R154.3-million unspent.

The province’s irregular expenditure totalled just over R1-billion for the year under review, and a further R358-million was flagged for audits finalised subsequent to the cut-off date for this report.

The Northern Cape province is in a prolonged state of undesirable audit outcomes, with yet another overall regression, with six municipalities regressing and only three improving.

The breakdown in the control environment continued with little response by the leadership to the messages of the AG to implement preventative controls, and the report says that the result has been an environment in which supply chain management processes are abused; bank accounts are not properly scrutinised; revenue is lost owing to system failures and transactions that are recorded twice; and proper reconciliations are not performed.

For the year under review, the municipalities in the province incurred irregular expenditure totalling R390-million.

The province spent a total of R47-million on consultant costs for financial reporting, of which R12-million related to audits finalised after the cut-off date for the report. Despite the overall poor performance of municipalities in the province, Makwetu notes that a handful of municipalities continued to deliver good audit results, such as the John Taolo Gaetsewe district municipality that achieved a clean audit outcome.

Further, the regression in the North West’s audit outcomes completes a three-year downward trajectory in the province: nine municipalities received disclaimed opinions and eight received qualified opinions.

The availability of documents or evidence to support financial activities remained a vast challenge across the municipalities, as evidenced by the number of repeat disclaimed opinions, according to the report, which says that “the inability of the province to reverse the trend of negative audit outcomes points to a culture that is not proactive in dealing with control weaknesses flagged in prior years”.

Accountability failures by senior management, municipal managers, mayors, internal audit units, audit committees, municipal public accounts committees and councils are indicative of a systemic breakdown in the discipline of financial control.

For the year under review, the municipalities in the province incurred irregular expenditure totalling R3.7-billion, with a further R1.8-billion relating to audits finalised after the cut-off date for this report.

The cost of using consultants amounted to R227-million for financial reporting, with municipalities paying their staff and the consultants for the same service without any value being realised and resulting in a waste of scarce public resources.

Of this, R47-million was spent by municipalities whose audits had not been finalised by the cut-off date of the report.

In conclusion, the largest concentration of clean audits remained in the Western Cape (45%), with 93% of the province’s municipalities receiving unqualified opinions on their financial statements.

Eight municipalities retained their clean audit status, six of which have maintained this status for the past five years or longer.

Municipalities that sustained their clean outcomes are characterised by control environments that are institutionalised, preventative in nature and reinforced by a strong tone set by leadership, which the report says includes operational controls that are institutionalised within their systems independent of individuals, which implies that staff turnover will not result in the failure of controls.

In addition, there is a low tolerance by management for audit findings and a high level of accountability; and all the relevant assurance providers know their roles and do their part in the control environment.

According to Makwetu, the financial statements generally correlated with the socioeconomic climate of the respective municipalities as well as the AG’s assessment of financial discipline.

“More municipalities struggled to collect their debt, but overall the financial health of Western Cape municipalities was the strongest of all the provinces.”

For the year under review, the municipalities in the province incurred irregular expenditure totalling R2.7-billion, and the province spent a total of R42-million on consulting costs for financial reporting.

Of this, R1-million was spent by municipalities whose audits had not been finalised by the cut-off date of the report.