1|P a g e

“Ethical and accountable leadership should drive the required

change,” says AG Maluleke

PRETORIA – On Wednesday, 30 June, Auditor-General (AG) Tsakani Maluleke tabled a consolidated

general report on the local government audit outcomes for the 2019-20 financial year, a full year after the
completion of the financial year under review.

In tabling the report, the AG emphasised that the progressive and sustainable improvements required to
prevent accountability failures, or to deal with them appropriately when they do occur, do not exist.

“Audit results under the outgoing administration have demonstrated little sign of improvement and we
have observed the deteriorating state of local government. When it took over, the administration inherited
33 clean audits. Unfortunately, it has now regressed to only 27 clean audits. We therefore call on
leadership to embrace their responsibility to drive change if we are to make a difference,” says Maluleke.

Impact of covid-19

In the midst of the covid-19 pandemic and in keeping with our commitment to President Ramaphosa, we
performed a real-time audit of the financial management of the funding made available to local
government for covid-19 initiatives. We report on this real-time audit in our third special report, which has
been tabled together with the MFMA 2019-20 general report.

The minister of Finance granted local government a two-month concession on the deadline to submit
financial statements, which severely affected our normal audit processes and timelines. In addition, we
performed a real-time audit at the same time as our normal audits and the unavoidable challenges of
auditing during a pandemic further contributed to our audits running into April 2021. We thank all our
auditees for their patience and assistance during the audit.

2018-19 report

In the previous financial year, we delivered a very direct message that local government finances were
under severe pressure and were not being managed as they should. In that report, titled Not much to go

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around, yet not the right hands at the till, we warned that short-term solutions were not going to bring
about the change needed and were often both costly and ineffective.

We therefore put forward the following solutions:

 Investing in preventative controls, which is more effective than having to deal with the impact of
accountability failures, including financial loss, fraud and corruption, the misuse of public resources,
and service delivery failures.

 Significantly improving monitoring, review and oversight by senior officials, municipal leaders and
councils.

 Using our reports, briefings and engagements to identify key areas that need attention and would
benefit most from implementing preventative controls, such as our status-of-record reviews, which
alert municipalities to risks during the year and act as an early warning signal.

 Effecting consequences for accountability failures.

“Unfortunately, we have not seen evidence of these messages being taken to heart,” says Maluleke, “and
hence we are reporting that poor audit outcomes remain prevalent, while we also recognise the net
improvement year on year.”

“The continued calls for change we make to leadership are based on the overall state of financial and
performance management, the material irregularities we identified and our observations in the
provinces,” she adds.

Financial and performance management

The AG emphasises that disciplined financial and performance management is key to achieving improved
audit outcomes and service delivery, which remains in a poor state.

Local government finances continued to be under severe pressure as a result of non-payment by

municipal debtors, poor budgeting practices and ineffective financial management. The financial position
of just over a quarter of municipalities is so dire that there is significant doubt that they will be able to
continue meeting their obligations in the near future. Almost half of the municipalities are exhibiting
indicators of financial strain, including low debt recovery, an inability to pay creditors and operating
deficits.

The impact of municipal creditors not being paid is well-known – it severely affects Eskom and the water
boards, but is even more devastating for smaller suppliers.

Maluleke adds that “local government loses billions of rand annually because of interest and penalties,
which form a significant portion of the R3,47 billion of fruitless and wasteful expenditure reported in
2019-20”.
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The AG has expressed concern that after all the years of the AGSA reporting shortcomings and making
recommendations, municipalities have still not mastered the basics of financial reporting, with only 28%
being able to submit quality financial statements for audit purposes. This highlights prevailing weaknesses
in the processes that underpin effective financial management, including those relating to the preparation
of the in-year financial reports necessary to monitor a municipality’s budget and expenditure.

“The cost of financial reporting has amounted to over R5 billion, based only on the salary cost of finance
units and the cost of financial reporting consultants, which accounts for 18% of the total cost. Only 2% of
municipalities used consultants to bridge the vacancy gap, while others paid consultants even though their
finance units are well capacitated,” explains Maluleke.

What is equally concerning, she adds, is that the use of consultants was not necessarily effective. Sixty-
four percent (64 %) of municipalities did not provide adequate records, appointed consultants too late or
did not manage the consultants’ work properly to benefit from their appointment – effectively outsourcing
responsibilities.

Disclaimed municipalities are of great concern, please refer to chapter 4 of the general report

Despite all our previous messages, actions taken by oversight, initiatives implemented by national and
provincial departments, and some municipalities even being placed under administration, 22
municipalities had received disclaimed opinions by 4 June 2021. Another four municipalities that had
disclaimed opinions in the previous year have not yet submitted their financial statements for auditing.

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At least five of the disclaimed municipalities have been under administration for two years or more.
Despite this, we see a prolonged state of poor performance and therefore remain concerned about the
effectiveness of the administration process.

The AG explains that these municipalities received funding during the year in the form of conditional grants
and an equitable share of revenue raised nationally to enable them to operate and deliver essential
services to the communities they serve. “However, we did not find auditable proof of what was done with
the money from the time it was received to account for what was left in the bank at year-end,” she adds.

A lack of complete and proper records inevitably leads to unreliable financial reporting during the year and
at year-end, which is likely to result in substantial harm to these municipalities and compromise their
ability to deliver on their service mandate.

“We therefore notified the relevant municipal managers of 21 material irregularities in terms of the Public
Audit Act. In their response, these municipal managers are required to clearly articulate what caused the
material irregularity. They must also commit to actions that will prevent any further harm and ensure that
there are consequences for those responsible for the dire state of their municipality. If they do not respond
appropriately, or do not implement the actions to which they have committed, we will implement remedial
action,” Maluleke continues.

The municipalities’ performance reporting was even worse than their financial reporting. It is not
surprising that citizens experience poor service delivery from municipalities if less than a quarter of them
could provide us with quality performance reports to audit. After addressing our findings, just under half of
the municipalities managed to publish performance information that was reliable.

“We once again observed widespread non-compliance with legislation and reported material non-
compliance at 86% of municipalities,” says Maluleke. “As in previous years, non-compliance with supply
chain management legislation was prevalent, significantly contributing to the irregular expenditure of
R26 billion. This amount is likely to be even higher, as just over a third of municipalities were qualified on
the completeness of their disclosure or were still investigating the full extent of the irregular expenditure.”

The AG was also unable to audit contracts worth R1,43 billion as municipalities did not provide the required
documentation and evidence to support the procurement processes. At year-end, the cumulative amount
of irregular expenditure not dealt with stood at R79,22 billion, which demonstrates that municipalities do
not implement consequence management. We call on the incoming administration to address this as a
matter of priority. We view this in serious light and will not hesitate to take serious action should the
accounting officers not act.

Material irregularities (chapter 5 of the general report)

The poor state of financial and performance management in local government, as evidenced by the audit
outcomes, resulted in material financial losses at some municipalities and substantial harm to their ability
to deliver on their mandate. The amendments to the Public Audit Act, which came into effect on 1 April 2019,
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provide us with the mandate to report on these matters as material irregularities and to take action if
municipal managers do not deal with them appropriately.

“In the second year of carrying out our expanded mandate in local government, we significantly expanded
our work by implementing the process at fifty seven auditees, which was a significant increase from the
nine auditees that were the subject of our first year of implementation. By 11 June 2021, we had issued
notifications for 96 material irregularities against municipalities,” says Maluleke.

A total of 75 of the material irregularities related to non-compliance with legislation that resulted, or is
likely to result, in a material financial loss totalling an estimated R2,04 billion. These material irregularities
emerged in four key areas: procurement and payments, interest and penalties, revenue management, and
investments and assets.

These are all matters that we have been reporting as areas of vulnerability for a number of years, including
as part of this year’s audit outcomes. These are not complex issues; rather, they are some of the basic
disciplines and processes that should be in place at municipalities, such as procuring at the best price,
paying only for what was received, making payments on time, recovering the revenue owed to the state
and safeguarding assets. Good preventative controls would have made all the difference in preventing or
detecting these matters before they became so material.

“As mentioned earlier, we identified material irregularities where municipalities received disclaimed
opinions. By 11 June 2021, we had issued notifications of these material irregularities to the municipal
managers of 21 disclaimed municipalities, because we identified that these irregularities have caused
substantial harm to their institutions. As the material irregularity process is continuous in nature and not
affected by the audit cycle, we continue to assess the findings from our audits that could potentially be
material irregularities,” Maluleke explains. “If confirmed, and once the municipal managers have been
notified, we will report on these matters in our 2020-21 reports.”

Based on the responses to the notifications and the actions being taken to resolve the material
irregularities reported in the previous year, we can conclude that we are starting to see signs of a
behavioural change by most municipal managers towards responding to our findings in a decisive and
timely manner. However, there are some instances where we have not seen the required response as
outlined on page 102 of the report. The support of mayors and councils is crucial when it comes to resolving
material irregularities, but this is an area where we have not yet observed any significant uptake or
commitments.

Provinces

AG Maluleke emphasises that, despite the uniqueness of each province, the need for leadership to step up
and turn the tide is transversal. Therefore, we call on provincial authorities to hold municipalities to
account.

The detail on the provincial audit outcomes is contained in chapter 6 of the general report.
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Eastern Cape
Although there are improvement in outcomes, the improvements will only be sustained through an
improved focus on strengthening controls.

Free State
The lack of accountability in the province creates a perpetual disrespect for regulations, which leads to
mismanagement of resources and lack for service delivery. The leadership needs to be decisive and take
deliberate action if there is to be accountability.

Gauteng
There have been pockets of improvement; however, inadequate monitoring of preventative controls has
led to stagnation of outcomes and increasing levels of unauthorised, irregular, and fruitless and wasteful
expenditure.

KwaZulu-Natal
The audit outcomes in the province have stagnated because there is a lack of effective accountability and,
as a result, consequence management is not consistently enforced. The province is encouraged to upscale
the implementation of preventative controls and drive consistent consequence management.

Limpopo
The province recorded an improvement in audit outcomes, mainly driven by consultants. However, this
improvement is not supported by an equal improvement in the key control environment at the
municipalities and might therefore not be sustainable.

Mpumalanga
The poor state of internal controls, failure to enforce consequences for transgressions and weak
oversight are at the centre of deteriorating accountability in the province.

Northern Cape
The benefit derived from implementing preventative controls is evident, but there is still a lot to be done to
address undesirable audit outcomes in the province. A strong leadership tone will drive the required
change.

North West
There is total neglect of internal control disciplines in the province, which has caused financial and
operational collapse, as well as weakened governance processes, and has resulted in a lack of
accountability.

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Western Cape
The province has good financial accounting controls; however, there are inadequate controls to prevent
compliance failures.

A call to leadership

There have been many calls from all quarters of the country to turn around the decline in local government.
Barely a day goes by without shocking revelations of fraud and corruption, wastage, infrastructure
deterioration, and municipalities that have lost the trust of the communities they serve. The most jarring
revelations concern the impact of service delivery failures on the most vulnerable of our citizens – the
poor.

“We have seen many initiatives, plans and strategies – even direct interventions by national and provincial
government – but these have had little effect. Short-term solutions such as consultants, administration
and additional monitoring, rules and capacitation are just not working,” says Maluleke. “As an audit office,
we have also done everything within our mandate to support municipalities; we have even taken on a more
direct role in the accountability process through the material irregularity process.”

She emphasises that “the audit office is convinced that if municipal leaders at both administrative and
political level, supported by their provincial leadership, are fully committed to turning around local
government and moving it towards the capable, efficient, ethical and development-oriented institutions
envisaged by the constitution, improvements are bound to follow. We have seen great results where
leadership has taken definite strides towards a better future for the communities they serve”.

We therefore believe that the political and administrative leadership has a collective role to play in
effecting this change. The provincial leadership needs to work together with municipalities and focus on:

 ensuring that leadership sets a tone of ethical and courageous leadership, service-orientation,
good governance and accountability

 capacitating and stabilising administration

 enabling and insisting on a strong control environment with practical, automated and routinely
executed internal controls that prevent financial loss, wastage and transgressions, and
significantly improve financial and performance management and reporting

 implementing swift, consistent and appropriate consequences for accountability failures.

We remain committed to working tirelessly within our new mandate to strengthen financial and
performance management in local government, emphasising the need for accountability and getting the
basics right.

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We encourage councils, Parliament, provincial legislatures, as well as the political and administrative
leadership, to play their part effectively to ensure accountability for government spending and
improvement in the lives of the citizens of this country. Ethical and accountable leadership should drive the
desired change.

Special report on the financial management of local government’s covid-19 initiatives

At the same time as tabling the general report, AG Maluleke released the results of the real-time audit on
local government expenditure on covid-19-related initiatives.

This is the third special audit report on the financial management of the relief funding government made
available in response to the pandemic.

We performed the audit at 43 municipalities that were selected based on:

 the portion of the funding that municipalities were paid – we included all municipalities that had
been paid more than R16 million each from the conditional grants allocation by the end of
August 2020

 the top three contributors to irregular expenditure in each province, based on the irregular
expenditure incurred for the 2018-19 financial year

 the municipalities identified through our environmental scanning of media reports, Special
Investigating Unit (SIU) reports and Public Protector reports.

For the remaining 214 municipalities not selected for the real-time audit, we audited and reported on the
use of funds from April to June 2020 as part of the normal 2019-20 audit cycle.

Striking resemblance between the two reports

The AG reports that the findings from the real-time audit her office performed on the covid-19 initiatives
“shows a striking similarity to the poor outcomes and other findings we are reporting in the 2019-20
general report. The impact of compromised control environments and poor financial and performance
management was even more pronounced in the midst of a pandemic, when vulnerable citizens relied on
local authorities to keep them safe from harm”. She adds that while emergency response and quick actions
were required, these were not supposed to be “at the expense of careful planning and the disciplined
execution of controls that prevent transgressions, loss, fraud and project failures”.

Key findings and audit observations at a glance

The municipalities that were subjected to the real-time audit were allocated a combined R14, 4 billion out of
the R23,937 billion that was announced for the municipal response to covid-19. Of this amount, 42% had
been spent by 31 March 2021. We made the following observations regarding the funding that had been
spent:
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  It is difficult to plan and operate in an emergency when sufficient information is not always
available and swift action is required. The impact of weaknesses in needs assessment and demand
planning were, however, amplified in these circumstances. Where funds were used for quarantine
sites and temporary shelters, inadequate planning by some municipalities resulted in the facilities
being over or under used.

 Similarly, when it came to providing emergency water and additional sanitation, community needs
were not adequately assessed and delivery planned according to those needs.

 The procurement of personal protective equipment (PPE) also bore testament to the haphazard
manner in which municipalities responded to the crisis – we found little evidence of proper needs
analyses being conducted before procurement took place, resulting in either insufficient or excess
PPE being procured.

 Poor workmanship, project delays and non-adherence to infrastructure-related requirements

were observed on water and sanitation projects, and on projects related to providing shelters for
the homeless. The water tanks were not always filled and, where sanitation facilities were
provided, they were not serviced regularly, resulting in the required impact not being achieved.

 When it came to the management, storage and use of PPE, we found that the same deficiencies we
previously reported in relation to the education and health sectors were also prevalent at
municipalities.

Says Maluleke: “In our report, we once again highlight the significant deficiencies in the procurement and
contract management processes, and report on the inadequate controls meant to ensure that payments
are only made for goods and services that are delivered at the right time, price and quality. We are
particularly concerned about unfairness in the awarding of government business and that sufficient care
was not taken to protect against overpricing, as we identified a number of instances where municipalities
paid excessive prices for goods and services”.

She adds that municipalities did not respond to the increased risk of fraud in a crisis situation by adjusting
their fraud risk management processes and implementing strong preventative controls. As a result,
auditors identified irregularities, poor internal controls, and indicators of potential fraud.

Procurement documents not provided

The AG says audits were also frustrated by payment and procurement documentation not being provided
for auditing. This is a recurring theme in local government, where our ability to audit is sometimes limited
by claims that documents are missing or by a lack of response to our requests. As we did with our first two
special reports, we will share our findings, fraud risk indicators (such as those records that were not
provided for audit) and data analyses with the Fusion Centre, which has the investigative and law-
enforcement abilities needed to dig deeper and follow through on these results.

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 “With few exceptions, municipalities missed an opportunity to display the responsive, caring and ethical
leadership required in a time of disaster. When you are responsible for people’s lives, every rand should be
spent with care. However, in the midst of the pandemic, municipalities continued to plan poorly and
misappropriate the funds made available to them,” notes the AG.

“We are particularly concerned about the municipalities’ inability to produce records to support the current
spending as the covid-19 relief spend has occurred recently and therefore it should not be a struggle to
produce these documents. We will continue to audit the covid-19 funding as part of our normal annual
audit, including at those municipalities not selected for this real-time audit, and will report further
observations in our next general report for local government.”

Conclusion – moving towards an improved local government

Maluleke concludes, “Finding and implementing sustainable solutions for the crisis in the municipal
landscape should be a common goal for all in local government. The relevant role-players should work
together to strengthen the capacity, processes and controls of municipalities, which will enable credible
financial and performance reporting, compliance with key legislation, sound financial management, and
improved service delivery. As the audit office, we are committed to continuing to play our part in improving
local government audit outcomes”.

We reiterate our message that “ethical and accountable leadership should drive the required change”, and
we call on the incoming leadership to take this message to heart if they aim to realise improved outcomes.

End.

Issued by: Auditor-General of South Africa

Contact: Africa Boso 071 365 3024 [email protected]

Follow the AGSA on Twitter: @AuditorGen_SA

Media note: The consolidated general report on the MFMA local government audit outcomes will be available on www.agsa.co.za.

About the AGSA: The AGSA is the country’s supreme audit institution. It is the only institution that, by law, has to audit and report on how
government is spending taxpayers’ money. This has been the focus of the AGSA since its inception in 1911 – the organisation celebrated its
100-year public sector auditing legacy in 2011.

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