Western Cape 2017/18 audit outcomes: AGSA briefing; Corrective measures at underperforming municipalities: Department of Local Government & Provincial Treasury; Quarter 1 performance

Meeting report

Western Cape local government 2017/18 audit outcomes

Mr Ashley Olkers, Deputy Business Executive: Auditor-General of South Africa (AGSA) in the Western Cape, commenced by briefing the Committee on the entity’s auditing role, and explained how accountability for financial and performance management continued to deteriorate.

Elaborating on the three-year Municipal Finance Management Act (MFMA) audit outcomes, he described the movement in audit outcomes; how accountability and transparency were not being enabled through a lack of credible financial and performance reporting; ineffective consultants assisting municipalities with their financial reporting; how disregard for compliance with legislation continued; and how non-compliance with supply chain management (SCM) legislation was widespread. He said that the impact of prior year non-material procurement findings had not been addressed on clean audits, irregular and unauthorised expenditure had increased, consequence management had stagnated, and inadequate investigations were being performed.

It was becoming increasingly difficult for the auditors and other role players to fulfil their accountability functions. There was:

• Increased pressure placed on auditors as a result of threats of litigation where there were disputes, to avoid negative audit outcomes.
• Recommendations made in previous years to improve outcomes were not implemented and messages were not taken seriously.
• Quality deficiencies in submitted financial statements and annual performance reports prolonged the audit process and resulted in overruns on audit fees.

Mr Olkers unpacked the impact of municipalities’ financial health on the payment of utilities, pointing out that Eskom was owed over R1.5 billion by local government in the Western Cape, and indicated that the provision of municipal infrastructure for roads, water and sanitation was adversely affected. He drew particular attention to Beaufort West and Oudtshoorn for their regression in audit outcomes.

He said the root causes of the accountability failure were:

• Varied interpretations of the supply chain management legislative requirements, resulting in improper application thereof during the procurement process.
• A culture of “no consequences” at some auditees had seen irregular expenditure spike as a result of a lack of investigations into these occurrences.
• Lack of understanding by staff, with limited training interventions by some auditees on SCM compliance requirements.
• Messages, root causes, control deficiencies, recommendations and emerging risks were not taken seriously by leadership, resulting in the ineffective action plans.

Other factors were the slow, or lack of, response to recommendations arising from previous audits, and leadership instability, a high level of vacancies, and an absence of the required competencies.

Corrective measures at underperforming municipalities

Ms Eda Barnard, Chief Director: Municipal Performance Monitoring and Support, Department of Local Government (DLG), said 26 out of 30 municipalities had obtained an unqualified audit for the 2017/18 financial year. Notwithstanding the drop in the number of clean audits, unqualified opinions had increased year-on-year. In addition, no disclaimers or adverse opinions had been issued for the 2017/18 financial year.

After presenting a summary of the audit outcomes and an analysis and summary of the audit outcomes, she said the DLG had designed support programmes to address some of the specific matters raised by the AG. These included information technology (IT), human resource (HR) management practices, and strengthening administrative leadership in municipalities.

The Department consistently engaged with its municipalities to ensure that support was tailored to strengthen municipal operational capacity, systems and processes. The “Back-to-Basics” programme had been successfully used as vehicle to facilitate tailor-made support to municipalities. Due to the success of this programme, six municipalities had been able to exit it.

Ms Barnard referred to the other departments and stakeholders involved in providing support in the “Back-to-Basics” and other programmes -- Provincial Treasury, the Department of Environmental Affairs and Development Planning; the Department of Community Safety; the Department of Rural Development and Land Reform; the Department of Water Affairs and Sanitation; and the South African Local Government Association (SALGA).

She singled out Kannaland Municipality as currently being the only municipality under administration in the province. It had been experiencing political and administrative challenges for over ten years. This had resulted in a decline in its governance stability impacting on financial sustainability, service delivery, economic growth and the ability to attract suitably skilled staff. Corrective measures were being implemented.

After explaining the joint district approach, Ms Barnard concluded that the Department remained committed to continue its support to municipalities to ensure clean governance and a better life for all.

Provincial Treasury on corrective measures at underperforming municipalities

Mr Msimelelo Sigabi, Senior Manager: Local Government Finance Group 2, Western Cape Government, commenced by giving context to the governance environment in the province. There were, among others, challenges with effective political and administrative leadership (accountability failures), a shortage of requisite skills and competencies in local government, increased allegations of fraud and corruption, and ineffective utilisation of assurance providers to improve the design and implementation of internal controls.

He unpacked the submission of the municipalities’ 2018/19 annual financial statements (AFS), the audit files and asset registers. Except for Kannaland, every other municipality in the province had complied with the MFMA legislative prescripts regarding the submission of AFS and annual performance reports, including the reviews by the audit committees.

He explained the Provincial Treasury’s support to municipalities in response to disclaimer and adverse audit opinions, unauthorised, irregular, fruitless and wasteful (UIFW) expenditure, consequence management, SCM, financial governance, public finance and cash management items impacting on municipal audit outcomes.

The Department was committed to the joint district approach as a lever in addressing municipal support initiatives to assist with the drive to improve financial governance, integration, co-planning, budgeting and implementation.

Discussion

Ms M Maseko (ANC) asked whether the number of transgressions reported were based on just the financial year of 2017/18. If so, did the Department look back to check whether corrective measures were implemented in the previous financial years of 2015/16 and 2016/17? If so, would Provincial Treasury have an SCM workshop with the municipalities? Where municipalities were not accounting for expenditure, was the government institutionalising corruption or were there measures in place to close the loopholes that enabled it?

Mr A van der Westhuizen (DA) highlighted that only the audit outcomes of the 2017/18 financial year were being debated. Some of these problems may go back more than 20 years, if the transgressions had occurred in previous financial years. How could potential problems be detected earlier? While Provincial Treasury was offering all kinds of interventions, one would be able to see if those interventions were successful only in two years’ time. One could not have this situation. The Department had to be able to act more quickly and earlier. What had the opportunities been for the it to intervene? Furthermore, there seemed to be a high cost of compliance, such as to set up supply chain management offices, to comply with all the regulations, and the filling of crucial posts. What was being done to make it easier and cheaper for municipalities to comply? Moreover, the AG had been able to pick up a number of non-compliance issues, such as family relationships with suppliers, etc. How could the AG identify such instances, yet the municipality was either unaware of these non-compliance issues or felt that these instance would not be identified?

A key problem identified in the presentations was that staff with the necessary skills were not being attracted to local government. Something must be done about this. While the AG could come from the outside to assist, it was important for the organisation itself to maintain standards and to have the necessary skills. Why was local government not attracting people with the necessary skills? The remuneration levels at local government had gone up considerably, to the extent that it had become very costly for local government. Lastly, municipal managers could now be held personally accountable for certain actions in a municipality. They expected to be remunerated much more than in the past because of the risks that they faced. In cases of severe non-compliance, had any municipal managers in the Western Cape been held accountable to the extent that the law allowed for them to have to account for failures in the administration of those municipalities?

Mr D Smith (ANC) stressed that there were clear problems in these municipalities. The observations of the AG showed that in two years there had been a downward trend in MFMA audit outcomes, from 70% to 40%. If this trend continued, one could only imagine where the municipalities would be in the next two years. Regarding the assistance to municipalities by consultants, there had been a circular from either provincial or national treasury on the appointment of consultants. Had the treasury been able to track who these consultants were? Were they the same consultants in all these municipalities, or different consultants? The outcome was very suspicious. The amount given in rewards to close family members was very concerning, and more details were needed. What did the Auditor-General mean by close family members? A year or two ago, an investigation had been carried out specifically on the Stellenbosch municipality. What was the next step, now that these recommendations had not been implemented? The presentation had also mentioned employees not disclosing interests in suppliers. What did this mean?

Mr P Marran (ANC) welcomed the improvement in terms of submissions. In the 2017/18 financial year, both Kannaland and Laingsburg had not submitted on time. For the past three years, there had been a downward trend and a pushback from municipalities. There had been no such pushback in 2015/16 because 70% of municipalities had received a clean audit. Suddenly, when there was a decrease in clean audits, there had been a pushback from the municipalities. Could the pushback be attributed to the fact that the rules of auditing had changed, given that there may be a difference of interpretation? Furthermore, to what extent was the pushback attributable to the AG identifying non-compliant beneficiaries within those municipalities, such as family members of both counsellors and officials? It was commendable that local government was giving support to municipalities. However, did the legal opinions that were given to municipalities include the pushback? In giving support to municipalities, how were municipalities convinced to implement the recommendations when one of the province’s own departments, namely Agriculture, was pushing back against the audit outcome?

The Chairperson asked Mr Marran to provide more clarity on his question regarding the reasons for the pushback.

Mr Marran asked whether there was a pushback because of auditing rules that had changed, or whether the pushback had existed prior to these changes.

Responses

Mr Isaac Smith, Head: Asset Management: Western Cape Government, touching on a number of SCM issues that had been highlighted, and provided some context on them, especially where the decline originated from in terms of financial statements. Firstly, what one needed to understand was that over the last year or two, the municipal Standard Chart of Accounts (mSCOA) reformat had had a major impact on municipalities. It had been expected that because of this big challenge, there might be deterioration in some of the audit findings. Secondly, there were concerns in relation to the supply chain. One of the biggest problems in the supply chain environment was the number of rules and regulations, and even the inconsistencies between the rules and regulations. This puts the AG in a difficult position to express a viewpoint on some of the regulations. This was where concerns around interpretation came from. Over the last year, there had been particular emphasis on SCM non-compliance. From an AG and NT perspective, there had been a huge focus on the supply chain. What happened was that in this environment, some of the interpretation problems had come to bear. Some of the findings related to supply chain issues where particular rules applied. The municipalities felt that the same rules were not being applied. This was where some of the pushback came from. Supply chain management had been the big issue in the whole audit environment, and was experienced throughout the country.

Provincial Treasury had always responded in a particular way. Because of the audit findings, it had just heightened its interventions on those issues. It always had assessments in municipalities and feedback. For the last ten years, it had followed a particular process together with the Department of Local Government. Of course, the sharp decline in audit outcomes had heightened Treasury’s approach on certain issues, most of which happened in the supply chain. The first session was with the AG, so that Treasury could communicate with the CFOs and the supply chain managers in terms of the severity of these findings. Plans had been put in place which would hopefully have a positive impact in the current audit cycle. To place this in context, although there had been a sharp decline, this was attributable to two areas -- the mSCOA focus, and also because of the supply chain reforms that had been introduced over the last couple of years.

Ms Melissa van Niekerk, Senior Manager: Financial Governance: Western Cape Government, highlighted that the focus had been on good governance and how that translated into service delivery and making a positive impact on the lives of citizens. There were three key drivers to improving good governance, one of which was integrated capacitation and development, where there was a focus on building up the skills pipeline. To address the challenge faced by municipalities in attracting the necessary skills, there were support initiatives in the form of the external bursary programmes to municipalities, which focus on bursaries for learners within municipal areas to gain financial management skills. There was also the effective implementation of an internship programme covering financial management, and development of the competencies and skills of existing officials within municipalities. There were training programmes conducted by the provincial Treasury to address specific problems it had identified. Another key driver was looking at good governance and the maturity model. This also informed Treasury as to where it needed to focus the capacity building initiatives. A key focus at the moment was, among others, supply chain management, and also looking at support during the audit process ahead of the annual submission. Importantly, it was an integrated approach. Treasury looked at how it could utilise its external stakeholders such as the DLG, National Treasury, tertiary education institutions and other professional bodies just to improve the effectiveness and efficiency in the delivery of those support programmes to the municipalities.  

Mr Smith continued that a position paper had been developed on all the issues in relation to supply chain management. This had been sent to National Treasury. Some of the issues that had been raised could become problematic. National Treasury was looking into this and had said it would come back to Provincial Treasury on some of those issues which it believed that the National Treasury needed to correct.

Mr Graham Paulse, Head of Department: Department of Local Government (WCPP), referred to the pushback by municipalities, and stressed that it was fundamentally about the interpretation of the laws, rules and regulations. The AG just audits on the rules and regulations that National Treasury determines. As highlighted, the PT was engaged with NT around the rules and regulations relative to the supply chain requirements, laws and regulations. When the AG applied an interpretation based on the NT’s rules, regulations and policies, it may happen that the NT did not concur with the AG’s interpretation. In some cases, municipalities approach the courts for a proper interpretation on the rules and regulations of NT. It was not out of disrespect, but a matter of acquiring the correct interpretation and application of policies and regulations. On a year on year basis, the AG increases and amends its scope on what it wishes to audit. Last week, he had met with the business executive of the AG in the province to discuss the scope in relation to supply chain management for the 2018/19 financial year in municipalities. The scope would be revised again for the audit of 2018/19.

In relation to the capacity of CFOs in municipalities, there was a due diligence process. As a Department, the Minister exercises oversight over the appointment and to what extent the CFO meets the requirements, skills and competencies for that particular post. In some cases, the Department has approached the courts to set aside appointments of CFOs who were not adequately competent, skilled or did not meet the requirements. The court had ruled in favour of the Minister in that regard. It was about having the correct skills and competencies.

At times, municipalities had had to appoint people who were not necessarily competent or skilled. It had been very difficult to attract appropriately skilled and competent staff, given the salary levels. Between senior management, executive directors and staff, the salaries of executive directors and the municipal manager were now regulated. However, the salaries of the supervisors and the staff were not necessarily regulated. Therefore, the salary variances between directors, senior management and managers in the municipality were so close that some of the managers’ salaries exceeded their directors’ salaries. They would not apply for the job or accept the responsibility -- why should they apply for a job that would give them less money? Not only in this province at local government level, but throughout the entire country, there was a struggle to get competent, skilled and appropriately qualified staff members in municipalities because they did not want to work at that level of accountability, based on the current salary levels. Municipalities had a continuous fight with the DLG, as a provincial department of local government, about their remuneration levels. They were arguing that they needed to pay far more than they were currently paying. The previous Minister of Local Government, Mr Pravin Gordhan, had set thresholds for salaries. Municipalities were not happy about these thresholds, and were struggling to get competent staff because of this. Certain CEOs had resigned. The Western Cape needed to employ some of the provincial staff to go and help out in municipalities so as to have competent staff in those municipalities.

Mr Paulse said that with his counterparts on a national level, they dealt with some of these challenges across the borders of the provinces. They could not contain the wage bill in municipalities -- it was running away with them. In certain cases, the wage bill was in excess of up to 70% of the budget. This did not allow discretion around the spending on capital projects and other operational requirements. It was a problem at the moment for the Department.

A combination of factors had been responsible for the audit outcomes regression. It concerned the scope of the AG, the implementation of mSCOA, and the supply chain management implementation. This did not suggest that if there were audit findings or disclaimers, this amounted to fraud, corruption or maladministration. Within this province, allegations of fraud, corruption and maladministration were investigated. This forensic capacity existed within the Department. Through whistle-blowing, allegations would be brought before the Minister. The Minister would ask the DLG to go ahead and investigate. Even municipalities that had consistently clean audits were currently being investigated for fraud, corruption and maladministration. It was being picked up by the Department as opposed to the AG, because the AG lacked the forensic capacity. It was important that the DLG, together with the PT, work in concert with the AG to see to what extent these issues could be dealt with. The DLG, together with PT and SALGA, did extensive work within municipalities.

If there was all this support, why was the situation still the way it was? It was fundamentally about leadership. This was why the DLG was changing the focus of its training. It had trained counsellors extensively on the governance matters, including how to apply the rules and regulations and the roles and responsibilities of councillors. Based on whistle-blowers’ allegations, councillors were alleged to be involved in supply chain matters. The DLG had therefore changed its approach to the training and emphasised personal value systems. How did one say that it was not acceptable to influence the SCM process in the municipality, or an appointment in the municipality? The Department was also training the administration and giving lots of support to this. As a collective between the DLG, SALGA, the PT and the AG, they had to work to improve the audit outcomes. It was about implementing key controls within municipalities. Failures or non-compliance were about key control efficiencies. It was not necessarily about fraud, corruption and maladministration in municipalities.

Mr Olkers responded on whether the rules of auditing had changed and resulted in the associated pushback, and said that the rules of auditing had not changed. They had stayed the same for a number of years. However, what had changed were the focus areas that the AG looked at. Regarding compliance matters, SCM regulations had been around for a number of years. The rules applicable to municipalities had not changed significantly in this area. There were interpretation issues, however. For example, it was left to the discretion of the accounting officer to sign off on a deviation. Sometimes, however, when an objective person looks at the discretionary exercise by the accounting officer, it does not lead into what could be considered reasonably justifiable in terms of the regulations. This then became an interpretative issue. AGSA had forewarned municipalities in its management reports about these issues and the risks that it saw looming in terms of the processes that they were following. Examples might be deviations from the supply chain management process, implementation of the mSCOA framework, etc.

He stressed that the AG includes this in its management report well in advance before it engages with municipalities on these issues. It was a challenge, and hence there had been a pushback. When municipalities receive a clean audit outcome and the clean audit outcome is under threat of being lost through the AG’s findings, then the pushback increases. The pushback was always there, and was part of an audit process. Municipalities could interrogate the findings that the AG raises. However, if these findings were a clear-cut application of legislation that had been transgressed, such as financial statements not submitted by the legislated deadline, and where there was no argument, there was seldom pushback from municipalities. In the context of interpretive issues, such as deviations from SCM processes, AGSA expects to receive pushback. There was discretion in that. The pushback increases when municipalities stand to lose their clean audit status. In the last year, there had been a substantial pushback from a number of municipalities around issues of legislation because of the regression in audit outcomes.

Regarding the issue of ‘close family members,’ municipalities could transact with them, but it was important for there to be a declaration. When the adjudication committee did the adjudication of a bid, there had to be transparency and a declaration in terms of whether councillor X’s brother or sister was the owner of this business that the municipality was working with. This was where the challenge lay with some municipalities -- the declaration process did not happen. In that case, the municipality was supposed to act against the transgression through various means. In some cases, disciplinary action needed to take place against a high level official. There had to be action when false or no declarations had been made.

Referring to the use of consultants, he said AGSA had noticed that in the Western Cape one would find consultants at many of the municipalities. They were mostly the same consultants, or consortiums of consultants around the municipalities.  

Discussion

Ms Maseko asked what steps were being taken to recover money that had been paid to implementing agents of projects, such as stadiums. Was there something that empowered a municipality to recover that money, or was it a prolonged system? How did one recover all the money that was not being used as it was supposed to have been used?

Mr I Smith said that a circular had been issued because municipalities were over-dependent on consultants. The circular had also stressed the need to develop internal capacity. Those municipalities that utilised consultants were precisely those municipalities that had problems with misstatements, etc.

Mr Van der Westhuizen reiterated his question regarding the accountability of managers, not only in reference to formal disciplinary processes or to early termination of contracts. To what extent was there scope to hold municipal managers accountable for some of the findings in the AG’s reports, some of which appeared to be quite serious? To what extent had there been actions to hold people accountable in their personal capacity?

Mr Marran commented that based on the responses, the public were not interested in the fight between the municipalities and the AG. What the public wanted was service delivery and compliance. It had been highlighted that although mSCOA had been fully implemented by 1 July 2017, it was there even the year before, and municipalities had received clean audits in 2016/17 under the same rules. Now that they had failed to receive a clean audit, they were pushing back. 12 municipalities had received a clean audit under mSCOA. Why was it impossible for other municipalities to comply? Could one foresee that municipalities that no longer received a clean audit in 2018/19 would contest it? One would want to see compliance by municipalities. With the expansion of the mandate of the AG when it comes to the Public Audit Act (PAA), one could foresee more problems on the horizon when the President signed off on that piece of legislation.

The Chairperson said that in the eight other provinces, there had been only six clean audits. In the Western Cape, there had been 12 clean audits. It was good to be balanced in one’s comments.

Mr Marran stressed that, by this response, the Chairperson was suggesting that it was fine if the Western Cape had these types of issues, as long as it was better than the other provinces. They had to ensure that the people of this province received the services that were promised to them by the government.

The Chairperson referred to municipal managers signing off on deviations, and said that often deviations were taken to council, and council agreed to do the deviation. As the Department had indicated in its presentation and responses, there were challenges where the municipal mayor was often more powerful in terms of the influence he/she exercised within that municipality, compared to the municipal manager. In this context, the whole question of leadership became significant. He was very pleased and satisfied with the measures that the Department had put in place and the enormous effort that it was expending in terms of capacitating the councillors. He welcomed the amendments to the Public Auditors Act in terms of accountability.

Regarding materiality, which was defined as consisting of quite a number of elements, when one of those elements were present, then that particular expenditure would then be classified as a material error in terms of the statements that had been presented. He had visited a municipality last week which had previously received a clean audit. However, they had received an audit with findings now. Upon interrogation, the Committee was told that the reason why they did not receive a clean audit and incurred irregular expenditure of R52.7 million was as a result of the late submission of their financial statements by one day. R22.3 million that had been classified as irregular expenditure was a result of a lack of local content -- the nuts and bolts for that particular project they could not source locally, and they had had to get it from China. This local content issue occurred often when it came to non-compliance. Training may be in order, but in certain areas it may not always be that the particular capabilities would lead to providing the necessary local content.

The subsequent financial year had now closed. Was AGSA busy auditing or in the process of compiling its report? Should expectations be raised, or was there a more serious scenario? Furthermore, there seemed to be a lack of consequences for both officials and politicians. Often politicians were complicit in enabling officials in an improper way. Political parties often did not act with the necessary speed and eagerness to deal with these errant councillors who pressure officials unduly to benefit their family and friends.  

Mr D Smith asked that his question in relation to Stellenbosch be answered. It was stated in the report that there was irregular expenditure and an investigation had been carried out. What was going to happen next?

Responses

Mr Paulse referred to the cost of compliance, and stressed that intergovernmental relations (IGR) engagements with municipalities had consistently raised concerns about this. Some would say that this was at the cost of service delivery, while others would say that it was at the cost of innovation in municipalities. When the DLG engaged with municipalities, there was a need to employ additional staff to ensure that there was compliance with certain rules and regulations. The Department was concerned about the increased pressure on municipalities in regard to compliance. It had been argued that this came at the cost of service delivery, as it detracts attention from service delivery. Some of the municipalities had made the calculations on the cost of compliance, and it was exorbitant.

Concerning the pushback, the municipalities had raised concerns that despite the fact that there was a mechanism within the AG for escalation, they would like the Department to consider the establishment of an ombudsman for the AG in order to deal with situations where there were differences of interpretation. It was something that the DLG did not necessarily support, but this was the extent to which the municipalities were now considering the difference of interpretations, and the need to create or establish an audit ombudsman.

Regarding accountability, there had been a limited number of people held responsible in municipalities over financial matters, whether they were councillors or senior officials. The Act had now been amended so that a debt certificate could be issued in one’s personal name. This would fundamentally change the way in which accountability and consequence management would be dealt with by municipalities. As far the DLG was concerned, there had been limited consequence management and cases where either senior officials or managers and councillors were held responsible or accountable in municipalities.   

Mr Lance Brinders, Senior Manager: Local Government Accounting: Western Cape Government, referred to the 12 municipalities that had received a clean audit, and stressed that the issue was that different municipalities used different accounting systems. With the mSCOA reform in these different accounting systems, they were not all alike in their involvement with the Executive Committee (EXCO) regulations. There were different levels of involvement when it came to taking on the new system and the mSCOA regulations. It was seen as a direct consequence that some system providers were not able to satisfy the mSCOA requirements. There had been only one late submission, and that had been as a consequence of mSCOA.

Regarding the expansion of the AG’s mandate, it was important to take note of the fact that there had been a lot of legislative additions. While the scope had increased, there were new regulations that had come up. In the application of that legislation, there were often teething problems that municipalities faced. In terms of the AG’s statement that there was non-compliance when there was a late submission, and the municipality had not submitted by 31 August, it was a matter of fact that there was a late submission. There was a pushback when the AG interpreted this as a material non-compliance. The municipality, in their opinion, questioned how it could be material. In terms of the non-compliance, there was less pushback, but regarding the interpretation of materiality, that was where the pushback was coming from. 

Mr I Smith stressed that the provincial government worked in a highly regulated environment. There was a reason for this -- the provincial government was working with public money where compliance was a big issue. This was why the Western Cape government drives the particular issues that it does in terms of rules and regulations which municipalities need to adhere to. One of the things which this government emphasized was good and clean government.

The Chairperson agreed that a late submission constituted non-compliance -- a material irregularity in terms of the legislation. However, concerning the impact of the non-compliance, would it have a detrimental effect on the service delivery for that particular year? His interpretation was that it would not. How could it be classified as material according to the particular interpretation?

Mr Olkers explained that when the AG performed audits, materiality was based on the auditor’s judgment. Therefore, if one looked at compliance in terms of the laws and regulations, this was also based on the auditor’s judgment of what was or was not material. Regarding compliance with laws and regulations, that materiality had been predetermined for the AG’s purposes at a national level to ensure consistency throughout South Africa. If there was a straight-forward non-compliance -- for example, the municipality had not submitted its financial statements by 31 August -- the first tick in the box was that the AG had not received financial statements according to the legislation. The second tick in the box was whether it was material which, from a local perspective, had been predetermined at the national level by the AG’s office. If a municipality did not conform in submitting its financial statements by 31 March, it was non-compliance, but it also ticked the box for material non-compliance.

Regarding the local content requirement, the legislation was there. Certain items procured by the municipalities had to adhere to the requirements for local content. If there were deviations, the accounting officer had to give the reasons for the processes that had been followed to satisfy the AG. Many times this was not done.

Ms Maseko stressed that the municipality still needed an interpretation of local content. It seemed like there were different interpretations. If material was bought oversees, and the t-shirts were made here, in what sense were those t-shirts local content? How did one go about getting the AG’s outcomes throughout the financial year? How did those interactions take place so that there could be the same interpretations, so that there would be no discrepancy in interpretation in the end? Whose interpretation took priority? If a municipality went to a legal firm to argue its interpretation, they may land in a situation where they would approach someone as qualified as the AG. However, this could be avoided if from the onset, the AG approached the municipalities with its interpretation so that municipalities understood and acted accordingly.

Mr Van der Westhuizen commented on the auditor’s judgment, and stressed that everyone preferred things to be objective and not subjective. In the past, the Auditor General had made use of private auditing companies when auditing at the local government level. Did municipalities believe that when representatives from AGSA did the audit themselves, that the bar was set significantly higher than when private firms were used for auditing purposes? If this was true and the bar had been raised, did this mean that one could not really read anything into the trends?

While it was great to hear of the ICT support that was being given to municipalities, from personal experience he knew that ICT systems could sometimes create havoc, and with new versions of software, new problems came up. To what extent had the ICT environment at the local government level been standardised? To what extent were they able to offer technical support if there was a variety of such systems used in South Africa in local government?

Mr D Smith reiterated that his question in relation to the Stellenbosch municipality had not been answered.

Mr Marran, regarding the responses by the AG insofar as changes to legislation were concerned, said that those changes applied to all municipalities -- even to those that had received a clean audit. From the responses, it appeared that these changes were the reason that some municipalities had failed to receive a clean audit. Yet those changes applied to all municipalities. Why had the issue concerning the cost of compliance been raised? What was the message that was intended? One did not want to walk away with the impression that the cost of compliance was too high. The municipalities had made the calculation -- the cost of compliance was too high, and therefore it was better not to comply.

The Chairperson referred to the amendments to the Act and the AG’s new powers, and said that the Committee would embrace the AG’s additional powers. It would make a significant difference in terms of how people were going to behave and act, including mayors, municipal managers and CFOs. What was missing in the presentation was that in the event of establishing non-compliance in so far as the amendment of the Act was concerned and there was a recommendation as to the rectification and it was escalated to a very severe stage, to what extent in the Western Cape did one take the Provincial Treasury and the DLG along to execute the progressive remedial processes that may be recommended?

Mr Paulse responded to whether or not the Department recovered money for projects -- for example, the provision of toilets – and said that the process of recovering money was very long, but it was eventually recovered.

Regarding Stellenbosch, municipalities were required in respect of irregular, fruitless and wasteful expenditure to report back to the Member of the Executive Council (MEC) responsible for local government. This was framework legislation. There were regulations to say that when this was reported, the council must get either the Municipal Public Accounts Committee (MPAC), or establish a committee, to do an investigation into why it was irregular, unauthorised or fruitless and wasteful expenditure. That committee must then report to Council on the findings and the recommendations. If that recommendation was to recover the money, then the Council should implement actions to recover it from the person or the persons responsible. Council could also decide not to recover the money, saying that the Council had received the full value for that money, but that the laws and regulations in the case of irregular expenditure had not been followed in the procurement process. In the case of Stellenbosch, the Department requests to come back to the Committee so that it could find out what all the details were, and how the Council -- and to an extent the committee that had been established in terms section 32 of the MFMA -- had dealt with the irregular expenditure.

Regarding the cost of compliance, the DLG would push for compliance. It was very strong on governance in the province, but would also push service delivery and have a balanced approach. Having indicated to the Committee what the views were of municipalities who say that the cost of compliance was exorbitant, this was not implying that the Department must relax in terms of compliance. It was fundamentally to raise awareness amongst Committee Members about what municipalities were telling the Department in IGR engagements, that the expensive and exorbitant costs in relation to compliance could no longer be afforded.   

Mr Olkers acknowledged that the AG did make use of private audit firms, but they were performing under the auspices of the AG itself and used all the AG’s infrastructure, software and audit methodology, and performed according to this. AGSA’s quality control units ensure that they perform according to this. The perception that the private audit firms were not as rigorous as the AG itself when it came to performing the audits was incorrect. Their audit files would not pass the AG’s review processes if that was the case. In the application of the audit methodology, the private audit firms and the AG were exactly the same.

Concerning the amendments to the Act, the AG would keep all the stakeholders in the Western Cape informed when there was material irregularity. In the end, there would have to be remedial action on the recommendations being issued. There would also be timelines for when certain processes needed to happen. All the stakeholders, which includes local government, provincial treasury etc, would be informed of the progress the AG was making with the implementation of the Public Audit Act and any issue that may come up.  

Mr Brinders continued that when mSCOA legislation was passed, there were various systems that municipalities had used. When National Treasury passed the legislation, there needed to be a fair and equitable process. In the departmental space, there was a single system, and because there were different service providers, a fair opportunity had to be given to all the service providers to upgrade their systems to meet the legislative requirements. It would not be seen as a fair process to select a single one of them unless at the end of the process, only one had made it. The legislative requirement for there to be only one system would not have been fair and equitable in terms of the mSCOA legislation and the procurement procedures.

The Chairperson thanked the presenters for bringing pertinent issues to the attention of the Committee.

First quarter performance report

The Committee did not raise any issues or points of clarification in relation to the Department’s report on its first quarterly performance report.

Adoption of minutes

The minutes of 30 July 2019 were adopted.

There were a number of resolutions, which included that the Committee should schedule a similar meeting next year, as soon as the audit outcomes were available, to review municipalities in the 2018/19 financial year as early as possible. There was also a suggestion that the Committee should conduct oversight visits to various municipalities, like Drakenstein municipality, and that perhaps municipalities like Stellenbosch should be invited to brief the Committee to give their point of view on the challenges regarding compliance with the MFMA regulations.  

The meeting was adjourned.