Western Cape Municipalities 2018/2019 Audit Outcomes & Corrective measures at underperforming municipalities

Meeting report

Western Cape local government 2018/19 audit outcomes

Ms Sharonne Adams, Business Executive: Auditor-General of South Africa (AGSA) in the Western Cape, commenced by briefing the Committee on the entity’s auditing role. About 55% of the province’s 30 municipalities had been non-compliant with material procurement laws and regulations, while 41% had material findings raised for procurement and contract management. There had been an increase in irregular expenditure from R680 million to R2.7 billion. Debt collection periods exceeding 30 days had deteriorated, mainly due to the overall socio-economic conditions.

The National and Provincial Treasury (PT) had engaged on 4-5 February 2020 to address the major supply chain management (SCM) challenges and audit issues. This was an ongoing intervention with the Office of the Chief Procurement Officer (OCPO) at National Treasury (NT). A response per line item would be provided by NT to the Western Cape Provincial Treasury (WCPT) matrix on the key SCM issues, and how these issues were to be resolved or responded to. Quarterly feedback would also be provided to the National Technical Committee of Finance (TCF) regarding progress. Proposals had been made to NT to establish a structure to assist the OCPO to address the SCM challenges and audit issues. AGSA would be engaged to reach consensus on how to conduct the next round of audits while the NT was addressing the SCM issues. Provincial comments had been submitted to NT on 4 June regarding the local content challenges.

Ms Adams described the challenges faced by municipalities in the governance context. These were:                                           

• The conflict between effective political oversight, as opposed to political interference;
•  Accountability failures within the political and administrative leadership structures;
• Vacancies, non-compliance to ethical codes, and a failure to govern and assume responsibility for compliance with laws and regulations;
• Increased tension between the cost of compliance versus service delivery;
• Interpretation and implementation of challenges in the legislative framework impeding the achievement of the intent of the policy objectives;
• Ineffective utilisastion of assurance providers to improve the design and implementation of internal controls;
• Internal control deficiencies, such as the lack of implementation and monitoring of controls);
• Ineffective consequence management;
• Inability to attract and retain qualified and competent persons.

Discussion

Ms M Maseko (DA) requested a report on the material irregularities of the municipalities in order to pinpoint which of the municipalities had these irregularities. The presenter had indicated that Beaufort West and Laingsburg municipalities had qualified audit outcomes, with findings on their asset management inventory and non-compliance with pre-determined objectives. These had also been the AG’s concerns in the previous financial year, and there had been a discussion on how to empower municipalities to know what assets they had. How could they be empowered to provide an accurate record of their asset inventory? Perhaps there was a training model the AG could put in place. If that was the case, had the AG carried out such training in those two municipalities? There was a mention of political instability also being a contributing factor -- could that be expanded on?

Mr D Mitchell (DA) said the audit findings relating to asset management in Beaufort West municipality had been going on for two years. What processes had the AG put in place to remedy the situation? On the financial health status of that municipality, what needed to be done? There were also numerous deviations happening at Beaufort West -- what was the link between the AG, the provincial government and local government to get to the bottom of these deviations? With regard to engagements with various internal audit committees, there seemed to have been only one such engagement with the internal audit at Beaufort West -- was that the norm? Especially in light of what was happening there?

Mr A van der Westhuizen (DA) said it was shocking to see that the best performing province was still showing a lot of room for improvement. Some of the issues highlighted were disturbing. The payment period for creditors was 54 days on average. Many small enterprises would not survive if they had rendered a service that was paid for in 54 days. He asked for a comparative figure for previous years, to establish if this was an improvement or regression. He also wanted more information on debt collection, and said that because the pandemic, this year would be very challenging.

The AG had highlighted the role of management, and the impression was that most senior managers were appointed on five-year term contracts. Municipalities were struggling to attract people with competencies, particularly the small and rural municipalities. Had the turnover of senior staff been identified as contributing factor, because many of these senior staff could not be held liable? By the time the audit of municipalities was completed, many had moved to a different municipality, so it was difficult for executive mayors to hold people to account.

Was it correct that there were 20 municipalities countrywide with clean audits and of those, 13 were in the Western Cape in spite of all the shortcomings mentioned in this report? For effective remedial action, these results should be shared with the municipalities sooner. How could they speed up the feedback to municipalities so that management could act on the audit results more swiftly and effectively?

Mr D Smith (ANC) asked the AG about the process whereby raw findings on management reports were first obtained, where the municipalities were given the opportunity to correct some findings before the final report. Was there a possibility for the AG to avail such reports to the public? In this case, the public could monitor those reports on a year to year basis to ascertain improvements made by the municipalities. Was it safe to say that the AG could be persuaded in a particular municipality when it pertained to findings or audit outcomes?

Ms N Makamba-Botya (EFF) commented that for the year under review, the Western Cape municipalities had incurred irregular expenditure totalling R2.7 billion. Could the Committee be provided with a list of the municipalities mostly responsible for this irregular expenditure? The presenter had already mentioned Beaufort West and Laingsburg among those impacted. Money had been diverted from certain projects, and this impacted negatively on the lives of poor people who sorely relied on municipalities for service delivery. Poor performance by municipalities had been highlighted in the findings. Were there reports where municipal councils had conducted investigations into all instances of unauthorised and wasteful expenditure? Whose heads were going to roll due to the failure to deliver services to the people? Were these cases dealt with in the office of the minister?

Digging deeply into these reports, it was clear that leaders were looking only after their own interests instead of those of the communities. Decisive political leadership was urgently required now, that would look after the welfare of the communities. It was trend in this province to claim clean audits which did not reflect reality. Were there ongoing investigations from the AG into these municipalities?

Mr P Marran (ANC) said that irregular expenditure was increasing, and this information should be forwarded to the municipalities as soon as possible.

AGSA’s response

Ms Adams promised to send the documents requested by Members with regard to material irregularities.

On the issue of audit qualifications issues and what the AG would do about its findings, there was a record review for the municipalities of Beaufort West and Laingsburg based on the findings from previous years. These issues would be raised again, and it was then the management’s prerogative to implement the recommendations. From an oversight perspective, it was important for the local and provincial governments to provide guidance to the municipalities.

When looking at the assets at Beaufort West, the AG could not get confirmation that the information was complete, and the assets properly recorded and verified. That was a key challenge and in that qualification area, as unbundling the assets review for the year had not been completed. From pre-determined objectives, there was also a qualification for irregular expenditure. The challenge here was about record keeping, and information not being readily available. On pre-determined objectives, there had been various areas of non-compliance, and it required attention for year under review.

Training support should be provided to the municipality by the local government. The AG also had a status of record review that gave early warnings to the municipalities, but if they failed to implement the recommendations, the AG had no power to intervene and would mean the same findings would be repeated the next year. This year there had not been any movement in terms of the audit outcomes.

On the question relating to political instability and how it impacted the audit outcomes, the concerns here were that some appointments made affected the municipal performance and engendered gross mismanagement. When changes were frequently made in the political leadership, they sometimes affected the administrative leadership, which led to instability.

On general financial health and what remedies should be put in place, revenue enhancement measures should be undertaken, and provincial and local government still had a lot of work to do.

Ms Adams said that while deviations were allowed in terms of supply chain management regulations, specific reasons had to be given. From the AG’s side, a sample was tested, based on the risk identified. The deviations were reported if they did not conform to the regulations, and led to irregularities.

On internal audit engagements with AG, the status of records review was where these engagements took place. Internal audit also had specific roles and responsibilities, and where possible the AG rendered support and shared information with them. Administratively internal audit reports the municipal managers and to their various audit committees. These two bodies had clear oversight responsibilities.

Information on the average days’ payment of invoices compared to prior years was not available with her now, but she promised to come back with it.

In cases where money was provided for certain projects but services were not provided, the AG had identified that this was mainly in housing-related projects. Some contracts were awarded without following proper protocols, and this happened in some municipalities, and they had had to disclose irregular expenditure relating to this area. As this was a concern for the Committee, it should get written responses from affected municipalities to explain what had happened and the remedial measures put in place.

What was followed in terms of the management and audit reports, was the holding of steering committee meetings which the mayors attended. In January, there were council meetings that AGSA attends and the audit reports were shared. Recently, audit outcomes were also presented at the speakers’ forum. At these meetings, the concerns raised by Members were noted.

The Chairperson thanked the AGSA for the briefing, and commented that the Western Cape could at least celebrate its position as having the most unqualified clean audit outcomes in the country. What was concerning though, was the ballooning of irregular expenditure, which was frightening. The procedural officer would make provision for the detailed irregular expenditures to be presented to the Committee. As the oversight body, it would hold those municipalities accountable.

Corrective measures at underperforming municipalities

Mr Aziz Hardien, Chief Director: Financial Governance and Accounting, Western Cape Provincial Treasury, said that audit outcomes had improved, but concerns remained, as 43% (13) municipalities had attained unqualified audit outcomes with no findings, while 47% (14) had unqualified audit outcomes with findings.

The reality of local government finance was that the financial statements of 29 completed audits showed that the total revenue, excluding equitable share and conditional grants, was R50.8 billion, but not all was recoverable. National government financed the municipalities through equitable share grants of R4.4 billion, and conditional grants of R6.9 billion. Salary and wages, including councillors’ remuneration, was R18.9 billion. Goods and services were procured, but the suppliers were not paid – the average creditors’ payment period was 54 days. R2.68 billion of expenditure was irregular, R400 000 of expenditure was unauthorised, and 3% of municipalities ended the year in deficit, where expenditure was more than revenue. The total deficit in local government was R400 000.

The total creditors at the yearend was R6.2 billion, and the cash available at the yearend was R13.8 billion – but  creditors were greater than available cash at yearend at 14% of municipalities. An average of 51% of municipal debs was not recoverable, and at four municipalities more than 80% could not be recovered. Debt collection at three municipalities was at more than 90 days.

In terms of the Municipal Finance Management Act (MFMA), in 2019/20 there would be phased-in implementation of the Public Audit Act (PAA). In addition to the City of Cape Town, where it was phased-in during the 2018-19 audit, the following additional municipalities would be phased-in during the 2019/20 MFMA audit cycle. These audits were selected based on the quantum of irregular expenditure disclosed:

• Beaufort West
• Cederberg
• Drakenstein
• Garden Route district municipality
• George
• Stellenbosch

Discussion

Ms Maseko was concerned about the use of consultants which had been highlighted by the AG. This raised the question as to whether municipalities were going to use their chief financial officers (CFOs) or consultants for their financials. What was the AG’s view on this? She referred to a blanket statement by the officials that the AG’s findings of irregular expenditure were not tantamount to corruption and fraud. However, there was information of double payments made for a housing project. This was not about a signature or one document missing, but a double payment made to a supplier that should not have happened.

Mr Mitchell said reference had been made to action plans in the presentation to address the AG concerns on management, and asked if it was possible for the Committee to get the action plans for Beaufort West and Laingsburg highlighted in the presentation? How often did the provincial treasury meet and engage internal audit committees of municipalities? If internal audit recommendations were not being tabled in council, as required by law, what role did the provincial treasury play to ensure that those recommendations were implemented?

Mr Van der Westhuizen said one instance had been mentioned that had led to irregular expenditure was when four out of five members of a bid committee had been present in a bid committee meeting. Surely the easiest thing to say in such circumstance was to postpone such a meeting, because the law required five members to be present. With this kind example, did the AG want to tell this Committee that this kind of basic mistakes was still being made?

Mr Marran amplified the last speaker’s contentions, and said if such a meeting took place, and it was not regarded as a case of corruption, what then was the intention to have held such a meeting anyway? Surely the intention was to benefit someone. When a payment was made to someone who delivered nothing, what was that? Even communities might receive value for money through a fraudulent process. Eight municipalities had cases of liquidity problems, yet four of them had received clean audits. Clean audits but in a financial mess -- how could one reconcile this?

Mr Smith asked what happened when one had evidence in a municipality that the supply chain manager was part of the committee that awarded a tender to his or her partner, and the supply chain manager declared this? Secondly, there had been a case of goods and services never being delivered, yet payment was made. There was clear evidence of these cases happening in the year under review. What had happened in such cases?

Response

Mr Hardien responded that the expense on consultants in the province had been R40m and on audit fees over R120m. Consultancy was used for the entire year, while the auditors came in for three months. It could not be said that any municipality that appointed consultants with appropriate reasons was an errant municipality. In setting up the financial statements, there were about 220 pages of compliances that had to be met. It was for this reason that the provincial treasury had no problems if a municipality used the services of an expert to ensure its financial statements were completely free of material irregularities. Provincial treasury had conducted an in-depth analysis of consultants used by the municipalities.

Regarding the statement in the audit report that irregular expenditure could not be fraud and corruption, this was an international standard that governed auditors. These standards were designed to pick up fraud and corruption and that was why in every audit report, there were assurances from the auditors that procedures had been followed to pick up fraud and corruption and material transgressions. If they had picked up fraud and corruption, it would have been included in the audit report and that was the reason for that statement.

On the central Karoo action plan, the Committee should write to the procedural officer and permission would be obtained from the municipality to make the specific municipal report available to the Committee. The audit report was a public document, but the management report was not.

Eight of the 30 municipalities had liquidity risks, and this was as a result of the impact of COVID-19. Without this pandemic, these municipalities would have not been in this situation. They were all rural municipalities, and many jobs had been lost and when that happened, the first action taken was not to pay for services provided by the municipalities.

The province had a zero tolerance for fraud and corruption where the laws had been flouted, and had channels where such could be reported.

The meeting was adjourned.