Material irregularities as reflected in AGSA report on Municipalities

Meeting report

Briefing by AGSA Western Cape

Ms Sharonne Adams, Business Executive: AGSA Western Cape, took the committee through the process of finding material irregularities in the Western Cape. She explained what the term meant and the different stages in the process. For the AGSA to make a difference in the lives of people, there should be a shift in the culture of the public sector by identifying key players in the accountability eco-system. If every person in the accountability eco-system played their part, service delivery would be improved. There are processes that need to be followed in local government decision-making to achieve the desired goals. The roles of the accounting officers are clearly stipulated in the MFMA and internal audit units are critical.

The audit committee plays an important part in the oversight process, from an internal and external audit perspective. The information presented to all the role players must be credible so that the correct decisions are made. The AGSA needs proper insight to be able to inform stakeholders to take appropriate action. An active citizenry is very important in the accountability eco-system and the AGSA works very closely with civil society organisations to identify potential risks to service delivery.

Ms Adams reported a R1.2 billion decrease in irregular expenditure during 2019/20 in Western Cape municipalities, much of that in the City of Cape Town.

She said in identifying irregular expenditure, fruitless and wasteful expenditure, and unauthorised expenditure, the AGSA considers what has happened over a number of years. In determining if there has been unauthorised expenditure the AGSA considers the different votes in municipalities to identify if any expenditure appears to be out of line. A key concern is not having sufficient funds to sustain the work of projects. Most unauthorised expenditure occurs in non-cash items. It does not mean a financial loss in the municipality but reflects a divergence in actual expenditure compared to the budget.

The AGSA spends a lot of time tracking fruitless and wasteful expenditure, most of which is related to interest payments, penalties for late payment, and delays experienced by contractors. The AGSA analyses each of these in detail when making an assessment of material irregularities, asking if these could have been avoided.

With regard to material irregularities, the first step that is considered is non-compliance with legislation. The AGSA asks if fraud has been considered when it comes to breach of fiduciary duties. The AGSA further looks at the loss or misuse of public resources or if there has been substantial harm to the public sector institution or to the general public. Substantial harm is established by considering expenditure over a number of years. Material irregularity is identified if there were disclaimers in the prior year and current year. If the same opinion is held in the current year, the AGSA finds a substantial harm material irregularity for the year under review. For example, if the AGSA finds poor service delivery at a wastewater treatment plant that has not been properly maintained, material irregularities and substantial harm to the public are identified because if the water is contaminated it could harm the people who drink it.

Ms Adams noted that this year for the first time the AGSA has issued material irregularities for financial statements not being submitted on time, firstly because without the financial statements oversight cannot be conducted, delaying the accountability process. Secondly, if financial statements are not submitted in time, the National Treasury withholds funds. Departments do not receive their full portion of the equitable share, which impacts on service delivery.

In assessing material irregularity, it is critical to note if non-compliance was identified during the audit process and if it resulted in financial loss. The AGSA has the power to refer material irregularities that have been identified for further investigation to a public body and have done so on a number of occasions. In instances where the accounting officer is involved, the AGSA refers the matter to an external body for investigation because the accounting officer cannot investigate himself or herself. If the AGSA believes it is required, the matters can be referred to the SIU, the Hawks, or the Public Protector. A few have also been referred to the National Treasury.

When the AGSA finds material irregularities, the auditees are allowed to respond. They have to respond within 20 days and indicate the processes they intend to use to follow up on the matter. The AGSA assesses these, does further investigation, and sets timelines. The accounting officer is allowed to play a role in attempting to correct the material irregularity. If the auditees correct the findings and recover the financial loss, and corrective action is taken against the official(s) implicated, the AGSA does not issue a material irregularity. If the AGSA’s findings are not corrected, a finding of material irregularity is issued. If no progress is made on correcting the material irregularity, the AGSA can provide recommendations in the audit report and indicate the steps that should be taken. If these recommendations are not followed, the AGSA can issue binding remedial actions and a certificate of debt, which is the final stage in the process. Once a certificate of debt has been issued, all available oversight processes have failed.

The AGSA has introduced a phased-in approach based on the merit of the irregular expenditure with the largest irregular expenditure being scoped first. Every year, more auditees are phased in as the AG identifies further material irregularities.

The AGSA identified six material irregularities in the recent audit and is satisfied with the progress being made in correcting them. Most of these are at the stage where the accounting officer is taking action and the AGSA is following up on the action being taken. It has been determined that in 26% of cases the accounting officer did not take the appropriate action and the AGSA will move on to the next phase of the process. The AGSA has issued recommendations in the audit reports for all municipalities, clearly stipulating the steps that should be followed to rectify the material irregularities. Municipalities are usually given four to six months to make corrections. In one municipality the AGSA has introduced remedial actions, and if there is no progress a certificate of debt will be issued and efforts will be made to try to recover the money from the accounting officer.

The R1.2 billion irregular expenditure in the Western Cape is in part related to the extension of contracts without following the correct procedures. This had been identified in the previous year and the AGSA found the irregular expenditure had continued into the current year. In some cases, the AGSA found that the suppliers’ tax compliance had not been established when the contract was awarded. That does not necessarily mean financial loss was incurred because the suppliers may have delivered the service they were contracted to perform. But even if the AGSA confirmed that services had been delivered, this was still identified as irregular expenditure because of non-compliance with the correct procedures.

In other municipalities, irregular expenditure was related to non-compliance in the way bid adjudication committees (BICs) had been constituted. Two years ago, the AGSA discovered that in many cases BICs had been constituted in breach of the law and some of these irregular practices had continued into the current year. The National Treasury has made recommendations on this matter.

The AGSA also found deviations in the supply chain processes where incorrect senior officials were delegated responsibilities.

Irregular expenditure could also be the result of poor planning. For instance, a refuse removal contract is for five years. In the third year, the municipality is required to start preparing to apply for an extension to the contract or start the process of appointing a new contractor. If this is not done timeously, irregular expenditure could be incurred.

The AGSA identified three material irregularities in the City of Cape Town for the previous year, which were published in the City of Cape Town’s audit report. The AGSA discovered a proper needs assessment or analysis was not done. Many service providers were placed on standby and were paid for services that were not needed. There were also instances of overcharging. The City of Cape Town is taking proper action and is conducting an investigation to see how the money could be recovered and to ensure consequence management follows. The AGSA will continue to identify instances where municipalities risk incurring fruitless and wasteful expenditure and will follow its processes in investigating material irregularities.

Discussion
Ms M Maseko (DA) remarked that during recent Association of Public Accounts Committee (APAC) engagements shortcomings had been identified arising from the AGSA oversight. She asked what role the Chief Financial Officer (CFO) plays in municipalities where external agencies are called in to conduct the audit. She wondered if there was a lack of information sharing between the municipal manager and the CFO even though there is an internal audit unit and audit committee to identify risks before going to the AG. She wanted to know how the Municipal Public Accounts Committees (MPACs) are empowered to conduct oversight as MPACs are a new concept in the municipalities; she also asked if the AGSA has to be paid for auditing municipalities.

Ms Adams replied that section 57 of the MFMA refers to senior managers such as the CFO who play a very important role in the municipality. The correct procedures for appointing consultants have not always been followed and in some cases, incompetent officials have been appointed. Needs assessments must be considered and sometimes there is a lack of clarity about what they need to deliver on, hence the need to follow processes. Sometimes challenges arise in appointing consultants, who play a key role when it comes audits and internal controls because all audit reports come from the office of the CFO.

On empowering MPACs, the internal audit has to advise the MPAC and there is collaboration with the South African Local Government Association (SALGA) for inducting the MPACs and new councillors on oversight roles and how the processes unfold. Capacitation is provided to weaker MPACs. They should ensure credible information is put on the table for decision-making.

The AGSA pays attention to service delivery projects and is committed to monitoring risk identification. Most of the time these projects are delayed, which causes the costs to double or triple. When looking at the project, the AGSA starts with the Integrated Development Planning (IDP) process. Communities’ needs are identified, the budget processes are then examined, and how the project will be implemented and delivered is determined. The AGSA sometimes finds that some of these projects are not prioritised or are not included in the IDP. A project on the ground is a promise made to the community and if the needs analysis is done well, there is no reason why the service cannot be delivered to the intended community. The budget process will determine if there are sufficient financial resources to deliver on the promises that have been made. The pre-approval of these processes is the responsibility of the council and the Department of Local Government, and the Provincial Treasury is responsible for oversight. Implementation and post-correction processes are needed when processes do not proceed according to the plan. When it comes to the evaluation phase, and when important information is provided during oversight, it is possible to detect if poor decisions were taken, which impacts on the service delivery on the ground.

Ms C Murray (DA) wanted to know how active citizenry is enhanced in rural areas, townships, and municipalities that are under-performing, such as the Central Karoo; she asked if the impairment is resulting in unauthorised expenditure; if it is happening in under-performing or better-performing municipalities; and where this could be detected.

Ms Adams said the AGSA has started engagements with civil society organisations and premiers’ departments to provide risk assessment and to give feedback on service delivery challenges. These civil society organisations are very close to the communities. The MFMA and Municipal Systems Act (MSA) speaks of public participation and the role of councillors in identifying the needs of the communities. When civil society speaks, people on the ground also speak. Citizens may just accept the status quo so civil society must mobilise to address the needs on the ground. She also said there is impairment across the board but the biggest challenges are in struggling municipalities such as the Central Karoo. She agreed that impairment is worse in poorer communities.

Mr C Dugmore (ANC) …audio unclear…wanted to find out why the AGSA has not referred any material irregularities to an external agency since its powers were enhanced in April 2019; he asked if this contradicted evidence that has been presented to the committee concerning this matter, including a newspaper article.

Ms Adams pointed out that the newspaper article indicated there have been no material irregularities issued in the Western Cape but this is not the case as the AGSA has identified material irregularities. Before these are referred for investigation they have to be identified. Four material irregularities have been identified, three with regard to the City of Cape Town and, it is believed, the accounting officer is taking appropriate actions and investigating. The AGSA will then consider these reports to see if money can be recovered and whether consequence management would take place. If the AGSA believes there is a considerable risk, the matter might be referred, firstly to the accounting officer. If that is not successful a referral to an external agency would be considered. There has been no need to refer any material irregularities to an external body in this audit.

The Chairperson asked how the provincial legislature and government departments could help address the lack of capacity in internal controls in many small municipalities and asked if there is a shared service that could be provided at the district level.

Ms Adams said a shared service has been considered for the Central Karoo because of the scarcity of skills and the AGSA has been pursuing this option.

The Chairperson remarked that ward committees are playing an important role in the area of active citizenry and they need to be empowered to play an even larger role.

On the issue of consequence management, Ms Maseko wanted to understand what municipalities investigated when the municipality commissioned an independent body to do the investigation. She asked if the municipalities are given a framework, and how the AGSA makes sure this would add value for consequence management.

Ms Adams said the first step was to identify the material irregularity, which is then communicated to the accounting officer. It would then be decided if the AGSA should investigate the matter or refer it to the internal audit unit for investigation. Based on the database and the nature of the investigation an external firm may carry out the investigation under the ambit of the accounting officer. The AGSA has noticed that when material irregularities are raised the municipality refers them to an external body for further investigation, which takes a lot of time. An internal investigation would follow normal processes. If it is referred to an outside body, the AGSA gets regular updates through its coordinators from the external agency. One of the key challenges the AGSA finds across the board is that in many cases the delays are caused when a new accounting officer is appointed. The AGSA has to re-issue the material irregularity and the accounting officer will need some time before taking action. This is why the processes take a long time, and this is exacerbated when the municipality is placed under administration.

Ms Murray asked if there have been any forms of consequence management that could be used in courts, such as court orders; she also enquired where the increase in material irregularities has largely occurred.

Ms Adams said consequence management is a huge challenge in the public sector. The Hawks pursue criminal charges when the matter has been referred to them. There are many steps in the process that have to be taken to keep the accounting officer accountable. A certificate of debt is issued in the name of the accounting officer.

Mr Dugmore wanted to know what the four material irregularities were related to, what their status is, and what the AGSA is doing about them; and asked what the AGSA meant by seven auditees.

Ms Adams said the AGSA started the phase-in approach in the Western Cape with the City of Cape Town. Beaufort West, Cederberg, Drakenstein, Garden Route, George and Stellenbosch would follow. The AGSA made this decision based on the quantum of irregular expenditure in terms of risk assessments. If the AGSA identifies a material irregularity in a municipality that has not been phased in, that municipality could be scoped in. This has been done in the past to report material irregularity. By 2023/24 all auditees would be phased in across the country.

The information on material irregularity for the City of Cape Town is in the audit report and it would be sent to the committee. The AGSA would also send written responses to the committee on what the material irregularities are about and the context thereof. Concerning the newspaper report, she said the AG was responding to the questions from the journalist stating that material irregularities have been identified. The media liaison officer would be asked to correct the misunderstanding.

The Chairperson enquired about the impact of the unfunded budgets and how non-payment of Eskom bills by municipalities feeds into the audit outcomes. He also asked if municipalities receiving unsolicited bids are complying with the MFMA. He approved of placing accounting officers at the centre of material irregularities and asked to what extent they could be held liable for any material irregularity identified in the municipalities and if they could be unfairly targeted.

Ms Adams stated unfunded mandates would result in unauthorised expenditure, which is of great concern and is getting attention. Eskom charges penalties and interest payments for unpaid bills. This is money that could have been used by municipalities for service delivery. The legislation is clear on what should be done about unsolicited bids when there is a service provider that can do the same work but problems arise when other service providers are discovered that can do the same work. She pointed out municipality councils cannot be involved in the procurement processes and if they are, this needs to be reported to the speakers by the accounting officers.

The Chairperson asked if it would be possible to access reports to address concerns earlier instead of letting them surface later because losses were incurred when the PPE contracts were awarded.

Ms Adams said three reports were issued: two by the national government and by the municipalities. The audit looks at historic information and transparency of information. But it depends on how the government responds to such information.

Ms Maseko asked when the auditing took place so that the Committee could give direction on what it has picked up.

Ms Adams said it usually starts in early August and continues until the end of November every year.

Mr Aziz Hardien, Chief Director: Financial Governance and Accounting, Western Cape Provincial Treasury Department, said his department would send the Committee more information on unfunded budgets and the committee should write to his department concerning Eskom bills that have not been paid by municipalities and the AGSA’s involvement.

Resolutions

The Committee resolved to request reports on the material irregularities of the seven auditees; to engage with the Provincial Treasury on unfunded and under-funded mandates; that MPACs should be invited to meetings of the Standing Committee on Public Accounts (Scopa) to see how Scopa interrogates government departments, and that the committee provide the MPACs with tools of trade.

The meeting was adjourned.