Material Irregularities in Local Government: AGSA briefing

Meeting report

Opening remarks

The Chairperson welcomed everyone to the first meeting of the year. He said that the Committee has seen how the office of the Auditor General of South Africa (AGSA) sought to entrust and instil a modelled approach of accountability for accounting officers and executives in various institutions. The Committee is mainly concerned about the municipalities, considering the previous audit outcomes. This is an area that worries everybody, including the President. During yesterday’s State of the Nation Address (SONA), an emphasis was placed on “working hard to make local government work”.

Briefing by AGSA on material irregularities (MIs) in local government

Ms Tsakani Maluleke, Auditor-General of SA, AGSA, said that the presentation is to brief the Committee on the impact that AGSA has been making in the implementation of its powers, especially in the local government sphere. She recalled that when it had tabled the MFMA/MI report at the end of last year, the AGSA shared some insight into how those powers were being implemented.

Definition and process of MIs

An MI is any non-compliance with, or contravention of, legislation, fraud, theft, or a breach of a fiduciary duty identified during an audit performed under the Public Audit Act that resulted in or is likely to result in a material financial loss, the misuse or loss of a material public resource, or substantial harm to a public sector institution or the general public.

The AGSA would notify the accounting officer if it identified an MI and would give the accounting officer an opportunity to respond. The AGSA would assess whether that response is adequate. If AGSA believes that the response is adequate and appropriate in the circumstances, then the accounting officer is allowed to continue implementing the stated actions. The AGSA will continue to track the performance, up until the accounting officer resolves the MI.

If the AGSA does not see appropriate action (i.e., the accounting officer does not respond or their response is inadequate in the circumstances), then the AGSA will invoke its powers. The AGSA has powers to refer matters to a public body for further investigation, issue a recommendation in the audit report, take binding remedial action, and issue a certificate of debt.

Legal obligations of municipal manager to address an irregularity

The legal obligations of every accounting officer in the municipal space are set out in the Municipal Finance Management Act and its regulations, especially on the steps to be taken when non-compliance has been identified.

MI process addresses significant issues in local government

The AGSA started the process of implementing MIs four years ago, which started with nine municipalities being audited on the basis of MIs. In the four Municipal Finance Management Act (MFMA) cycles since then, the AGSA has ramped up efforts to implement its new powers, where a total of 170 municipalities were being audited by the 2021/22 financial year.

• So far, the AGSA has identified a total of 268 MIs in the local government space.

• 194 of those MIs related to transactions where there were instances of material financial loss (estimated R5.19 billion)

• 44 of those MIs were associated with substantial harm to public sector institutions (e.g. instances of repeated disclaimers and non-submission of financial statements)

• 29 of those MIs were associated with substantial harm to the general public (e.g. poor management of wastewater treatment plants, which led to pollution of water resources)

Accounting officers responding to MIs

An MI is resolved when an accounting officer takes all possible steps to recover financial losses or remove or address the harm caused, implement consequence management, prevent any further losses and harm, and through improved internal controls.

Status of the 281 MIs identified:

• Most accounting officers are responsive. There were at least 57 instances when an MI was resolved. In 95 instances, appropriate action has been taken to resolve an MI.

• In 61 instances, no appropriate action was taken, which invoked AGSA’s powers.

• In 31 instances, AGSA did receive a response to its MI notification but was still in the process of assessing the appropriateness of the proposed action at the time when this report was tabled.

• In 24 instances, accounting officers had recently been notified. The AGSA is awaiting a response on how the accounting officers intend to correct the MI.

Non-responsiveness

The presentation gave further details on the 61 instances where AGSA had to invoke its powers, due to accounting officers not taking appropriate action. It listed the specific municipalities and indicated in which provinces this is most prevalent.

(See presentation for details)

Discussion

The Chairperson thanked the Auditor-General for the detailed report, which followed the heels of what was presented at the end of last year. He said that it was indicative of the AGSA’s philosophy of the accountability system that it instils through the auditing process. It is even more visible that the intention of the key principles of the MFMA is to ensure that the depth of accountability is inculcated one way or the other and that accounting officers will always be held accountable for their own actions or inactions. The progress is very encouraging.

He believed that in most instances the municipalities required a culture change and a sense of urgency to address the financial losses, as this further results in bad service delivery and in some instances is caused by fraudulent activities. The AGSA is instrumental in ensuring that accounting officers are held accountable and take appropriate action in resolving MIs. This is progress towards making local government work, as this will ensure that public institutions use the resources allocated to them effectively and efficiently.

Ms C Phillips (DA) said that the presentation was very interesting and informative. She had a question relating to the financial audits that are undertaken by municipalities, but the results of those audits are not presented to the municipal councils. She questioned how the councils are supposed to conduct oversight and ensure accountability.

She noted that a company called Gobodo Forensic had recently conducted a forensic financial audit on the Rustenburg Rapid Transport System, but the outcome of this had not been made available to the council. There were several other audits on Rustenburg’s water system, where CMS Water Engineering was involved, and the project was halted. In some areas, the people in Rustenburg have gone up to 12 days without water. It does not seem that there is any progress. She questioned how municipalities could be held accountable if their audits were being concealed.

She asked if the AGSA was making progress in collecting the audit fees owed to them by municipalities.

Ms M Matuba (ANC) said that she noted the progress in the implementation of MIs in various government institutions. She asked if the AGSA gave accounting officers a specific timeframe to respond to MI notifications and resolve the MIs. She asked about the processes that are in place to resolve MIs.

She noticed that the Auditor-General had highlighted the issue of the municipal billing system, which is a concern that is raised year in and year out. She believed that there are good citizens who pay their dues each month and make a positive impact as responsible citizens, but the municipal billing system has become so abnormal to an extent that one feels that one is being taxed for other people's non-payment. She questioned whether the AGSA had raised this concern and advised the local government to resolve this matter.

She appreciated the improvement that has been observed in the Govan Mbeki Local Municipality in Mpumalanga. She asked if there has been progress with the other municipalities that were also issued with an MI notification, especially where the accounting officer took little or no action to address the MI. She asked if the provincial departments that are responsible for local governance were also responsive in resolving MIs.

Mr O Mathafa (ANC) commended the AGSA for continuously taking the MI process seriously, he welcomed the developments in this regard. He observed that AGSA had also identified areas where there may have not been a material financial loss, but rather a substantial harm to the public sector institution or the general public. He asked how the Committee could assist AGSA in making such observations and ensuring that instances of substantial harm to public sector institutions or the general public would be addressed with the same urgency as in instances of a material financial loss. He explained that AGSA might issue an MI notification due to inaction, but if the accounting officer does nothing to resolve this then it might lead to the public being deprived of the services that they deserve.

Mr Z Mlenzana (ANC) said that the questions that his colleagues had raised made him question the effectiveness of the internal audit committees. He asked whether it would be possible to conduct some type of assessment to evaluate the effectiveness of the internal audit committees within the local government space.

The Chairperson recalled that the Fusion Centre was established during the Covid-19 pandemic, which was some form of a modelled structure to speed up remedial-based approaches that existed during that time. He asked if the Fusion Centre still existed. It seemed as if the recoverability of funds was in most cases left to the public sector institutions which experienced the financial losses. However, there are very effective institutions such as the Special Investigating Unit (SIU) that recover financial losses suffered by the state through corruption and negligence.

He observed that the presentation detailed the MI process and the role of the accounting officer in being responsive in resolving the MI. He believed that it was key for public sector institutions to institutionalise response models at the municipal level, to ensure that there is a trail of action within the institutions.

Ms Maluleke referred to the question that Mr Mlenzana and the Chairperson had raised in terms of how the AGSA institutionalises responsiveness by using other role-players, such as the internal audit committees. She concurred that it was a big opportunity for AGSA to contribute to strengthening these specific elements of the accountability ecosystem. The internal audit committees are professional colleagues who are often trained in ways that are similar to AGSA’s officials. The AGSA has identified that it can collaborate more effectively with the relevant professional bodies and invest in the capabilities of internal audit functions to ensure ongoing alignment within institutions and across the system.

She explained that every single public institution has an internal audit committee and an internal audit function, but far too many of them tend to focus on financial reports and not so much on performance reports and compliance. With regard to the MI process, the internal audit committees and internal audit functions could make an impact by tracking the implementation of the specific action by the accounting officers, and by advising the accounting officers on how to implement corrective action more effectively. She assured the Committee that there is work underway to ensure that there is improvement in the value that the internal audit committee and internal audit functions bring to public institutions.

The internal audit committees and internal audit functions also play a role in driving continued focus on improvements in the control environment. They should not only be worried about obtaining a favourable audit outcome but should also be concerned about strengthening internal controls, the extent to which the accounting officer is instilling discipline, and ensuring that consequence management becomes the norm, et cetera.

Ms Maluleke pointed out that the Public Finance Management Act (PFMA) and MFMA contain a specific obligation for the accounting officer to instil discipline in the environment, but this is something that is not often spoken about. She said that discipline is not only about having disciplinary action when things go wrong, but it is also about setting a culture (i.e. the way in which the employees of that department or entity apply themselves with discipline). Instilling a culture of discipline within institutions will also improve their responsiveness.

She referred to Ms Matuba’s questions about the timeframes when AGSA issues an MI. She replied that AGSA would issue the MI notification and give the accounting officer 20 working days to respond. The accounting officer must inform the AGSA on how they intend to deal with the matter. AGSA would assess the response, and if it is believed that the proposed action is adequate and appropriate then the AGSA would give them the opportunity to act. If the proposed action is believed to be inadequate and inappropriate, then the AGSA will indicate this. The AGSA might take a decision to refer the matter or issue a recommendation, but this is dependent on the nature of the matter at hand. The recommendations come with a clear timeframe by when the accounting officer must take particular action. If the accounting officer does not act on the recommendation, the AGSA will take binding remedial action. The timeframes are set in a way that is deemed to be a fair period within which the accounting officer must do what is required.

On the question about the billing system, she replied that much of this is about discipline. While there are skills issues and IT issues, the AGSA’s assessment shows that much of this tends to be a discipline issue. She explained that when people have the skills and the technology to go out and read meters, but they do not do this for months on end, then the catch-up becomes really difficult. The only way that this is dealt with is by having discipline, ensuring that there is order in how the institution is run, monitoring this to ensure that the basics are done on a regular basis, and applying consequence management when this is not done. There should be a culture of disciplined action in what people have been employed to do. In AGSA’s assessment, the environments that have poor discipline lend themselves to instances of poor billing practices.

She concurred that there has been significant progress. For instance, the report shows that several municipalities have improved in their efforts to submit financial statements, especially in the Free State. There have been improvements in municipalities that had previously had consecutive disclaimed opinions, especially in the Free State and the North West. Overall, there are a number of instances where improvements have been affected as a consequence of the MI process.

On Ms Phillips’s question about the audit fees that are due to AGSA by municipalities, she replied that this remains a big problem. The AGSA is struggling to collect its audit fees, especially from municipalities. AGSA’s debtor’s book is currently over one billion Rand. Almost a quarter of AGSA’s revenue is in debtors, which is a big constraint on AGSA’s ability to make investments where it must and to build capability. Ms Maluleke explained that the culture of paying the AGSA needs to be improved within local government. The discipline of paying all creditors on time and honouring commitments needs to be dealt with. There has been a tendency amongst municipalities to pay consultants rather than prioritising payments due to the AGSA, which shows that there is a posture and culture problem around paying for things that are being provided by the audit office, amongst others. There are far too many municipalities that fail to honour their obligations to the audit office but are quick to prioritise other things which add even less value.

On Ms Phillips’s question about the forensic financial audits conducted by private services, Ms Maluleke replied that the accounting officers may procure the service of an investigator to investigate a particular transaction or a particular matter that they are concerned about. The terms of reference and terms of engagement between the accounting officer and the service provider may include clear provisions on how the report would be dealt with depending on the matter. She explained that she was unable to provide an answer on how the municipal council or other stakeholders could get a hold of such reports, but she advised that the accounting officers could be compelled to account for what it was that they were investigating, why they were investigating it, what the outcome of that investigation was, and what action has been taken in relation to the investigation. She assumed that the primary interest that one may have on such reports is on the consequence management and the corrective action. Every role-player in the accountability ecosystem has every right to follow up on this.

She explained that in terms of AGSA’s reports, once an audit is finalised, the audit report must be tabled in council by the municipal leadership. Every councillor will have access to that report within a particular legislative timeframe. When there is a delay in the audit process, either due to a dispute that has arisen before or after the audit report is drafted, the AGSA is compelled to engage with the auditee to at least get to a point where there is agreement on the critical issues on a factual point of view. Although AGSA conducts independent audit reports, the process must also give an accounting officer the opportunity for a dispute to be heard. AGSA does have an established dispute resolution process, which has been in place for a number of years and has recently been refreshed. The dispute resolution process has a predictable set of procedures that allow the auditee to be heard by different people within the AGSA so that there is fairness in the process. The audit process can easily be subjected to contention on a particular interpretation of a legal matter or an accounting issue, which would likely delay the conclusion of the audit report until the dispute has been finalised. The AGSA tries hard to be as efficient as possible in resolving disputes so that the audit report can be tabled. Once the audit report and dispute resolution process have been finalised, the municipal leadership must table the report in council. The law provides that if the municipal leadership fails to do so within a set period, then AGSA will table it. There have fortunately not been too many instances in the municipal space where AGSA had to table the audit report itself.

Closing remarks

The Chairperson said that the audit function is anchored in the prescripts of the law, and such prescripts must be honoured at all times. Public sector institutions must be modelled within a value system that seeks to respect the fact that they are in use of public funds, and therefore there should be a culture inculcated for thorough efficiencies. He thanked the Auditor-General for the role that AGSA plays in ensuring that the constitutional system of the country is not only observed but it is fully practiced.

The meeting was adjourned.