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Chilling indictment of SA’s local government sector

CIARAN RYAN: The South African auditor general’s report on the findings of local government audits, which was released last week, is a chilling reminder of how much needs to be done to clean up the sector. Only 41 out of 257 municipalities have received clean audits – and this despite years of advice and recommendations from the Auditor General [AG] and increased powers under the amended Public Audit Act to search for missing money.

So what went wrong at the local government level? To help us understand this, we are joined by Natashia Soopal, Head of Ethics and Public Sector at the South African Institute of Chartered Accountants. [Saica]. Hello, Natasha. Thanks for join us. I assume you saw the GA report last week on the results of local government audits. What struck you the most in the report?

NATASHIA SOOPAL: Good day Ciran. Yeah, I saw the GA report last week. I think this is something we follow at Saica to identify the movements of financial reporting and service delivery in local government. This actually helps us to better target our advocacy efforts in the public sector.

As many would have noted when they heard the AG [Tsakani Maluleke] tabling its report last week, the message of this year’s report was a little different from previous years, with a particular focus on accountability. I think what particularly struck me was that the GA did not reflect [as] much on unsuccessful, wasteful and irregular spending as it has done in the past, but has paid more attention to accountability and the accountability ecosystem – indicating that urgent action needs to be taken by relevant stakeholders within government.

CIARAN RYAN: I think we were all shocked when the GA announced the costs of preparing financial statements at the local government level. Just remind us – what were those costs? Also, don’t forget the consultants who were brought in to help complete financial statements that the finance teams themselves couldn’t do. Was this money well spent?

NATASHIA SOOPAL: [The issue of consultants has] been raised for many years with the AG; specifically from a financial reporting perspective for consultants, the cost incurred in the last fiscal year was actually R1.26 billion and if we look at the salary costs of the financial units it was R10.41 billion rand.

I think that in total, it’s almost 12 billion rands that have been spent on the financial units.

As you mentioned, only 41 municipalities had positive audits – which represents only 16% of all municipalities – despite the large sums spent on the preparation of financial statements.

I think the most concerning thing was that, [of] Among the municipalities that received their own audits, only 18% of them have the municipal expenditure budget. It is certainly not a good return for the money spent, as it does not receive the desired result.

CIARAN RYAN: I guess the question then arises as to why the local government is unable to prepare credible financial statements, despite the huge costs incurred? You mentioned almost R12 billion for financial reporting. Why are we getting such bad results?

NATASHIA SOOPAL: There are many factors. I think the main factor would be the lack of skills. In order to prepare credible financial statements, you would need finance managers to have some basic financial skills. These include the ability to know how to prepare basic reconciliations, such as bank reconciliations and debtor reconciliations.

I think in addition to that, municipalities are required to prepare their financial statements using the standards of Grap [Generally Recognised Accounting Practice]and it is important that officials have the ability to interpret and implement these standards.

Unfortunately, we found that many municipalities lack these essential skills.

We found that municipalities are also not complying with the minimum CFO competencies. And as you may know, CFOs are the leaders of finance units. It is therefore a major challenge. So the only thing is the lack of skills and with that the lack of basic internal controls. Obviously, if you don’t have the skills to implement the controls, there will be a challenge in that aspect as well.

CIARAN RYAN: OK. So what are the main challenges that contribute to poor audit results? You mentioned the lack of internal controls, but are there others?

NATASHIA SOOPAL: There are others. One I can mention is the lack of accountability and consequence management, and this contributes significantly to poor audit results. Year after year, we receive the same audit results from the municipalities, and there is no change. Officials are not held responsible. I think if we take the example of irregular spending and look at the 2019/20 financial year, we will notice that there was R110 billion of irregular spending. Of this amount, only 1% of the money has been recovered – or was being recovered.

But I think, more drastically, 89% were not addressed, and no action was taken against those who were responsible for the non-compliance and, probably, those who impacted the maximum potential of the service delivery.

Thus, for municipal financial management and audit results to improve, it is important that consequence management is implemented to also improve the control environment.

CIARAN RYAN: Briefly discuss the overall financial health of local government, covering revenue management and expenditure management. We hear that some municipalities don’t even bother to bill customers. Well, you’re not going to make any revenue if you don’t charge customers. This seems like a huge oversight.

NATASHIA SOOPAL: Yes. As I mentioned earlier, there is an oversight in the implementation of core controls. The main source of revenue for municipalities is the tariffs and taxes paid by landlords, as well as electricity and water. [bills] paid by consumers. However, we find that given the current economic climate, municipalities are struggling to collect revenue. Apart from this, there is also the lack of controls implemented, which also results in municipalities not charging all revenues or implementing poor debt collection practices.

This means that the municipality does not actually receive all of its revenue. I think it also alludes to the lack of leadership to ensure that these controls are in place so that the municipality can receive all of its revenue.

Going back to the financial health, I think the concern is that [in the case of] 28% of municipalities in South Africa [there is] significant doubt [as to] whether they can continue as operating businesses in the near future. This means that the expenses of these municipalities exceed the revenues they receive, which is a major concern for all citizens, as this will have an impact on service delivery.

CIARAN RYAN: Of course, this is going to be an even greater burden on the state. But tell us what impact that has on service delivery, because it all ultimately comes down to things that are very visible to people who live in the suburbs where they are. They see the potholes not fixed, they see the electricity go out. What impact does this have on service delivery, bearing in mind that many municipalities receive disclaimers – which is the worst audit opinion from the AG?

NATASHIA SOOPAL: The impact on service delivery is actually drastic – I think specifically for municipalities that have received disclaimers.

If we look specifically at a disclaimer, it means that this municipality is unable to account for the money spent.

In many cases, auditors would not be able to trace where that money went, and that actually deprives the community [of] delivery service.

So if there was money that was allocated to fixing potholes, that money could have been spent on something else, and those potholes would never have been fixed. I think the impact of this is dramatic, because it impacts the citizens of this community. If it doesn’t get better, things [will] only gets worse from a service delivery perspective.

CIARAN RYAN: Finally, what can the Auditor General do to improve audit results? Is there one or more things that you would recommend as a Saica that the AG could do?

NATASHIA SOOPAL: If we look at the Auditor General in particular, they are [mandated] check the financial statements and confirm that the money was spent for the purpose intended.

A few years ago, in 2019, the Public Audit Act was amended to give them more powers, and they started to implement these powers allowing them to report material irregularities and also issue a certificate of debt to accountants who are unable to fulfill their responsibilities.

Based on the general report, we noted that it seems to be slowly getting the desired results. However, the AG cannot do much, in accordance with his mandate.

The responsibility for improving audit results rests with management, [the] Municipal Public Accounts Committee as well as parliament and provincial legislatures. And their responsibility is to apply accountability and consequence management, to ensure that appropriate controls are in place for service delivery to take place and for money to be spent for the intended purpose: that is- that is, ensuring the delivery of services to citizens.

So basically we all have a role, from that point of view, in upholding the accountability of elected municipal officials as well.

CIARAN RYAN: Natashia Soopal, Ethics and Public Sector Officer at the South African Institute of Chartered Accountants, thanks very much for joining us. We will leave it there.

Presented by the South African Institute of Chartered Accountants (Saica).

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