Chilling indictment of SA’s local government sector

This despite years of guidance and recommendations from the Auditor-General. Natashia Soopal of Saica helps us understand the debacle.

CIARAN RYAN: The report of the South African Auditor-General on local government audit outcomes, which was released last week, is a chilling reminder of how much has to be done to clean up the sector. Only 41 out of 257 municipalities received clean audits – and this despite years of guidance and recommendations from the Auditor-General [AG] and enhanced powers in terms of the Amended Public Audit Act to chase down missing money.

So what has gone wrong at local government level? To help us understand this we are joined by Natashia Soopal, who is the executive for ethics and public sector at the South African Institute of Chartered Accountants [Saica]. Hi, Natashia. Thanks for joining us. I guess you saw the AG’s report last week on local government audit outcomes. What struck you most about the report?

NATASHIA SOOPAL: Good day Ciaran. Yes, I did see the AG’s report last week. I think it’s something we track at Saica to identify the movements of financial reporting and service delivery in local government. It actually helps us to better focus our advocacy efforts in the public sector.

As many would have noted when they heard the AG [Tsakani Maluleke] table her report last week, the messaging for this year’s report was a bit different to prior years, with a huge focus on accountability. I think specifically what stood out for me was that the AG did not reflect [as] much on fruitless, wasteful and irregular expenditure as she has done in the past, but paid more attention to accountability and the accountability ecosystem – which indicates that urgent action needs to be taken by the appropriate stakeholders in government.

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

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

I think in total it’s close to R12 billion that was spent on the finance units.

As you mentioned, only 41 municipalities received clean audits – which is only 16% of all municipalities – despite the large amount of money spent on preparing the financial statements.

I think more of a concern was that, [of] those municipalities which received clean audits, only 18% of them have the municipal expenditure budget. This definitely is not a good return for money spent, as it is not receiving the desired outcome.

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

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 officials to have some of the basic financial competencies. These include the ability to know how to prepare basic reconciliations, such as bank reconciliations and debtor reconciliations.

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

Unfortunately, we have noted that many municipalities lack these essential skills.

We’ve noted that municipalities also do not comply with minimum competencies for CFOs. And as you may know, CFOs are the leaders in the finance units. So this is a major challenge. So the one thing is the lack of skills and, with that, the lack of basic internal controls. Obviously, if you don’t have proper skills to implement the controls, there is going to be a challenge from that aspect as well.

CIARAN RYAN: Okay. What are the key challenges then that contribute to poor audit outcomes? You have mentioned lack of internal controls, but are there others?

NATASHIA SOOPAL: There are others. One that I can mention is the lack of accountability and consequence management, and this contributes drastically to the poor audit outcomes. Year on year we receive the same audit outcomes from municipalities, and there is no change. Officials are not held accountable. I think if we take irregular expenditure as an example, and we look at the 2019/20 financial year, we would note there was R110 billion worth of irregular expenditure. Of this, only 1% of the money was recovered – or was in the process of being recovered.

But I think, more drastically, 89% was not dealt with, and no action was taken against those who were responsible for not complying and, probably, those that impacted the maximum potential of service delivery.

So, in order for municipal finance management and audit outcomes to improve, it is important that consequence management is implemented to improve the control environment as well.

CIARAN RYAN: Talk briefly about the overall financial health of local government, touching on revenue management and expense management. We hear that some municipalities are not even bothering to bill customers. Well, you’re not going to make revenue if you’re not billing customers. This seems to be a huge oversight.

NATASHIA SOOPAL: Yes. As I mentioned previously, there is an oversight in implementing basic controls. The main source of revenue for municipalities is rates and taxes paid by property owners, as well as electricity and water [bills] paid by consumers. However, we note that, based on the current economic climate, municipalities struggle to collect revenue. Apart from this, there’s also the lack of controls being implemented, which also results in the municipalities not billing all revenue or implementing poor debt-collection practices.

This means that the municipality’s not actually receiving all of its income. I think this also alludes to the lack of leadership to ensure that there are these controls in place so that the municipality can receive all of its income.

Just coming back to the financial health, I think what’s of concern is that [in the case of] 28% of South Africa’s municipalities [there is] significant doubt [as to] whether they can continue as going concerns in the near future. This means that the expenditure of these municipalities exceeds the revenue that they receive, which is a key concern for all of the citizens, as this will impact service delivery.

CIARAN RYAN: Of course, that’s going to be an even bigger burden on the state. But tell us what impact this has on service delivery, because all of this at the end of the day comes down to things that are very visible to the people who live in whatever suburb they’re in. They see the potholes not being repaired, they see the electricity being cut off. What impact is this having on service delivery, bearing in mind that a lot of municipalities are receiving disclaimers – which is the worst audit opinion from the AG?

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

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

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

So if there was money that was allocated to repairing potholes, that money could have been spent on something else, and those potholes would never have been repaired. I think the impact of this is drastic, as it is having an impact on the citizens in that community. If this is not improved, things [will] only get worse from a service-delivery perspective.

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

NATASHIA SOOPAL: If we look at the Auditor-General specifically, they are [mandated] to audit financial statements and to confirm whether the money has been spent for its intended purposes.

A few years ago, in 2019, the Public Audit Act was amended to give them more powers, and they have started implementing those powers where they are able to report on material irregularities and also issue a certificate of debt to accounting officers who are not able to execute their responsibilities.

Based on the general report, we’ve noted that this seems to slowly be getting the desired results. However, the AG is able to do only so much, as per its mandate.

The responsibility to improve audit outcomes is the responsibility of management, [the] Municipal Public Accounts Committee as well as parliament and provincial legislatures. And their responsibility is to enforce accountability and consequence management, to ensure that there are proper controls in place in order for service delivery to take place and in order for the money to be spent for its intended purposes: that is to provide service delivery to the citizens.

So basically we all have a role, from that perspective, to enforce accountability on municipal officials as well.

CIARAN RYAN: Natashia Soopal, executive in charge of ethics and public sector at the South African Institute of Chartered Accountants, thanks very much for joining us. We’re going to leave it there.

Brought to you by the South African Institute of Chartered Accountants (Saica).

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