Municipalities’ audits improve, but challenges persist

30th July 2014

By: Natasha Odendaal

Creamer Media Senior Deputy Editor

  

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While unauthorised expenditure by South Africa’s municipalities has declined year-on-year, irregular expenditure has recorded a R2-billion increase as municipalities failed to follow legislated procurement procedures, the latest Auditor-General South Africa audit has revealed.

Unpacking the 2012/13 audit outcomes of municipalities and municipal entities, which had a combined total expenditure of R268-billion, in Pretoria, on Wednesday, Auditor-General (AG) Kimi Makwetu explained irregular expenditure emerged within 265 – more than 80% – of the 319 municipalities audited.

Further, irregular expenditure, at R11.6-billion for the period under review, had increased significantly from the R9.32-billion reported in the prior year.

Makwetu said this was a result of a “significant breakdown” in controls, with the municipalities and entities entering into transactions valued at a collective R8-billion without following the prescribed and transparent supply chain protocols.

While the goods and services were received, the AG said the audit had identified weaknesses in the procurement process and contract management of 74% of the municipalities, with 29% unable to provide evidence that their procurement processes had complied with legislation.

“The value of these controls cannot be emphasised enough, as they are an important mechanism to narrow the space for widespread abuse of the public resources that are required to provide services to citizens,” Makwetu stressed.

The audit report had showed that about R95-million in contracts were awarded to suppliers in which employees and councillors had an interest, and contracts valued at R455-million were awarded to suppliers that other State officials had an interest in.

The report explained that employees and councillors did not declare their interest in 35% of the contracts they received and, in 83% of these, suppliers did not declare that officials, councillors or other State official held a financial stake.

Further, the noncompliance with legislation had resulted in uncompetitive or unfair procurement processes at 71% of the auditees and inadequate contract management at 33%.

The audit was unable to confirm whether goods and services were received or not for the balance of R3.6-billion of the irregular expenditure, owing to a lack of supporting documentation.

Cooperative Governance and Traditional Affairs (Cogta) Minister Pravin Gordhan pointed out that the reported irregular expenditure did not indicate extensive fraud and corruption.

However, he cautioned that there were some cases of corruption and plans were under way to explore new ways of strengthening enforcement and discouraging “such behaviour”.

Unauthorised expenditure had reduced from R10.1-billion in 2012 to R9.1-billion in 2013.

The total expenditure of all audited municipalities during the year under review comprised R62-billion for employment costs, R166-billion for goods and services and R40-billion in capital expenditure.

CONSULTANTS NOT DELIVERING

While many municipalities use internal services to assist with the preparation of financial statements, private consultancy fees are becoming a cause for concern, and 77% of the municipalities spent nearly R700-million on assorted consultants.

National Treasury and Cogta were examining the option of introducing a centralised procurement structure for accounting services.

 Makwetu on Wednesday raised the alarm, stating that more than 80% of the municipalities were unable to produce financial statements that were free of material misstatements, with 110 of the auditees receiving financially unqualified opinions only because they had corrected all the material misstatements identified during the auditing process.

Cogta and Treasury aimed to instil accountability of service providers through, besides others, the withholding of payment to outside consultants failing to present comprehensive, accurate work, while the South African Local Government Association planned to, this week, launch a new programme aimed at capacitating the municipalities and developing the required skills internally to limit the risk inherent in using external consultants.

IMPROVING AUDITS
While the most common material noncompliance findings, identified at more than 60% of the municipalities, were on the quality of the submitted financial statements, supply chain management and the prevention of unauthorised, irregular and fruitless and wasteful expenditure, overall, the performance of South Africa’s municipalities and municipal entities had registered slight improvements over the past five years.

Sixty-three municipalities had improved their audit outcomes during 2012/13, while only 25 of the audited municipalities had deteriorated.

The number of financially unqualified opinions with no findings, or the so-called “clean audit”, which showed a municipality had “impeccable levels of discipline and oversight” in its financial management and operational activities, increased to 30, accounting for 9% of the audited municipalities.

This compared favourably with the achievement of clean audits for 16 entities, accounting for 5% overall, during the 2011/12 financial year, and four municipalities during 2008/9.

Nearly 140, or 41%, received financially unqualified opinions with findings, meaning that the financial reporting was solid, but lacked transparency or failed to follow required processes.

While 60% of the municipalities were heading in the “right direction”, Gordhan stated that more needed to be done to improve the performance of lagging municipalities.

A critical number of municipalities were still struggling, with 25% of auditees receiving “qualified” audit opinions, which meant they were unable to adequately and accurately account for all the financial effects of the transactions and activities they conducted.

Eight municipalities had registered adverse audit opinions, performing similarly to those with qualified opinions, but demonstrating “extreme” levels of lack of accountability for financial statements.

Another 59 municipalities had received disclaimed audit opinions.

“These auditees were unable to provide the required evidence to enable the auditors to perform tests to satisfy themselves regarding the fair presentation of financial statements,” Makwetu said.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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