The financial position of just over a quarter of the 257 municipalities in the country is so dire that there is significant doubt that they will be able to continue meeting their obligations in the near future, auditor-general Tsakani Maluleke said on Wednesday after tabling the consolidated general report on the local government audit outcomes for the 2019/2020 financial year in parliament.
The report showed a deterioration in the audit results of local government with the number of clean audits declining.
“Almost half of the municipalities are exhibiting indicators of financial strain, including low debt recovery, an inability to pay creditors and operating deficits. The impact of municipal creditors not being paid is well known — it severely affects Eskom and the water boards, but is even more devastating for smaller suppliers,” Maluleke said in a statement. “The progressive and sustainable improvements required to prevent accountability failures, or to deal with them appropriately when they do occur, do not exist.”
Also putting severe pressure on local government finances were nonpayment by municipal debtors, poor budgeting practices and ineffective financial management.
The number of clean municipal audits declined from 33 to 27, while fruitless and wasteful expenditure amounted to R3.47bn, a significant part of which was the loss of billions of rand because of interest and penalties.
Irregular expenditure amounted to R26bn with widespread non-compliance with supply chain management legislation being a significant contributor. The actual amount of irregular expenditure is likely to be even higher, Maluleke noted, as the financial statements of more than a third of municipalities were qualified because of the incompleteness of their disclosure of irregular expenditure or because they were still investigating the full extent of it.
The auditor-general was also unable to audit contracts worth R1.43bn as municipalities did not provide the required documentation and evidence to support the procurement processes.
Maluleke noted that municipalities had done nothing to implement the auditor-general’s recommendations in the previous year’s report, such as introducing preventive controls. She expressed concern that after all the years of the auditor-general reporting shortcomings and making recommendations, “municipalities have still not mastered the basics of financial reporting, with only 28% being able to submit quality financial statements for audit purposes”.
By June 4 2021, 22 municipalities had received disclaimers on their financial statements — the worst audit outcome, which signifies that there was not sufficient financial information available for a proper audit to be conducted.
Another four municipalities that had disclaimed opinions in the previous year have not yet submitted their financial statements for auditing. At least five of the disclaimed municipalities had been under administration for two years or more but poor performance persisted, raising doubts about the effectiveness of the administration process.
Municipalities spent more than R5bn on financial reporting based on the salary cost of finance units and the cost of consultants, which accounted for 18% of the total cost. Only 2% of municipalities used consultants to bridge the vacancy gap, while others paid consultants even though their finance units were well capacitated. What was equally concerning to Maluleke was that the use of consultants was not necessarily effective.
“Sixty-four percent of municipalities did not provide adequate records, appointed consultants too late or did not manage the consultants’ work properly to benefit from their appointment — effectively outsourcing responsibilities,” the statement said.
By June 11 2021, notifications for 96 material irregularities against municipalities had been issued in terms of the Public Audit Act, which requires municipal managers to clearly state what caused the material irregularity and commit themselves to taking action to prevent any further harm and to ensure that there are consequences for those responsible. If they do not respond appropriately, or do not implement the actions to which they have committed, remedial action will be taken. This can include holding the municipal managers liable for any financial loss incurred.
Of the 96 material irregularities notified, 75 related to non-compliance with legislation that resulted, or is likely to result, in a material financial loss amounting to an estimated R2bn. The material irregularities emerged in four key areas: procurement and payments, interest and penalties, revenue management, and investments and assets.
“They related to some of the basic disciplines and processes that should be in place, such as procuring at the best price, paying only for what was received, making payments on time, recovering the revenue owed to the state and safeguarding assets.
“Good preventive controls would have made all the difference in preventing or detecting these matters before they became so material,” Maluleke said.
The municipal managers of disclaimed municipalities had been notified of 21 material irregularities.
Maluleke noted that municipalities’ performance reporting was even worse than their financial reporting.
“It is not surprising that citizens experience poor service delivery from municipalities if less than a quarter of them could provide us with quality performance reports to audit. After addressing our findings, just under half of the municipalities managed to publish performance information that was reliable. We once again observed widespread non-compliance with legislation and reported material non-compliance at 86% of municipalities.”
At year end, the cumulative amount of irregular expenditure by local government that had not been dealt with stood at R79.22bn, which Maluleke’s statement said demonstrated that municipalities did not implement consequence management.
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