AG: Just one clean audit in KZN

2019-06-27 15:00

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Amid a climate of impunity for officials who flout legislation, only one municipality out of KwaZulu-Natal’s 54 managed to achieve a clean audit.

This was revealed on Wednesday as Auditor-General (AG) Kimi Makwetu warned that municipalities will continue to receive poor audits if they carry on ignoring his office’s accountability advice.

Makwetu expressed his frustrations during the press briefing where he flagged the lack of accountability as a major cause for the nationwide deterioration in the quality of municipal audit results.

This advice included addressing the lack of consequences for transgressions and irregularities.

“There were largely no consequences for those who flouted existing legislation,” he said.

Of the 257 municipalities audited for the 2017/18 financial year, the outcomes of 63 regressed, while those of 22 improved.

Only 18 municipalities managed to produce quality financial statements and performance reports, and complied with all key legislation, thereby receiving clean audits.

This has dropped from the 33 municipalities that received clean audits the previous year.

Audit outcomes in KwaZulu-Natal continued to deteriorate in the second year following the 2016 election and the appointment of the new political and administrative leadership in municipalities.

Only Bergville’s Okhahlamba Local Municipality received a clean audit in the province.

“We again identified and reported that the leadership along with management was slow to respond, or did not respond at all, to the early warning risk signals and recommendations that we regularly communicated during our engagements. Vital internal controls were ignored,” Makwetu said of KZN municipalities.

He blamed the decline on the persistent control and monitoring failures which resulted in the “glaring” poor management of the municipalities’ finances.

“Evidence of this is largely incomplete projects, unsupervised projects, lack of maintenance of significant service delivery infrastructure and haphazard road maintenance projects and infrastructure.”

Makwetu said some reports were not even credible enough for the council or the public to use.

“Not only did the unqualified opinions on the financial statements decrease from 61% to only 51%, but the quality of the financial statements provided to us for auditing was even worse than in the previous year.”

Only 19% of the municipalities produced financial reports without material misstatements.

The level of non-compliance with the key governance laws — including those related to the procurement of goods and services — was the highest since 2011/12 as it increased to 92% from 85% the previous year.

Irregular expenditure remained high, but decreased from R29,7 billion to R25,2 billion after the record highs in 2016/17.

With regards to consequence management, Makwetu said 74% of the municipalities did not adequately follow up allegations of financial and supply chain management misconduct and fraud.

At least 45% of the municipalities did not have all the required mechanisms for reporting and investigating transgressions or possible fraud.

He added that sufficient steps were not taken to recover, write off, approve or condone unauthorised, irregular and fruitless and wasteful expenditure as required by legislation.

“As a result, the year-end balance of irregular expenditure that had accumulated over many years and had not been dealt with totalled R71,1 billion, while that of unauthorised expenditure was R46,2 billion and that of fruitless and wasteful expenditure was R4,5 billion.”

Makwetu said the poor financial health of municipalities was the reason that some struggled to balance their books.

He added that the inability to collect debt from consumers was also to blame for the ailing municipalities as some struggled to pay creditors, including water service providers and Eskom.

Makwetu said the shortcomings in development and maintenance of infrastructure also frustrated the municipalities’ ability to protect and increase their revenue.

“It is not unexpected then, that 39% of the municipalities reported water losses of more than 30%, resulting in an overall loss of R2,6 billion,” he added.

Reasons for accountability failures

The AG’s report highlighted the following as some of the major contributors to the accountability failures and the regression in audit outcomes:

- Leadership, senior management and officials failed to develop, implement and monitor effective systems and processes of internal control, including corrective action.

- Vacancies and instability in key positions slowed down systematic and disciplined improvements and affected the ability of councils to hold individuals accountable.

- Key officials lacking appropriate skills and competencies in financial reporting led to over-reliance on consultants and had a negative impact on financial planning, record keeping and reporting.

- Inadequate or a lack of review and monitoring processes as well as officials not being held accountable for poor performance.

- Officials lacking the necessary skills, competencies or appropriate understanding of the management and reporting requirements for performance information.

- Leadership and municipal officials deliberately or negligently ignored their duties and disobeyed legislation, which was not decisively dealt with through mechanisms for enforcing consequences for transgressions.

The AG highlighted the role of leadership in addressing the deteriorating accountability in municipalities.

He said the current governance relapses besetting local government could only be turned around if leadership was to take the lead in the drive towards wholesale clean administration in the public sector.

“The leadership sets the tone at the top at any organisation. If an organisation’s leaders are unethical; have a disregard for governance, compliance and control; and are not committed to transparency and accountability, it will filter through to the lower levels of the organisation.

“Inevitably, a culture of poor discipline, impunity and non-delivery will develop, leading to the collapse of the organisation,” said Makwetu.

Increasingly difficult environment for auditing

Makwetu raised his concern about the continued difficulties facing his audit teams when conducting their audit work.

“The audit environment became more hostile with increased contestation of audit findings and pushbacks whereby our audit processes and the motives of our audit teams were questioned,” said the AG.

He also pointed out that in some municipalities, pressure was placed on audit teams to change conclusions purely to avoid negative audit outcomes or the disclosure of irregular expenditure, without sufficient grounds.

“Instances of threats to and intimidation of our auditors were also experienced in most of the provinces.”

KZN is one of the provinces where the AG’s team faced intimidation and threats, as well as pushbacks and hostility during the execution and reporting phases of audits, as the leadership and management were under pressure to achieve better audit outcomes.

He also disclosed that the persistent culture of not responding to audit recommendations not only affected his office, but has now extended to other accountability role players within municipalities. These include internal audit units, audit committees and municipal public accounts committees.

Read more on:    audits
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