Lack of compliance by worst performing municipalities

Auditor-General Kimi Makwetu (Netwerk24)
Auditor-General Kimi Makwetu (Netwerk24)

Johannesburg – The poorest audit results for 2015/16 were delivered by the Free State, North West and Northern Cape, according to the auditor general’s latest local government report.

The report was released on Wednesday. Auditor general Kimi Makwetu said that there were marginal improvements from the previous year.

The auditor general assessed 263 municipalities and 51 municipal entities. The findings showed only 49 municipalities achieved clean audits, while 25 municipalities received disclaimed opinions. The best performing provinces, with the most clean audits include the Western Cape (80%), KwaZulu-Natal (18%) and the Eastern Cape (16%).

The Eastern Cape, Mpumalanga and Limpopo showed improvements. The Gauteng province received no qualified opinions, which was commendable, said Makwetu. However, only the Midvaal municipality, which is run by the Democratic Alliance (DA), achieved a clean audit status in the province.

READ: Only nine new municipalities out of 263 achieved clean audits - AG report

The North West, Northern Cape and Free State were dragged down by the number of municipalities with disclaimed and adverse opinions as well as outstanding audits.

“There was little improvement in these provinces from the previous year’s outlook,” said Makwetu.

Free State

The steady improvement in the province, such as reduced disclaimed opinions in 2014/15, was outweighed by the regressions of some municipalities during 2015/16. “At the municipalities that regressed, the leadership failed to continuously strengthen the foundation of internal controls and the monitoring thereof,” said the report.

Examples include instability in municipal management and chief financial officer positions, failing to finalise and submit documents for the audit process and poor quality of financial statements. Further the province’s leadership failed to make progress to achieve a clean audit process due to weak internal controls related to compliance with legislation, the report showed.

Poor compliance with supply chain management resulted in irregular expenditure of R361m, this could be higher as not all amounts were disclosed, the report indicated. Disregard for procurement processes by the “administrative and political leadership” combined with limited consequences for transgressions creates an environment conducive for the abuse of state funds, the report explained.

The municipality’s financial health deteriorated, with net current liabilities increasing from R1.4bn to R1.9bn.

Northern Cape

Audit outcomes for this province stagnated over the past three years, the report revealed. Municipalities struggled to correctly measure and disclose property, infrastructure and equipment, receivables and revenue in financial statements. Most municipalities are still reliant on consultants and external auditors to submit quality financial statements.

The cost of using these consultants came to R38m, down from R42m recorded in 2014/15. It was concerning that 75% out of 24 municipalities which used consultants had material misstatements, said the report.

Only 84% of municipalities submitted statements on time, versus 88% the previous year. Further, compliance with legislation remained a challenge. Most (97%) of the R287m irregular expenditure incurred was attributed to lack in compliance with supply chain management regulations.

The financial viability of 50% of municipalities are of concern. By year-end, 73% of municipalities were in a net liability position. Outstanding debt from consumers are impacting the municipalities’ ability to pay creditors.

Only 31% of municipalities had good governance controls in place. There were also vacancies in key leadership positions such as municipal managers, chief financial officers and a head for the supply chain management.

North West

Only four municipalities received unqualified audit opinions with findings. However no municipality achieved a clean audit, indicating a lack of accountability by municipal management and other key players, the report said.

“The slow response by the political leadership to address the underlying root causes of continued poor audit outcomes will have to be countered with decisive action to hold officials accountable and implement consequence management for poor performance.”

Poor quality of financial statements submitted are of concern. Municipalities rely on financial consultants, spending close to R126.9m, however all of the financial statements had material misstatements, said the report. 

There was also a lack of compliance with legislation. Failure to comply with supply chain management regulations resulted in R2.5bn irregular expenditure. Unauthorised expenditure, as a result of overspending on budgets came to R2bn.

Movements in political leadership as a result of the local government elections in 2016 have indicated intentions to enforce improved controls and increase accountability. 

SUBSCRIBE FOR FREE UPDATE: Get Fin24's top morning business news and opinions in your inbox

Read Fin24's top stories trending on Twitter:

Brent Crude
All Share
Top 40
Financial 15
Industrial 25
Resource 10
All JSE data delayed by at least 15 minutes morningstar logo
Company Snapshot
Voting Booth
Please select an option Oops! Something went wrong, please try again later.
I'm not really directly affected
18% - 1591 votes
I am taking a hit, but should be able to recover in the next year
23% - 2083 votes
My finances have been devastated
35% - 3123 votes
It's still too early to know what the full effect will be
25% - 2255 votes