November 14, 2018

A-G’s report on this year’s audit shows sharp decline in legal compliance

A polite disagreement arose only minutes after the end of Auditor-General Kimi Makwetu’s presentation on South Africa’s national and provincial audit outcomes for the 2017/18 financial year. It followed some moments of disbelieving silence by members of the Standing Committee on Public Accounts (Scopa) and the Standing Committee on Appropriations who attended the joint meeting where the AG’s findings on the most recent state audit of government departments and entities were revealed.

A-G Makwetu had told a fairly stunned joint Committee meeting that his department put irregular state spending at R50bn for the 2017/2018 financial year.

The DA’s Davis Ross was up first. He said the DA has done some analysis of its own, and his party’s calculations showed that irregular spending for the year was closer to R72bn. He respectfully asked if the A-G could provide clarification on this discrepancy.

The A-G’s explanation is interesting. To avoid any inaccurate assumptions his calculation did not take into account those government departments and state entities that hadn’t submitted their figures by the cut-off date. Given that there were many late submissions “Makwetu conceded that irregular spending “could be substantially higher. But we couldn’t make assumptions so left [those] out. It’s not reliable.”

South Africa does not know the full extent of its irregular expenditure.

However, that then means that neither can the audit report be relied upon, as long as the total excludes the figures from SAA, Denel, SA Express or many other smaller entities. Even the audits of the departments of health, social development and energy were outstanding at the time his report was compiled he said. His figures are “based on signed statutory accounts. We don’t make assumptions.”

What this means is that South Africa does not know the full extent of its irregular expenditure. What is known, according to the A-G report, is that almost 84% of irregular expenditure is caused by non compliance with supply chain management (SCM) regulations that are spelled out in full in the Public Finance and Management Act (PFMA), which is the bible covering anything to do with finances in national and provincial government. It sets out the procedures for efficient and effective management of all revenue, expenditure, assets and liabilities, and makes clear the duties and responsibilities of government officials in charge of finances.

Irregular spending does not necessarily amount to expenses that are unaccounted for. What is considered irregular expenditure is spending in contravention of the law. So not only is the extent of irregular expenditure largely unknown, and could be way over the R50bn that the A-G has signed off, it is also in breach of the law.

The A-G said as much in his presentation. “The biggest portion of irregular expenditure, the buying process and the procurement of goods and services, is not always adhered to.”

The three worst offenders in this breach of SCM procedure turn out to be the most obvious requirements that a junior finance officer would know about. The most common among SCM offences is the failure to get three written quotations, which accounts for 27% of failure to comply with SCM procedures. Another 23% or almost a quarter of procurement cases fail to invite competitive bidding, and in another 19% the use of preferential point scoring is not applied or is applied incorrectly.

The other flaw in correctly implementing procurement procedures arises from extensive spending through multi-year contracts. The presentation made by the A-G suggested that irregular expenditure on multi-year contracts could be reduced through investigations that could lead to either condonement or cancellation of irregularly awarded contracts.

The report ‘named and shamed’ the ten worst offenders at national and provincial levels who were responsible for 52% of total irregular expenditure. These included the national department of Water and Sanitation as well as one of its entities, the Water Trading Entity, the national department of Correctional Services, the KwaZulu-Natal transport department as well as its health department, Gauteng Province’s roads and transport department, health department and department of human settlements, to name a few.

Altogether 434 government departments and enterprises were audited by 31 August. Makwetu reported that of these only 25% received clean audits compared to last year’s 34% of clean audits.

He said the number of clean audits this year had reached an “all-time low”, amounting to only 99 clean audits, where the previous year there had been 129. Clean audits for departments regressed from 47 to 40 and for public entities from 82 to 59.

Even more significant was the steep hike in departments/entities that failed to submit their audited reports in time. “Outstanding audits used to be the exception. There would be two or three, and there were specific reasons for many of these,” said Makwetu. Yet this year the number reached 41.

“That is 41 entities that have not been able to come forth and submit or there were delays because they were either contesting certain findings made in their audit”.

Makwetu attributed the dramatic decline in the 2017/18 audit report to poor financial management, lack of oversight and weak consequences for poor performance.

He said he could accept departments with legitimate questions that needed resolution before their audit could be completed, but this he described as “contesting for the sake of contesting” because the audit results had simply been unavailable in time or questionable.

Ultimately, he said, poor audits are the result of “years of deficiencies in financial management and in financial control [that] have almost resulted in a situation where [departments and entities] are now in a financially bad position where they are not able to pay their providers on time, their costs and expenses are starting to exceed the amount of revenue they can generate, and their ability to collect has declined.

“Some of the late submissions were [from] departments or entities that could not accept their financial health risks ... and they are trying at this late stage to see if there is anything they can do to fix that ... or they are waiting for someone to help them either with some guarantees or some injection that will allow them to operate as a going concern.”

The Public Audit Amendment Bill, which is currently before the President for consideration, is intended to give the A-G greater powers to act against those responsible for wasting public funds and non-compliance with the law.

A Committee member said to Makwetu, partly in jest: “your Bill is waiting to be signed into law so some of the things you lament about will no longer be matters of lamentation. We hope that the President will sign it into law so that it will enhance your work.”

But the A-G was very quick to make it plain that without compliance with the PFMA, the A-G could not do much more. He was not being capacitated to make new laws. The Public Audit Amendment Bill “can only create capacity to make the existing laws work,” the A-G said.

Moira Levy

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  • Author: Moira Levy
Last modified on Monday, 22 October 2018 23:05

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