Auditor-general calls for action as public finance audit outcomes worsen

The 2018/2019 national and provincial audit outcomes report released on Wednesday marks the fifth consecutive year of regression in accountability for government spending and compliance with legislation.

As a result of the continuously “disappointing” audit results, Auditor-General (AG) Kimi Makwetu themed the latest results “Act now on accountability” – a call to political leaders, accounting officers and oversight structures to deal effectively with the outcomes of the recent audits and to establish and adhere to the internal controls and supply chain processes.

Little to no improvement 

Of the 383 departments and entities whose audits were completed by the time of the cut-off date, only 26% or 100 entities received clean audits.

Irregular expenditure, where there was no compliance with legislation or procurement processes in the lead-up to a payment, increased to R62.6 billion from R51 billion in the previous year.

Fruitless and wasteful expenditure, which refers to money that is expected to be lost to government, also continued to rise, with 223 auditees losing 849 million in 2018/2019. When one takes the full five years of little to no improvement into account, the amount of fruitless and wasteful expenditure sits at R4.6 billion.

“Government cannot afford to lose money because of poor decision-making, neglect or inefficiencies, however, we continue to see a rise in fruitless and wasteful expenditure,” said Makwetu. 

The lack of consequences and slow implementation of the recommendations by the office of the AG were again root causes of these deteriorating outcomes, with Makwetu saying it is indicative of the fact that “the control environment of yesteryears is almost similar in the current year”.

The recommendations speak to the basic responsibilities of accounting officers and authorities, and don’t require more than what they need to do in terms of the Public Finance Management Act and other legislation. But those responsible for governance at the majority of these government departments and the 14 state-owned entities [SOEs]  were either slow to implement or completely disregarded the recommendations, said Makwetu.

Downward spiral

Makwetu said departments were struggling to balance their books and their financial health was “continuing on a downward spiral”. Out of 15 departments that were identified as needing urgent intervention, 13 “disclosed in their financial statements that they would find it difficult to continue to operate”. 

SOEs were in no better shape, with Makwetu stating that they “require urgent attention”. None of the SOEs had clean audit opinions and their financial health “remained under significant pressure”.

The AG’s reports state that entities – including the SABC (which recently received a R3.2 billion bailout from government), Denel (which received a R1.8 billion bailout), the Petroleum and Gas Corporation, South African Express Airways and the SA Post Office – had “material uncertainties” as to whether they would be able to operate without future financial assistance. 

“Considering also that most of the SOEs where audits had not yet been completed are facing going concern challenges, the financial outlook for most SOEs is bleak,” the report states. 

What’s worse is the 10 departments that are responsible for overseeing the governance and financial management of SOEs were not consistent in their mandate and “most did not adequately plan for their oversight function and report thereon in their performance reports”.

More bite 

The consolidated national and provincial audit outcomes report is the first one since the AG’s extended powers came into effect as a result of amendments to the Public Audit Act.

The new powers allow the office of the AG to report on material irregularities such as theft, fraud or breach of fiduciary duties, and to take further action when accounting officers and authorities fail to act on these irregularities.  

The AG now has the power to refer issues of material irregularities to officials, make binding recommendations, and issue certificates of debt for failure to implement remedial action if financial loss was involved.

“You will recall in the past we would issue the report with the management letter and recommendations and persuade, almost to no end, an accounting officer to please make sure they implement these recommendations,” said Makwetu, adding that in some of the cases this has gone on for half a decade.

The AG had identified 16 departments and entities out of 432 auditees to pilot the material irregularities process, and was able to uncover R2.81 billion in financial losses arising from material irregularities at eight of these auditees. The bulk of this, R2.2 billion, is a result of the irregular purchase of locomotives by the Passenger Rail Authority of South Africa. 

“We have not made an estimation as what this could have meant had we selected everyone – it would be difficult, but what it does say is that there is no shortage of material irregularities in this public financial management system,” said Makwetu.

“If you can find them among eight, having audited 432 institutions, you can imagine what you would have come out with.”

Prevention better than cure

Makwetu said that having gained experience and strengthened the office’s forensic capacity to conduct these audits, the number of entities that will be subjected to this material irregularity process will be increased to 89 for the 2019/2020 financial year, which ends in March. 

Makwetu again emphasised the need for preventative controls where a culture of compliance with regulatory and legal processes is institutionalised to prevent financial losses from happening.

“My message over the years has been that a strong control environment and processes are key to achieving strategic objectives, addressing risks, ensuring compliance with legislation, and managing public funds to the benefit of citizens,” said Makwetu. 

“I acknowledge that it takes time to institutionalise good preventative controls, especially in large and complex environments, but the accounting officers and authorities need to build their institutions towards accomplishing this in a deliberate manner.”