Auditor-General continues to push for accountability

Auditor-General (AG) Tsakani Maluleke presented her first general report on the national and provincial audit outcomes for the financial year ended March 31, 2020 on Wednesday.

Irregular expenditure for the year was R54.34 billion (2019: R66.90 billion), unauthorised expenditure R18.12 billion (2019: R1.65 billion), and fruitless and wasteful expenditure R2.39 billion (2019: R2.36 billion). These figures exclude Transnet and Eskom, as they are not audited by the Auditor-General South Africa (AGSA) .

Read: Slight improvement in SOE audits is ‘nothing to celebrate’

Standout issues

• Only 26% of auditees (111) received a clean audit;

• 69% materially did not comply with legislation;

• Only 36% fully complied with supply chain management;

• Irregular expenditure amounted to R54.34 billion; there was however missing or incomplete information so the full amount is not known;

• 21 auditees received disclaimed or adverse opinions on their financial statements;

• The financial health of departments “continued to be alarming” with many problems, including insufficient funds to settle liabilities and 87% of departments having claims against them totalling R147.12 billion … “continuing [the] trend of using next year’s budget to pay current year’s expenses and claims”;

• 55 (29%) public entities incurred expenditure in excess of revenue; and

• 44% of public entities do not comply with supply chain management legislation.

There is a lack of accountability and consequence management, weaknesses in basic internal controls, and a general tolerance for lack of compliance and transgressions.

Material irregularities (MIs)

Irregular expenditure doesn’t necessarily result in a financial loss. However, where it does, and the financial loss is material, this would constitute a material irregularity.

The office of the AG has the mandate to report on MIs, conduct a follow up, and can take binding remedial action if its recommendations are not implemented.

The AG can now issue a certificate of debt to the accounting officer for the failure to implement remedial action if financial loss was suffered.

By February 28, 2021, the AG had provided notifications of 75 MIs which mainly related to non-compliance with legislation. The material financial loss associated with these MIs is estimated to be R6.9 billion.

Four main categories of material irregularities were identified:

• Procurement: for example, overpricing of goods and services, and the supplier not delivering.

• Expenditure management: such as overpayment for goods, goods of poor quality received, and late payment resulting in penalties.

• Revenue management: for example, revenue not billed, and debt not recovered.

• Resource management: no benefit derived from cost, and assets not being safeguarded (resulting in theft).

The AG in her presentation remarked that there are still public officials who are doing business with government.

Provincial health departments

Medical health claims against provincial health departments were flagged. Each provincial department has a health department.

In 2019/20, total claims against provincial health departments amounted to R105.83 billion. This amount is staggering.

Health departments do not budget for medical negligence claims, hence, paying out these claims puts them in the red.

But the fact that there are so many claims should surely be investigated by government?

Read: Weak systems led to Covid-19 service delivery failures (Dec 2020)

Provincial health and education departments incurred R2.37 billion (79%) in unauthorised expenditure. (There isn’t a separate figure for provincial health departments).

State-owned entities (SOEs)

AGSA does not audit all the SOEs, and has flagged a number of auditees that are in financial stress.

The SOEs that disclosed uncertainty about their going concern status were: PetroSA, the SABC, and three Denel subsidiaries (Densecure, Denel Aerostructures and Denel Vehicle Systems).

“Based on the financial statements of the SOEs where the audits are outstanding, such disclosures were also made by the Independent Development Trust, Denel, the Land and Agricultural Development Bank of South Africa, Pelchem, and the South African Nuclear Energy Corporation.”

Read: Denel hunts for cash with debts falling due (Mar 11)

AGSA considers the following SOEs to be in good financial health (as it did not identify many negative financial indicators): “ … the Development Bank of Southern Africa, the Armaments Corporation of South Africa, the Central Energy Fund, Airports Company South Africa, Land Bank Life Insurance, the South African Agency for Promotion of Petroleum Exploration and Exploitation, and SFF Association NPC.”

The following SOEs had deficits at year-end: PetroSA R5.5 million, the SABC R511 million, the Central Energy Fund R334 million, Komatiland Forests R115 million, Land Bank Life Insurance R44 million, and Land Bank Insurance R39 million.

Read: SABC sheds over 20% of its workforce (Mar 30)

As at March 31, 2020, government had provided financial guarantees amounting to R445 billion to 11 SOEs (including four not audited by AGSA). This included R350 billion issued to Eskom. The total government exposure relating to these guarantees amounted to R374 billion; in other words, these guarantees have been used to obtain further financing.

For the sake of completeness, government guarantees per the 2021/2022 budget had increased to R581 billion, including:

• Eskom: R350 billion
• Sanral (SA National Roads Agency: R37.9 billion
• Trans Caledon Tunnel Authority: R43 billion
• South African Airways: R19.1 billion,
• Land and Agricultural Bank of SA: R9.6 billion
• Development Bank of Southern Africa: R10.2 billion, and
• Denel: R5.9 billion.

A number of other SOEs have “serious financial health concerns”, including the Road Accident Fund and the South African National Roads Agency.

Leadership must take urgent action

AGSA is fully committed to implementing its enhanced powers without fear, favour or prejudice.

However, the complete eradication of the illicit public official-government business partnership, consequence management and accountability are key to transforming the public sector.

Absolutely crucial though, is that the provincial leadership and provincial legislatures pay attention to improving the audit outcomes in the provinces which are detailed in the report.

Leadership across the provinces should take decisive action.

Read: Auditor-General speaking into the void on local government corruption (Jul 2020)