Auditor-General slaps remedial action notices on four public sector entities

The office of the Auditor-General (AG) has started using its new powers under amendments to the Public Audit Act to slap remedial action notices on four public sector entities, including the Passenger Rail Agency of SA (Prasa), the Department of Defence, the Free State Department of Human Settlements, and the South African Post Office.

This is revealed in the latest (2020/21) Audit Outcomes Report for national and provincial departments, tabled by AG Tsakani Maluleke in parliament on Wednesday.

Amendments to the Public Audit Act empower the AG to take binding remedial action to quantify and recover financial losses within certain time frames, failing which a certificate of debt is issued to the responsible accounting officer.

It is then up to the relevant minister, provincial member of the executive council (MEC) or the municipal council to recover the loss from the accounting officer or authority.

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The two departments issued with directives (Defence and Free State Human Settlements) have to now deal with the financial loss by a stipulated date. If not addressed, it “could result in a certificate of debt being issued,” says the AG report.

“We referred three material irregularities for investigation to the Hawks – one each for the Department of Defence, the South African Post Office and the Free State Development Corporation.”

It adds: “We also included recommendations in the audit report of the Free State Development Corporation to resolve certain aspects of the material irregularity that will not be dealt with by the Hawks.”

By October 2021, the AG was dealing with 121 material irregularities with an estimated value of R11.9 billion.

The amended Public Audit Act, which came into effect in April 2019, requires the AG to do more than simply report on the audit outcomes of public sector entities by giving it enforcement teeth.

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The primary tool for dealing with material irregularities is the remedial action notice, followed by the certificate of debt issued to the responsible accounting officer or authority.

Of the 425 public entities covered in the report, 115 achieved clean audits, representing 19% of the expenditure budget of R1.9 trillion managed by national and provincial governments. A further 31 auditees are very close to achieving a clean audit, adds the report.

Maluleke said one of the encouraging highlights from the report was that 62 auditees retained their clean audit status from the previous year.

While a clean audit is not always a good indicator of good service delivery, there is evidence that those with clean audits have the necessary controls and systems in place to provide good service delivery.

“When an auditee receives a clean audit, it means that their financial statements and performance report give a transparent, honest and credible account of their achievements, failures, problems and risks. In other words, these accountability reports present the true picture of that auditee, whether good or bad,” the report notes.

“This enables everyone with an interest in the auditee – particularly those who need to oversee the auditee’s performance and provide support for it to succeed – to judge how the auditee is doing and to take action where necessary. It also means that the auditee complied with the important legislation that applies to it and, where slip-ups did occur, they were rare or not material,” it adds.

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The audit outcomes of the key service delivery departments within the health, education, human settlements and public works sectors were poor when compared to other departments, and improvements were much slower.

These departments are responsible for almost a third of the expenditure budget and are instrumental in managing infrastructure and delivering essential services.

Poor quality financial statements

The AG berates those public entities that were late in submitting their financial statements which, she said, are crucial in establishing accountability and transparency.

More than half of public sector auditees submitted poor quality financial statements for auditing. Misstatements picked up by the AG vastly increased the number of auditees with unqualified audit opinions.

Without the AG’s intervention, just 182 entities would have received unqualified opinions, as opposed to the 302 that ultimately received this outcome.

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Twelve public entities received disclaimed opinions in 2020/21, including the South African Nuclear Energy Corporation, the National Skills Fund, four technical and vocational education and training colleges, and both the Free State and North West development corporations. All 12 of these public entities also received disclaimed opinions in 2019/20.

Another nine public entities that had previously received disclaimed opinions had either not submitted their financial statements for auditing by the cut-off date for this report, or had submitted them so late that the audit was still in progress.

SAA had not submitted financial statements since 2017, before it entered business rescue.

Unauthorised expenditure totalled R3.21 billion, and almost a third of departments ended the year in deficit, which came to a combined R41.7 billion. More than 60% of departments did not have enough cash to settle liabilities at year-end, with cash shortfalls totalling R33.3 billion.

The key service delivery departments have the poorest financial health of all, accounting for 90% of unauthorised expenditure and deficits totalling R15.6 billion. Five provincial health departments accounted for much of these deficits and paying out medical negligence claims of R1.76 billion – quite apart from unpaid claims of R124 billion.

State-owned enterprises are in serious financial difficulty, says the report.

Apart from SAA, Denel and SA Express Airways, the South African Broadcasting Corporation and the South African Nuclear Energy Corporation were uncertain about their going concern status.

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“We expect to see more [of] such disclosures at some of the state-owned enterprises with outstanding audits,” according to the AG.

“Some state-owned enterprises continued to ask for – and receive – funding from government, diverting funds intended for primary service delivery,” she added.

To cap this off, 69% of auditees did not materially comply with legislation, compared with 71% the previous year. This is not to say there were not improvements in audit outcomes. There were, but it’s clear from this report that we’re a long way from a properly accountable public sector.