Half of municipalities hopelessly far off clean audit target

Karen Heese and Kevin Allan

SOUTH Africa is understandably horrified by the latest auditor-general report on local government audits.

The figures that have been widely circulated are the finding that only 13, or a paltry 5 percent, of municipalities received a clean audit for the 2010/11 financial year, and unauthorised, irregular, fruitless and wasteful expenditure increased from R6 billion in 2009/10 to more than R10bn in 2010/11.

While such misspending may not point to outright corruption, the disconcerting sense that local government’s not insubstantial budgets are being neither properly nor judicially managed pervades most conversations about the results.

Of further concern is none of the nine metros, not even the previously proud Cape Town, was on the list of clean auditees, and only KwaZulu-Natal, Limpopo, Mpumalanga and the Western Cape can boast having municipalities that received clean audits – a very patchy outcome indeed. With policy focus switching towards cities as major delivery agents for the local government’s important basic service mandate, including housing in some instances, it is of concern that the list of 13 municipalities making the cut are not, by and large, the biggest or best known.

Of course, an important argument in local government circles should be considered before condemning the remaining 95 percent of local government – policy focus should, possibly, at least in the interim, shift to improving audit outcomes, aiming to achieve at the least a financially unqualified audit with outstanding issues (which 45 percent or 156 municipalities did this year), an important intermediate goal while internal controls are bolstered.

Promising a wary public that within three years all municipalities will have clean audits while changing nothing on the ground – as previous minister of co-operative governance Sicelo Shiceka undertook in 2008 in his fantastically ambitious Operation Clean Audit – is pointless.

Compromise, sadly, needs to be the order of the day, with steady work towards rather longer-term goals. For SA’s larger municipalities this second-best focus takes into account they have become vastly complex entities, and despite their difficulty in attaining audits, financiers and the bond market consider them credible enough institutions to support multibillion-rand loans.

Nonetheless, for the auditor-general such a lowering of the bar will most likely be a bitter concession that, bolstering internal controls, needs to take place over several years and that dramatic results are not in the offing in the short term, despite hard work by his office to engage municipalities and address audit concerns.

But even this lower standard fails to detract from the big headache of the 13 percent of municipalities that did not get their act together to submit financial statements in time, and the 37 percent that received either financially qualified opinions, or worse, adverse opinions or disclaimers.

Therefore, half of municipalities are hopelessly far off the ambitious 2014 universal clean audit target set by Operation Clean Audit in 2008.

Clearly, national government programmes are falling short of this important goal, but why?

While Auditor-General Terence Nombembe described outcomes as “static”, the regression in irregular expenditure points to inadequate financial control affecting 70 percent of municipalities.

There are two key reasons for this: first, because of incompetence, an issue Nombembe elaborated on in alarming detail – he found 72 percent of auditees wanting in capacity – and second, due to a lack of political commitment to ensure sound internal controls, especially regarding supply-chain management, despite public opinion demanding it be tightened up.

Consider the results of KwaZulu-Natal, with the highest number of clean auditees of any province. Political commitment stated unequivocally over several years has resulted in a small but steady improvement in audit results.

The auditor-general argues “results” are evident where “appropriate action is taken by leaders and key officials... moving forward towards the clean audit space by consistently committing to take ownership of municipal performance practices, insisting on adequately qualified staff and effective performance management”.

Such determination is clearly wanting in the worst-performing provinces, including the Eastern Cape. Gauteng, notwithstanding its three (supposedly highly capacitated) metros, the Free State, Northern Cape and North West also failed to achieve clean audits, showing up the pervasiveness of the dual challenge of political commitment combined with and translated into measures to bolster internal financial competence.

Reliance on consultants – assisting in 91 percent of municipalities, rising from 86 percent last year – is a further symptom of poor capacity, with audit processes clearly still not integrated into municipalities’ day-to-day management.

For many municipalities, notwithstanding engagement by the auditor-general’s office and numerous support programmes, audits clearly remain last-minute, annual scrambles to comply with auditing requirements.

It is important that politicians use newly established municipal public accounts committees to drive, oversee and entrench good financial oversight, and that they do not simply become another area of cynical and often unsuccessful compliance, the necessary reports often palmed off at the last minute to consultants. Credible information needed to achieve clean audits will only start to emerge with committed leadership and oversight.

But perhaps even more fundamental a mind shift is needed in many municipalities. Public funds must be managed in a rigorous, transparent and accountable fashion. Failing this, perhaps Finance Minister Pravin Gordhan’s view that negative incentives, holding poorly complying officials to account, is necessary. For those deployed to the local government because of political allegiances, this means political primaries need to take a back seat to public confidence and good governance, or, as the auditor-general phrases it, “the culture of clean administration”.

Finally, it should be noted that while acceptable audit outcomes are clearly and understandably important to the local government and its credibility, these should not be equated directly with its financial position or delivery. Stakeholders should watch trends regarding underspending on grants, debt and other concerns with vigilance.

It is interesting to note the province with the highest number of clean audits, KwaZulu-Natal, has typically low levels of expenditure, and the courts recently had to compell Gert Sibande District, which received a clean audit, to deliver clean water to Carolina residents.

So, good financial governance is a necessary but not sufficient condition for delivery.

n Heese is economist and Allan managing director of Municipal IQ, an independent local government data and intelligence organisation.