The trend of poor audit outcomes in local government has continued with only 34 municipalities (13%) obtaining clean audits according to the Auditor-General of South Africa for 2022/2023.
“There has been little change – and despite commitments made for improvement – action has been too slow with little impact on the lived realities of ordinary South Africans.”
Improvement over the term of new administration was not evident with only 45 municipalities having improved their audit outcomes since 2020/2021 (with the previous administration, 36 regressed).
The most prevalent audit outcome was an unqualified audit opinion on the financial statements with findings on performance reporting and/or compliance with key legislation – at 43% of municipalities. These municipalities had made little effort to move out of this category, according to AGSA, with 77 remaining there since the end of the previous administration’s term.
Compliance with legislation remained the biggest obstacle for municipalities with 86% receiving material compliance findings, slightly decreasing from 85% in the previous year and 83% in 2020/2021.
On a positive note, there were fewer municipalities with disclaimed audit opinions, which is the worst possible audit outcome. Over the administration term, 18 municipalities (mostly in KwaZulu-Natal, Mpumalanga, and North West) have moved out of this category with twelve municipalities receiving disclaimed opinions in 2022/2023.
The number of municipalities that submitted their financial statements by the legislated date continued to increase from a low submission rate of 81% in 2020/2021 to 91% in 2021/2022 and 94% in 2022/2023. These improvements were due to accounting officers responding positively to AGSA’s material irregularity notifications as well as provincial government supporting municipalities to submit financial statements on time.
Financial statements submitted late, or not at all, was AGSA’s main reason for not completing the 2022/2023 audits of ten municipalities by the end of March 2024 (the cut-off date for the report).
While local government has well-designed processed with legislated responsibilities for the planning, budgeting, monitoring, and reporting on municipal functions and integrated development plans, AGSA says it continued to identify significant weaknesses in performance planning and reporting processes with non-compliance of legislation on strategic planning and performance management at 45% of all municipalities and at 91% of municipalities with disclaimed audit opinions.
A total of 48% municipal performance reports included information that was not useful and/or not reliable. The performance plans of 19% of municipalities, including five metros, excluded indicators that measure performance on their core mandated functions.
AGSA, through numerous site visits to inspect progress and quality of infrastructure projects, identified deficiencies on 72% of the 75 projects identified. Its findings included that, all too often, work on projects is delayed, costing more than planned, and is of poor quality. New infrastructure is not put into use as soon as it is ready and existing infrastructure continues to deteriorate because it is not properly maintained or safeguarded.
Poor financial management remained prevalent according to the report. Municipalities lost revenue because they were not billing and collecting revenue, and due to water and electricity losses because of infrastructure neglect. They were also not careful with their spending practices. The main reasons for the continuing financial losses and waste were poor payment practices, uncompetitive and uneconomical procurement practices, limited value and benefit received for money spent, and weaknesses in project management.
Unfunded budgets and high unauthorised expenditure clearly show the weaknesses in financial planning. As a result, the financial health of municipalities remains weak. Poorly managed local government finances directly affect municipalities’ ability to deliver the promised services to their communities and place further pressure on the already constrained public purse.
Creditors are not paid within legislated timelines and, specifically, the debt owed to Eskom and the water boards remains high and continues to increase. If these debts are not paid, communities are left without access to basic services such as electricity and water. This also makes it difficult for businesses to operate optimally, further adding to the struggling economy.
The desired impact of national and provincial interventions to help financially distressed municipalities deal with their challenges has not yet been realised.
The material irregularity process continues to make an impact: financial losses of an estimated R924,1 million have been recovered, are in the process of being recovered or have been prevented because of this process. Accounting officers have also acted to strengthen internal controls and to address the non-submission of financial statements; the underlying causes and impact of disclaimed audit opinions; the pollution caused by neglected wastewater treatment plants and mismanaged landfill sites; infrastructure neglect and project failures; inefficient use of resources; poor procurement, payment and revenue management practices; non-payment of Eskom and water boards; ineffective use of financial reporting consultants; and assets not being safeguarded.
Most accounting officers are taking action to resolve material irregularities says AGSA, but where the material irregularities were not dealt with swiftly or with the required seriousness, it included recommendations in audit reports, took remedial action and referred matters to relevant public bodies for investigation (where appropriate).
The audit outcomes of metros have worsened since the last year of the previous administration, despite metros typically having greater capacity and bigger budgets to more easily attract suitably skilled and competent professionals to improve their outcomes.
Metros’ financial health remains concerning, as they struggled to improve their revenue-collection levels despite implementing financial recovery plans and turnaround strategies. Infrastructure delivery and maintenance still do not receive enough attention, as can be seen in projects being delayed, grant funding having to be returned to the National Treasury, and a lack of consequences for poor performance.
Municipalities with clean audits, particularly those that have sustained this status over several years, are generally characterised by sound financial and performance management disciplines and perform their functions in accordance with applicable legislation. They generally manage projects well so that deficiencies are identified and rectified promptly and so that timelines, budgets and quality standards are adhered to. The well-functioning control environment and good systems present at these municipalities form a solid foundation from which councils can prioritise further improving the performance and service delivery of their municipalities.
