The State of Local Government Cannot be Judged on Audit Outcomes Alone

Jun 26, 2022

The recently released Auditor-General’s consolidated report has again received widespread attention.  Unfortunately however, media reports on the consolidated audit opinions have often not fairly covered the work done by AG Tsakani Maluleke and her colleagues in their assessment of the failings in financial management, including their assessment of financial best practices.

The AG’s focus on material irregularities is excellent, and as she shows whilst some municipalities have followed up on these, many have not.  This is scandalous and MMs and CFOs who have not done so should be placed on notice if they fail to adequately set in motion an action plan to address not only these irregularities, but the financial findings contained in the reports.  The AG’s focus on financial management and the use of financial consultants who add no value, is important too, as is the role that the AG plays in reporting municipalities to investigative bodies.

However presenting audit opinions as percentages does not sufficiently contextualise the actual findings, particularly as there is significant differentiation across municipalities.  The devil is in the specific detail, and if one reads the AG’s reports, the complexity of what has been found is often quite different from the way that the report gets publicized.

Most importantly, too, by not contextualising statements, the impression is gained that ALL local governments have worsened their audits since 2016/17.  But in fact, whilst around 65 municipalities have regressed in terms of audit opinions since 2016/17, only Buffalo City out of the largest 20 municipalities regressed.  These 19 top municipalities which did not regress represent 70% of all the municipal budgets.  Municipalities that regressed were generally those that on average had budgets less than 50% of those which had audits that improved or stayed the same. These 19 municipalities which did not regress have 50% of SA’s population and once we add the populations of the other 164 municipalities that did not regress, we find most of SA’s population live in municipalities where audits did not regress.  This does not, of course, mean that all municipalities don’t face financial and other challenges, but we should not fall into a trap of overgeneralization.

At the outset we must say that having worked at a municipal level, audits and particularly the management reports generated in that process, are invaluable to any municipal political and administrative leadership committed to good governance.  But audits are specific processes of most value to the institutions being audited and care must be taken in generalizing these results across municipalities.

It must be noted that considering the challenges in capacity and the newness of our municipal system, there has been a significant reduction in disclaimers or adverse audits from 111 municipalities thirteen years ago, to 34 municipalities in the 2020/21 AG report

At the other end of the audit spectrum we have introduced the concept of “clean audits” to distinguish between two groups of unqualified audits. AG Maluleke correctly notes that “a clean audit outcome is not always an indicator of good service delivery and does not always directly correlate to the lived experience of all the communities in a municipal area”.

A “clean audit” is one where the unqualified audit is free from material misstatements, there are no material findings on the annual performance report and lastly, there are no material findings on non-compliance with key legislation.   It is the latter two aspects of clean audits which are problematic: firstly, annual performance measures are defined at an entity level, so if the bar is set low enough, it is easy to achieve.   Many officials spend their time ensuring they craft their performance frameworks in ways that will achieve good audit outcomes instead of solid developmental outcomes.

Secondly, non-compliance with key legislation can also be subjective:  In eThekwini we engaged in heated debate, for almost 18 months, with auditors who believed that before we prepared for the 2010 FIFA World Cup and built the Moses Mabhida stadium, we should have undertaken a complete feasibility study.  We directed them to the national Cabinet decision to which the municipality was complying and only eventually did the auditors relent and not qualify our audit for a decision taken by national Cabinet!

Also, clean audits are relatively easy to achieve if a municipality does not deliver much or simply don’t spend money in areas that are developmentally complex.  Few people realise that given the complex legislative frameworks we have, large municipal tenders often taken over 9 months to conclude, yet the financial year is only 12 months.

Unfortunately, this results in an untenable situation where, as a country we put more emphasis on “clean” audits that on developmental service delivery, instead of striving for a balance between the two.   Through making our major aim that of achieving a clean audit, we work against our objective of creating a developmental state, where our goal should be that of providing higher levels of basic services, addressing poverty and inequality.    This must be done whilst complying to rules which ensure that development is done in a fair, transparent and corruption-free manner, but we must not lose track of our broader developmental objectives.

In an overly compliant environment, the political and administrative leadership of municipalities are faced with  a delivery-compliance conundrum described in the diagram below.  With ever increasing compliance requirements the pace and scale of delivery declines, ironically often still allowing those who are corrupt to steal from the coffers.

In considering audit results, it is important to compare like with like.   Our metropolitan municipalities have on average over 17000 staff members and budgets of over R32 billion compared with category C1 District municipalities (non-Water Authorities) which have an average staff component of 242 and total budgets of around R240 million.

At the same time, we should also not automatically conflate irregular expenditure with corruption.  Irregular expenditure simply means that there has been expenditure occurring outside an approved budget or conditions of a grant.  In our own experience irregular expenditure is often incurred for quite legitimate reasons.  This could be as a result of emergencies, disasters, urgent needs, and the like.  Once this has happened though, a process needs to be conducted to condone such expenditure, which involves the Audit Committee and Council.

Overall, audits are one of many indices of governance at a municipal level which should be read, understood and contextualized.  Instead of only focusing on audit outcome reports, we should also look at the rich body of reports contained in National Treasury MFMA Section 71 reports and the reporting by COGTA, which provide a more current insight into municipal affairs.

We must increasingly and transparently hold municipal leadership to account in-year and we should equally report on cases where such leadership is responding well to identified challenges.  At the same time, we must revisit this situation where performance auditing is compliance and not developmentally driven.  Ideally we should de-link financial auditing from developmental/performance auditing and develop a mechanism where professional development and administration experts deal with the performance audits.  This would allow us to ensure we focus on how our developmental goals can be achieved within a fair, transparent and non-corrupt process.