Nationwide local government audit results unchanged at unqualified audit option level

23 Jul 2012

Six new municipalities have joined the ranks of municipalities with clean audits this year, bringing the total to 13 (5%), said Auditor-General Terence Nombembe.

These municipalities are in KwaZulu-Natal, Limpopo, Mpumalanga and the Western Cape. None of the municipalities in the Eastern Cape, Free State, Gauteng, Northern Cape or North West received clean audit reports.

Only four (4) municipal entities registered clean audits, which represents a decline from ten (10) last year.

Nombembe said he remained sure that, with the commitment of the leadership, any size municipality could achieve clean audits, as already proven by a few determined ones.

"Where appropriate action is taken by leaders and key officials, we are beginning to see results," said Nombembe, referring to the provinces with clean audits.

"What these provinces are beginning to display is the outcome of concerted efforts on the part of political leaders and management. They are 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 practices. The next logical step for these municipalities is to institutionalise these gains to sustain the culture of clean administration. This will surely uphold the public confidence that we witnessed during the presentation of the clean audit awards held at each of the municipalities."

The latest audit results at national level show that close to half of the auditees (156 out of 343 or 45%) have obtained financially unqualified audit reports, but with internal control concerns (findings). These financially unqualified audit reports were only obtained after corrections during the audit process and with the assistance of the auditors. The other half of the municipalities received financially qualified (18%) and adverse opinions or disclaimers (19%), while 13% of municipalities had not submitted financial statements in time for auditing.

This slow progress towards clean audits in local government is underpinned by three prominent causes:

• fifty seven percent (57%) of municipalities have shown a slow response to AGSA messages and the implementation of key controls
• A lack of consequences for poor performance and transgressions at more than 70% of auditees and
• A lack of minimum competencies of officials in key positions (most evident in the financial discipline) at 72% of auditees.

These factors have contributed to the poor and stagnant audit outcomes for 2010/11. "The desired progress towards clean audits is at risk if these root causes are not addressed," continued Nombembe.

He noted government's interventions to address the skills gap, including coordination and commitment by all parties to implement legislation on minimum competency levels.

The lack of skills is further evident in the fact that numerous errors needed to be corrected by auditors during the audit, despite consultants that were brought in to assist municipalities having increased from 86% last year to 91% of municipalities in 2011. In addition, 13% of audits in a few provinces (North West, Northern Cape and Western Cape) had not been finalised in time for inclusion in the general report being released today.

"We are seeing the impact of the lack of skills, the slow response of leadership to owning key controls, as well as the absence of managing poor performance and the risks that municipalities continue to face. At the moment these risks are beyond tolerable levels," said Nombembe, who explained that the five major risks relate to:

• supply chain management, which is showing a growing trend of irregular expenditure
• predetermined objectives (service delivery reporting), which show some improvement in certain provinces
• IT controls, which show minimal improvement in terms of internal control
• human resource management, which shows minimal improvement as well as
• significant errors in financial statements, which show no improvements at all despite the increased use of consultants.

"We need to purify and perfect the internal controls in all these areas to improve the level of transparency and accountability in local government," he added. In order to improve these, municipalities need to strengthen internal controls in the following three logical areas:

• Leadership, which is expected to set the correct tone for effective governance
• Financial and performance management reports, that need to be subjected to management checks and balances to confirm credibility of information and
• Governance, by strengthening audit committees and internal audit functions that will complement the work of the newly established municipal public accounts committees (MPACs).

In this regard, Nombembe said that only 30% of municipalities are making good progress in addressing the internal control disciplines. He remains concerned about 70% of municipalities where the basics of key controls have not yet been mastered.

The AG reiterated his office's commitment to assisting auditees, highlighting that following the launch of government's Operation clean audit in 2008, he had introduced regular engagements with municipal, provincial and national political leaders to share his office's assessment of key controls in the areas mentioned above and to identify threats to clean audits. These engagements helped to create greater awareness on matters that require urgent attention to enable the realisation of clean administration in local government.

Nombembe said the benefit of these visits was to further align expectations towards clean audits, recognise champions of goodness and encourage those who still need motivation in this direction.

"We do this because we care about how auditing can lead to building public confidence and to facilitating and encourage leadership and governance practices that are exemplary." 

He singled out the importance of strengthening oversight coordination between public accounts and portfolio committees in all legislatures.

In presenting these results today with the national ministries, Nombembe drew attention to the commitments that all partners had made during his roadshows. These commitments and a detailed analysis of the audit outcomes are captured in the respective general reports tabled in the national and provincial legislatures today.

These partners, which also include the South African Local Government Association and provincial and municipal leadership (executive and oversight), have committed to initiatives that can support excellent coordination of their various activities and strengthen their diagnostic and monitoring instruments. These initiatives will lead to improved support for municipalities and streamlined accountability to the municipal councils, legislatures and citizens.

Statement issued by the Auditor-General South Africa, July 23 2012

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