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The North West and Free State were the only provinces to receive disclaimers and adverse audit opinions in the 2017-18 financial year.
This was revealed by Auditor-General Kimi Makwetu during a media briefing at the Government Communication and Information System offices in Pretoria this morning.
Makwetu was delivering national and provincial audit outcomes, including that of some state-owned entities, audited for the 2017-18 financial year.
He also told reporters that President Cyril Ramaphosa signed the amended Auditor-General’s Act on Sunday. This act will give his office powers to issue a certificate of debt against accounting officers who had failed to give justifiable reasons for irregular expenditure and material findings during audits.
The act could also contain regulations that would possibly refer such matters for prosecution.
The regulations are currently being ironed out and a decision is still to be taken on when they would come into effect.
The amendment of the Auditor-General’s Act followed allegations of intimidation suffered by Makwetu’s staffers on the ground, contestation of audit outcomes by some departments and entities, and lack of consequences against those responsible for irregular expenditure in government institutions.
Makwetu said lack of accountability and commitment towards clean administration were factors that influenced the poor showing of North West and Free State.
“These provinces were in a very bad state – their financial health was the worst of all the provinces, no auditees, except one in North West, could comply with legislation, and the inability to reliably report on the performance of auditees and key provincial projects was common. Delays in the completion of projects, poor quality work and payments without evidence of delivery (especially in the Free State) resulted in poor service delivery and allegations of fraud.
“In spite of the commitments made to us in the past, it has become clear that the political and administrative leadership is disregarding our messages and recommendations, choosing rather to contest the audit conclusions instead of addressing the weak control environment at almost all of the auditees in the North West,” Makwetu said.
Also in the Free State, he said, instead of addressing the root causes of poor audit outcomes “strategies were changed to continue circumventing key internal controls”.
“Moreover, it was common in both these provinces that the oversight structures were not proactive, which hindered the effecting of consequences as members of the executive council were not held to account,” he said.
Makwetu said the Western Cape and Gauteng continued to produce the best results, receiving 83% and 52% clean audits respectively.
He said it was regrettable that the improvement in audit outcomes in the Eastern Cape over the past few years could not be sustained.
The audit outcomes for the province regressed in 2017-18 because a result of the slow pace of addressing the root causes of the findings raised by his office yearly, the Auditor-General report said.
Similarly, the improvement trend in Limpopo did not continue, with more auditees regressing than improving in the year under review.
Makwetu recognised Mpumalanga as the only province where the audit outcomes improved.
The report said in contrast, the outcomes in the Northern Cape and KwaZulu-Natal were erratic over the past four years and improvements in the one year were offset by regressions in the following year.
Makwetu cited a lack of urgency from the leadership in responding to the root causes of the audit outcomes in these provinces.
The Auditor-General report said at national level there was a regression in outcomes with the number of clean audits decreasing to 23% of the total population and irregular expenditure continued to remain high at R51 billion.
This total excludes the state-owned entities [Eskom whose irregular expenditure amounts to R19.6 billion and Transnet, which incurred R8.1 billion] that are not audited by the Auditor-General’s office, whose irregular expenditure totalled R28.4 billion.
State-owned entities
On state-owned entities, the Auditor-General report said their results continued to regress from the previous year and from 2014-15.
The Independent Development Trust received a disclaimer for the third year in a row and the SA Broadcasting Corporation regressed from an adverse opinion to a disclaimer, the report said.
Only the Development Bank of Southern Africa, which was audited by the Auditor-General’s office for the first time, obtained a clean audit opinion.
The report said as in the previous year, a significant number of state-owned entities’ audits had not been completed by the September 30 cut-off date.
This was, according to the Auditor-General, due to financial statements and audits that were delayed because of the auditees “struggling to demonstrate that they were going concerns”.
The report said this applied to the SA Airways Group, the Denzel Group and SA Express (where the last financial statements and audit report published were for the 2015-16 financial year, and the 2016-17 audit was finalised only recently).
The Auditor-General said there had been a slight improvement in the financial health of state-owned entities but the SABC, the Petroleum Oil and Gas Corporation and the SA Post Office disclosed that there was significant doubt about whether they could continue with their operations in future without financial assistance.
“Considering that most of the state-owned entities where audits had not yet been completed are facing going concern challenges, the financial outlook for most state-owned entitiess is bleak,” the Auditor-General said.
The Auditor-General report said there were weaknesses in the performance reporting processes and an increase in non-compliance at 16 state-owned entitiess audited by Auditor-General’s office.
Out of these 88% had material findings.
These entities also disclosed R1.9 billion in irregular expenditure but the amount could be even higher as three state-owned entities – the SABC, SA Forestry Company and Komatieland Forests were qualified on the completeness of their irregular expenditure disclosure, the Auditor-General report said.
Irregular expenses
The Auditor-General report also indicated that the R51 billion of irregular expenditure did not include R6.5 billion worth of contracts that could not be audited by the Auditor-General’s office due to missing or incomplete information.
The top 10 contributors to irregular expenditure were responsible for 52% of the total amount of irregular expenditure, the report said.
Makwetu noted that 17% of the irregular expenditure was expenditure in previous years only uncovered and disclosed in the 2017-18 financial year. The remaining 83% (37.9 billion) was expenses in 2017-18, representing 4% of the total expenditure budget.
“It included R16.8 billion in payments made on ongoing contracts irregularly awarded in a previous year – if the non-compliance was not investigated and condoned, the payments on these multi-year contracts will continue to be viewed and disclosed as irregular expenditure,” he explained.
He said irregular expenditure did not necessarily represent wastage or means that fraud was committed but this needs to be confirmed through investigations to be done by the accounting officer or accounting authority.
Unauthorised expenditure
The Auditor-General report said unauthorised expenditure increased by 38% from the previous year to R2.1 billion with 86% being a result of overspending.
Makwetu said he was concerned about an increase in unauthorised expenditure.
He said the rise in unauthorised expenditure “paints a picture of departments that are unable to operate within their budgets resulting in deficits and overdrafts”.
Unpaid expenses
In total, 82 departments (52%) technically had insufficient funds to settle all liabilities that existed at year-end if the unpaid expenses at the year-end were also taken to account.
The Auditor-General report said this meant that these departments started the 2018-19 financial year with part of their budget effectively pre-spent.
The report said while this will have a minor impact at the most departments because the amounts are low, 15 departments had already spent more than 10% of their 2018-19 operating expenditure budget if the budget for employee cost was not taken into account.
“Some departments did not pay their creditors when their budgets started running out and thereby avoided unauthorised expenditure, but the payments were then made in the following year, effectively using money intended for other service delivery priorities. This continuing ‘roll over’ of budgets had a negative impact on departments’ ability to pay creditors on time and to deliver services,” Makwetu said.
Fruitless, wasteful expenses
The Auditor-General report said the number of auditees with fruitless and wasteful expenditure increased by 10% from the previous year.
A total of 181 auditees incurred fruitless and wasteful expenditure in both the current and the previous year.
157 of these had incurred fruitless and wasteful expenditure for the past three years.
Makwetu said such expenditure could have been avoided.
“Government cannot afford to lose money because of poor decision-making, neglect or inefficiencies. However, we continue to see a rise in fruitless and wasteful expenditure. This expenditure, which is effectively money lost, increased by 200% from the previous year. The overall increase was mostly a result of the R1 022 million loss by the Water Trading Emory, where payments were made without resultant progress on water infrastructure projects,” Makwetu said.
Education, health and public works
The Auditor-General report indicated that the departments of education, health and public works continued to have the poorest audit results compared to other departments.
He warned that the financial health of the provincial health and education departments “needs urgent intervention to prevent the collapse of these key service delivery departments”.
He said in comparison with other departments these two were “in a bad state”.
He cited the unauthorised expenditure by provincial education departments as an example saying the amounts incurred stood at almost R1 billion.
He said the Eastern Cape education department alone had incurred a deficit of R1.7 billion.
His report indicated that the health departments in the Eastern Cape, Free State and Northern Cape were in vulnerable positions.
The total deficits of provincial health departments stood at R8.4 billion, the Auditor-General report said. “All the health departments, except the Western Cape and Free State, has claims against them that were more than their 2018-19 total operating budget. The claims of the Eastern Cape health department was over three times more than its operational budget,” Makwetu’s report said.
It also indicated that technical and vocational education and training colleges continued to struggle to account for their finances.
Of the 48 audited by Auditor-General’s office, only three received clean audits compared to nine in the previous year, the Auditor-General report said.
