What do PFMA Audit Results Really Mean

Phillip Rakgwale

CISA, CIA, CFE, RGA, M.Inst.D Chairperson of the SAIGA council

South Africa is facing unprecedented levels of corruption within its public sector. The audit results from the Auditor General South Africa (AGSA) reveal that just one-third of the national and provincial ministries have achieved clean audits.

The primary goal of financial management is to optimise value, establish sustainability, and concentrate on their fundamental operations. The Public Finance Management Act (PFMA) governs the obligations and tasks of public authorities in adhering to financial regulations.

The findings indicated that a substantial proportion of South African national and provincial departments, as well as stateowned enterprises did not get clean audit reports and failed to adhere to the financial management standards outlined under the PFMA

As a result, large sums of money are not distributed to the intended recipients.

This failure negatively impacts

South Africa’s prospects for growth and of addressing the challenges of inequality.

The irregular expenditure disclosed in 2022-23 totalled R63,37 billion, with high-impact auditees (Key service delivery departments and entities) being responsible for R53,77 billion (85%) of this amount. In terms of a National Treasury instruction note issued in December 2022, auditees do not have to include irregular expenditures incurred in prior years or the closing balance of irregular expenditures in their financial statements.

Therefore, the actual amounts incurred may differ where prior-year amounts were not disclosed in the annual report or where the annual report was not submitted.

Key findings from the Auditor General's report

The audit results indicate a general improvement; yet there are still deficiencies in the planning and reporting of service delivery, difficulties in managing infrastructure, and imprudent

The primary goal of financial management is to optimise value, establish sustainability, and concentrate on their fundamental operations.

utilisation of limited resources, which further strains government budgets.

• The audit outcomes have shown a net improvement, with a greater number of auditees improving their outcomes compared to those who experienced regression.

• In general, these auditees that are considered 'high impact” (Key service delivery departments and entities)' have worse audit results compared to other auditees. They also have difficulties in managing their performance, finances, and infrastructure.

• The material irregularity procedure has had a significant effect, resulting in the recovery, ongoing recovery, or prevention of financial damages amounting to an estimated R2.55 billion.

• High-impact auditees are crucial in attaining the goals outlined in the MediumTerm Strategic Framework. However, AG have once again discovered deficiencies in their performance plans and reports, comparable to the issues highlighted in the last report.

• AG detected shortcomings in more than 80% of the 137 projects inspected.

Regrettably, AG have observed a frequent occurrence of delays, cost overruns, and subpar workmanship in infrastructure delivery projects. Furthermore, there are also instances of infrastructure experiencing delays in becoming operational. Once again, AG provide an account of the current state of infrastructure that is gradually declining due to inadequate maintenance and protection.

• Inadequate fiscal management by the government diminishes the already constrained financial resources. The primary factors contributing to the ongoing financial losses and inefficiency that AG observed, particularly at high-impact auditees, were prevalent inadequate payment practices, noncompetitive and uneconomical procurement practices, limited value and costeffectiveness of expenditures, mismanagement of government properties and accommodation leases, and deficiencies in project management.

Claims filed against departments and auditees exceeding their budgets and have poor financial standing have the effect of reducing government funding for operations related to service delivery.

Struggling institutions such as stateowned companies add strain on the government by requiring financial assistance and creating future liabilities due to guarantees.

Insufficient management of performance, finances and infrastructure by auditees, particularly those with significant influence, has a direct impact on the implementation of crucial government programmes aimed at enhancing the well-being of South Africans and mitigating the challenges arising from difficult economic circumstances and poverty.

Wasteful expenditure leads to a reduction in funding for projects aimed at providing services, placing a heavy load on taxpayers. Overall, the audit results for both departments and public bodies showed improvement, with a greater number of auditees achieving better outcomes each year of the administration term compared to those who experienced a decline.

The net improvement in 2022-23 was 37 auditees, representing a 9% increase. This was the largest change observed over the four years. The provincial government demonstrated a net improvement of 44, equivalent to a 27% increase, while the national government exhibited a net improvement of 34, which corresponds to a 15% increase.

Inadequate fiscal management by the government diminishes the country’s already constrained financial resources.

Audit of performance and delivery of services

As of September 30, 2023, AG have finished conducting audits for 127 auditees of high impact. Out of the auditees, 74 of them (58%) had no significant issues indicated in the performance reports of the audit reports. This is an increase compared to 54

(45%) in the previous year, 2018-19. The enhancement in the calibre of performance reports for auditees with substantial influence during the administration tenure is a notable advancement.

Nevertheless, a few of these auditees managed to get this outcome mainly because the AG’s allowed them to rectify the inaccuracies that AG discovered throughout the audit procedure. Additionally, several auditees have eliminated performance indicators that draw attention or examination from oversight committees.

Infrastructure upkeep and protection

According to the Government Immovable Asset Management Act, a condition assessment must be conducted every five years. In the fiscal year 2022-23, the Property Management Trading Entity conducted condition evaluations on just 107 properties, which accounts for a mere 0.13% of the total 80,034 properties in its portfolio. This number is less than half of the 236 properties that were assessed in the previous year. The reason for this small number of assessments was due to the entity's constrained capacity.

Government officials and the public keep utilising dilapidated premises, risking the safety of officials and the public. In the fiscal year 2022-23, the Property Management Trading Entity identified a total of 6,943 properties as being in bad condition.

Presently, 2,394 government properties are vacant, with most of them being poorly managed and in poor condition.

Even though these properties are

not being used, there are still costs such as taxes and property fees that must be paid.

The Property Management Trading Entity must enter into lease agreements because there aren't enough suitable properties available for the departments, something which could have been avoided with a proper maintenance of property.

Infrastructure projects are susceptible to acts of vandalism and theft. These illegal operations not only endanger human lives but also lead to excessive expenses for infrastructure projects and substantial investments in security services to protect the infrastructure.

Wasteful expenditure leads to a reduction in funding for projects aimed at providing services, placing a heavy load on taxpayers.

Delivery of the projects

AG documented the results of the investigation on 112 projects examined, which accounts for 82% of the total. AG findings indicate a frequent occurrence of delays, cost overruns, and subpar quality in infrastructure delivery projects. Furthermore, there are also instances of newly constructed infrastructure experiencing delays in becoming operational.

AG report on project delays indicates that either the projects were finished behind schedule or were still being constructed after the agreed-upon completion date. Delayed commissioning has a detrimental impact on service delivery as it prevents the public from accessing infrastructure and related services. Additionally, it results in the wastage of revenue, such as payments made for municipal and security services that are not utilised.

Concluding remarks and ultimate evaluation:

Billions of rands received from taxpayers are not being allocated to their designated beneficiaries and are instead being given to unauthorised recipients. This leads to subpar service delivery and destruction of infrastructure caused by angry community members who do receive essential services. There is a correlation between violent protests and infrastructure damage costs.

Although the PFMA has explicit and commendable objectives to enhance financial administration in the public sector, many institutions are encountering difficulties in implementing key components of it.

The internal audit operations and audit committees lack effectiveness. The audit committees are not adhering to the written terms of reference, as mandated by Treasury Regulation 3.1.8.

• Internal audit plans are absent, not as mandated by Treasury Regulation 3.2.7.

• Limitations on capacity.

• Challenges in recruiting highly trained staff.

Risk management is a crucial aspect of an organisation’s strategic management. It involves the organisation’s efforts to identify and mitigate risks associated with its operations. The Public Finance Management Act (PFMA) mandates departments to establish and uphold robust, streamlined, and transparent risk management systems. Additionally, the Treasury Regulations compel departments to regularly carry out risk assessments and formulate risk management plans, which must encompass a fraud prevention strategy.

Since its inception in the public sector, risk management has been a novel idea. Consequently, the National Treasury deemed it appropriate to offer departments assistance in comprehending and applying its principles. The construction of a Risk Management Framework has resulted in the creation of a comprehensive guide for implementing risk management techniques in the public sector.

Despite the initiative, departments are still encountering challenges in implementing risk management systems to the point where the AG has expressed concern about the lack of performance in conducting risk assessments and the absence of risk management strategies and fraud prevention plans.

Considering these challenges, the National Treasury has implemented various measures to enhance capacity development. The purpose of risk management people is to offer assistance to departments with risk

management concerns. Since the initiation of performance information audits, the AuditorGeneral has maintained the perspective that institutions need to enhance the quality of the performance information they offer.

The identified issues encompass fundamental deficiencies:

• The collection and presentation of performance information and reporting is not cohesive or unified.

• The yearly report does not include all the performance information.

The objectives and performance information presented in the annual reports, the ENE, and the strategic plans of a department exhibit disparities:

• The failure to meet objectives is not disclosed or explained in the annual report.

• There is insufficient oversight at the program, departmental, and national levels.

• Some indicators are excluded from the Performance Plans.

• Indicators lack measurability and reliability.

The National Treasury should continue offering consistent guidance and support about matters regarding performance information.

In terms of infrastructure upkeep in South Africa, the country faces

major challenges that remain unaddressed by the government due to corruption and leakages. South Africa encounters infrastructural concerns ranging from energy supply problems, water scarcity to transportation constraints.

Despite the government’s failure to provide necessary support to meet public expectations, there is still hope in the form of the AGSA, which is actively trying to reduce the losses our country has incurred in the government sector.

In the financial year 2022-23, the Auditor-General of South Africa (AGSA) introduced its material irregularity procedure in 202 public sector institutions at the national and provincial government level, as well as 170 institutions at the local government level.

The AGSA was also on schedule to apply this process in all 879 audited institutions for the 2024/25 financial year. The material irregularity procedure has avoided a financial loss of R655 million. Additionally, R164 million has already been recovered, and there is an ongoing effort to collect an additional R820 million.

AGSA has been granted enhanced authority under the Public Audit Act to initiate enforcement measures in instances of significant irregularities pertaining to noncompliance with or violation of legislation, fraudulent activities, theft, or breach of fiduciary duty that have led to or are expected to result in substantial financial losses. The accounting officer will bear ultimate responsibility if no corrective measures are implemented.