Improving audit quality to address material irregularities

Amos Zungu

Registered Government Auditor Lecturer: Auditing and Taxation, Durban University of Technology

We have not seen improvements in audit outcomes in municipalities, provincial and national departments with huge budgets and significant public interest like education, health etc and on key SOEs like the power utility, Eskom.

Instead, clean audits have been recorded in a few municipalities, particularly in the Western Cape. There have also been clean audits reported in departments and public entities with small budgets and less significant public interest.

The questions that could be asked are:

• What is it that the leadership has done to improve the audit outcomes of municipalities, major/significant departments and SOEs with huge public interest?

• Why are leaders failing to provide leadership on the outcomes that must be

maintained by municipalities/ significant departments & SOEs?

• How can consequence management be implemented for ministers, and accounting officers in key departments who fail to achieve improved audit outcomes?

Financial management by government departments, SOEs and municipalities; material irregularities and financial losses as per the Public Audit Act. PFMA section 38 and MFMA section 62 contain the general financial management responsibilities of the accounting officers.

The PFMA and MFMA require accounting officers to manage the revenue, expenditure, assets and liabilities of the departments and municipalities. Importantly, they must prevent unauthorised, irregular, fruitless and wasteful expenditures and other losses. Departments and municipalities have been failing to prevent irregular expenditures and financial losses.

The audit outcomes released by the Auditor General of South Africa reflected the concerning state of financial management and service delivery in municipalities. Poor financial management and lack of service delivery resulted in some municipalities incurring financial losses, while others caused substantial harm to communities because they could not fulfil their mandates to deliver services to the communities.

As a result of the non-compliance with financial management legislations in municipalities, the Auditor General, guided by the Public Audit Act, identified financial losses and several financial mismanagement issues such as failure to manage the assets of the state, acquisition of goods and services at very high amounts than at fair values, payments for goods and services not received, tenders given to political leadership, such as councillors and their families, and tenders awarded to officials and families.

The Public Audit Act defines a material irregularity as follows:

Any non-compliance with, or contravention of, legislation, fraud, theft or a breach of a fiduciary duty identified during an audit performed under the Public Audit Act that resulted in or is likely to result in a material financial loss, the misuse or loss of a material public resource, or substantial harm to a public sector institution or the general public.

The overall aim of the Public Audit Act is to promote accountability, to improve the safeguarding of municipal resources, to enhance service delivery encourage an ethical culture in the municipalities and to strengthen municipalities to better serve communities.

Questions could be asked as to why the leadership is tolerant of such financial losses and irregularities by government departments, SOEs and municipalities. How can departments, SOEs and municipalities be structured/ managed for them to be able to prevent financial losses and irregularities or recover financial losses from officials and political leaders?

How can fraud and corruption, stealing and looting be prevented in departments, SOEs and municipalities? How can departments, SOEs and municipalities be held accountable for their mandates? Most of the municipalities are unable to fulfil

their mandatory roles of providing basic services, such as clean water, sanitation, provision of infrastructure, refuse and waste removal etc.

How can the challenges faced by municipalities be resolved or mitigated? The questions should interrogate the failure of municipalities to provide drinkable water, to provide roads, and clean towns, illegal dumping, failure to provide electricity and poor service delivery whereby contractors are appointed but deliver very poor infrastructure and services.

Importantly, the questions must probe the impact of poor service delivery on investments, tourism and the general economic atmosphere, because the effects of poor service delivery, financial mismanagement fraud and corruption result in poor economic activities, thereby impacting the quality of lives of ordinary citizens.

The accountability ecosystem

The Auditor General of South Africa has identified an accountability ecosystem for local government. The different role players within the accountability ecosystem of municipalities are shown in the table below.

The role players identified above are officials, senior managers, municipal managers, Internal Auditors, Audit Committees, councillors, coordinating departments such as parliament/provincial legislatures and oversight committees etc. The same ecosystem for local

government can be adapted to provincial and national departments and SOEs, and add role players like portfolio committees, SCOPA, Board of Directors, HODs of departments and CEOs of SOEs.

Questions can be asked about the contributions/challenges faced by each of the role players in improving audit outcomes. How can each role player improve in order to meaningfully contribute to good governance and service delivery? Why the different roles are not able to play their roles within municipalities, departments and SOEs? I would recommend that you push the audience to identify role players not mentioned in the AG reports.

The risk with limiting conversations on the AG reports is that you will never know what the participants have got in their minds or how they perceive the public sector financial management environment.

The role of political parties

Role players such as the private sector, construction mafias, business forums, and professional bodies (accountants, auditors, engineers, valuators, lawyers etc) play a huge role in infrastructure rollout, financial management and audit outcomes.

It is important also to probe the role of political parties, more especially their deployment structures and committees because they are the ones who are responsible for seconding their members to departments, SOEs and municipalities either as ministers, mayors, councillors, HODs, municipal managers and directors and senior managers. The deployment committees indeed play a huge role as they deploy political heads, accounting officers and even service providers.