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The South African government has always had a hard time accepting and implementing the recommendations of the Auditor-General of South Africa (Agsa), and the accompanying lack of consequences has meant that government departments and municipalities still grapple with the basics – 30 years after democracy.
But legislative amendments in the form of the Public Audit Amendment Act of 2018 (PAAA), which came into operation on 1 April 2019 and which are read with the Material Irregularity Regulations and Investigations and Special Audits Regulations, published on the same day, may finally be turning the tide against malfeasance and incompetence.
The PAAA provides the national audit office with expanded powers over and above its auditing and reporting functions, notably in terms of material irregularities (MIs). MIs are defined in the PAAA as: “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 or the misuse or loss of a material public resource or substantial harm to a public sector institution or the general public.”
Now, those enhanced powers are bearing fruit – in early November Auditor-General Tsakani Maluleke reported a noticeable impact on public sector accountability resulting from the PAAA enforcement.
“We found that issuing a material irregularity (MI) notification to accounting officers often jolts them into action to address irregularities and transgressions that they should have dealt with previously,” Maluleke explained in a press release. “In 86% of cases, nothing was being done to address the MIs we identified until we issued the notifications.”
This hasty action, she added, resulted in financial losses totalling R511.76-million being prevented, already recovered, or in the process of being recovered.
From April 2019 until 15 January 2023, the Agsa identified and notified accounting officers of 268 MIs. After the cut-off date, the office identified a further 66 MIs that will be reported on in the next MI report.
“The MIs we identified were caused by non-compliance with legislation and suspected fraud that resulted in, or is likely to result in, material financial losses and significant harm to the municipalities and the general public. The nature of these MIs reflects the areas in which municipalities and municipal entities are most vulnerable to loss, misuse and harm. We have highlighted the weaknesses in these areas for a number of years, including in our general and special reports.”
Material financial losses were most often caused by weaknesses in the procurement and payment, resource management, and revenue management processes, Maluleke said. In addition, interest and penalties charged due to late payments added to the losses.
Billions of rands lost
This is the Agsa’s fourth report on the status of MIs. It focuses on those MIs identified in the local government sphere by the cut-off date for this report of 15 January 2023, and gives details on the status of most of these MIs by 15 February 2023. The report also covers other MIs where further action is being taken or where assessments and decisions were still in progress, updated to 25 July 2023.
“We estimate the total financial loss of the 194 MIs that involved a material financial loss to be R5.19-billion, with R1.6-billion of that being lost by municipalities that invested in VBS Mutual Bank.”
As a result of the extended powers conferred by the PAAA, there has been what Maluleke describes as an “encouraging shift in response”, with many local government auditees now responding more swiftly to address the MIs raised by her office.
The main objective of the amendments was to enable corrective action to resolve the identified MIs and prevent similar ones from occurring in future by implementing consequence management and accountability. The amendments also sought to empower all roleplayers in the accountability ecosystem to strengthen internal controls that will enable good financial and performance management, compliance with legislation, and, ultimately, enhance service delivery by municipalities.
“We reported in the past that we are starting to see a shift at municipalities and municipal entities, which have gone from responding slowly to our findings and recommendations to now paying attention to the MIs we report and taking action to resolve them.”
Actions taken by auditees to address MI-related findings, or in response to the Agsa using its new powers, yielded the following positive results:
- Financial losses have been recovered, prevented or are in the process of being recovered.
- Consequences have been implemented for the officials responsible (through disciplinary processes) and, where applicable, for the suppliers involved.
- Fraud and criminal investigations have been undertaken.
- Internal controls are being improved to prevent MIs from reoccurring.
- Long-outstanding financial statements are being submitted.
- Steps are being taken to address environmental pollution.
Through these actions, 57 MIs (21%) have already been resolved. Of these, 19 were resolved by the auditee submitting outstanding financial statements. The other 38 MIs (including 13 relating to VBS) were resolved by preventing or recovering R124.36-million in financial losses and implementing consequences for those responsible. The audit office issued 13 MIs where municipalities suffered material financial losses totalling R1.6-billion due to the liquidation of VBS.
Appropriate action is being taken on another 95 MIs, although these have not yet been fully resolved. Accounting officers have made good progress in addressing the issues raised, however, and although they are in different stages of resolution, there is demonstration of common actions required to resolve these MIs.
“These MIs will be fully resolved once accounting officers have implemented the actions they have committed to take. This may include strengthening internal controls to prevent the MIs from reoccurring, starting disciplinary processes against responsible officials, instituting action against officials or contractors to recover losses, and preventing further losses.”
Obstacles to swiftly resolving MIs
Some of the Agsa’s biggest stumbling blocks in tackling MIs, Maluleke said, are instability in administrative leadership at local government and a lack of accountability for poor performance, including delayed investigations or disciplinary processes.
“The local government environment is complex as it is riddled with instability at accounting officer level; repeated disclaimed audit opinions; municipal public accounts committees not always attending to matters such as non-compliance with legislation, procurement deviations and financial misconduct; disciplinary boards not always in place; and weakened institutions because of a steady breakdown in governance over several years.”
Some delays were unavoidable, she added, and in these cases the Agsa did not invoke its powers.
Common reasons for delayed resolution include the following:
- delays in public bodies accepting and starting to investigate MIs due to multiple approvals required by officials and executive authorities.
- difficulties in public bodies obtaining statements from various roleplayers who may not be available during the investigation.
- various other dependencies, including on expert witnesses and legal counsel, court processes, and other law-enforcement agencies and public bodies.
If those charged with administration, governance and oversight were fulfilling their roles, said Maluleke, there would be no need to use the powers given to her office.
However, the Agsa would not hesitate to use these powers where there are lapses in governance.
“We are fully committed to implementing the enhanced powers given to our office – without fear, favour or prejudice.
She urged all roleplayers in the local government accountability ecosystem to support, monitor, and oversee the resolution of MIs, and to work even harder to ensure the gains already made are maintained – and even improved on – in the drive towards achieving wholesale good governance in the public sector.
