Presenting his audit report on provincial and national departments last year, auditor-general (AG) Kimi Makwetu said that wasteful expenditure and the flouting of procurement processes in government will continue because there are simply no consequences for errant officials who abuse systems without shame.
This year, he said much the same thing. Presenting his audit report for 2014-2015, Makwetu said that provincial and national departments as well as public entities that were audited did show a marginal improvement in audit outcomes – but the results could have been much better if the leadership of those bodies had stepped up the pace in addressing internal control deficiencies identified in the previous audit.
“I again observe that management at 73% of auditees have been slow to respond to the recommendations aimed at assisting them to improve key controls and addressing risk areas,” Makwetu said.
He stressed that when there are no consequences after matters have been raised, they tend to repeat themselves and nothing will stop someone who has become accustomed to acquiring transactions in a manner that is not transparent. “If there is no follow up, I will not be persuaded to do anything different.”
The audit covered 468 auditees, including 167 national and provincial departments and 301 public entities, with a total budget of R1 111-billion for the year under review.
“With the majority of them we are still stuck with no following up on recommendations. Undertakings are made, but commitments are not often achieved.”
The slow response that the AG had been seeing for some time, looked like becoming no response, he said.
Some gains, along with losses
There was a slight improvement in clean audits from 118 last year to 131 in 2015. The Free State (six, or 32% of auditees), KwaZulu-Natal (eight, or 22%), Gauteng (19, or 54%), and the Western Cape (20, or 83%) showed the biggest gains. A clean audit is one in which there was a financially unqualified opinion with no findings – see below for an explanation of the categories of audit results.
Mpumalanga, Northern Cape and North West regressed in the number of clean audits.
Of those who got clean audits last year, Makwetu noted, 70% were able to sustain their clean audit status.
The economic sectors, employment and infrastructure development cluster, performed the best of the five government clusters, with 19 financially unqualified audit opinions, which included five clean audits. None of the seven departments in the justice, crime prevention and security cluster obtained a clean audit, although four were financially unqualified.
The AG made mention of a notable improvement in the quality of submitted financial statements – last year 43% of auditees submitted financial statements which contained no material misstatements, and this year that percentage rose to 51%. However, the unqualified opinions on financial statements remained at 76%.
The departments of education, health and public works had the worst outcomes. There was a small reason to be optimistic, Makwetu said, because the number of auditees in this sector with clean audit opinions has increased from one in 2013-14 to two in the current period.
The AG mentioned that the Limpopo education department needs particular attention as it has retained its disclaimed audit opinion.
Irregular, unauthorised and fruitless and wasteful expenditure
The total amount of irregular expenditure for 2014-2015 was R25.7-billion, compared to R35.3-billion for the previous year. The treasury defines irregular expenditure as that, other than unauthorised expenditure, which is incurred in contravention of or that is not in accordance with a requirement of any applicable legislation, including the Public Finance Management Act, the State Tender Board Act, or any provincial legislation providing for procurement procedures in that provincial government.
This expenditure does not necessarily mean that money was wasted or fraud committed in all instances, said Makwetu, and it is necessary for investigations to determine what went wrong. Such investigations fall to the relevant department of entity.
“Leaders ought to investigate so they can best understand if the deviation from supply chain management rules was as a result of someone not understanding the rules, or whether someone deliberately ignored the rules in order to guide those funds. You can only come to a conclusion once an investigation has been undertaken.”
In supply chain management, 43% of auditees had no findings in this area, compared to just 39% last year. The situation has improved, however, this remains the largest contributor to the irregular expenditure. The key drivers of these findings continue to be auditees that don’t follow competitive or fair procurement processes.
The absence of consequences and follow-up around these transactions creates more vulnerability in control systems and creates an opportunity to take advantage, said the AG.
“Overall we are seeing slow movement in certain areas in terms of proper handling and accurate reporting of finances, and we also want to sound a word of caution on the manner in which supply chain transactions are handled.”
There was a decrease in fruitless and wasteful expenditure since 2013-2014 – this is expenditure that was made in vain and would have been avoided, had reasonable care been taken. The amount came to R936-million for the period under review, compared to R1.2-billion for 2013-2014.
“Although there’s a reduction in terms of the value, it is unnecessary and can be avoided if there is oversight,” Makwetu said.
He noted that 80% of this type of expenditure was identified by the auditees, which shows an improvement.
Although there was R1.6-billion in unauthorised expenditure this year, this figure has also decreased from last year’s R2.6-billion, largely because of a significant decrease in KwaZulu-Natal and Limpopo. This type of expenditure happens when the approved budget is not followed. Also, 99% of this expenditure was identified by the auditees themselves.
The root causes of undesirable audit outcomes include, mainly, slow response by management to improve key controls and address risk areas (73%). Instability or vacancies in key positions (46%) also contributes to the situation.
Explanation of audit outcomes
The audit outcomes fall into five categories:
- Auditees that received a financially unqualified opinion with no findings are those that:
- produced financial statements free from material misstatements (material misstatements mean errors or omissions that are so significant that they affect the credibility and reliability of the financial statements)
- measured and reported on their performance in line with the predetermined objectives in their annual performance plan, and in a manner that is useful and reliable
- complied with key legislation.
This is also referred to as a clean audit.
- Auditees that received a financially unqualified opinion with findings are those that produced financial statements without material misstatements, but were struggling to:
- align their performance reports to the predetermined objectives they committed to in their annual performance plans
- set clear performance indicators and targets to measure their performance against their predetermined objectives
- report reliably on whether they had achieved their performance targets
- determine which legislation they should comply with, and implement the required policies, procedures and controls to ensure that they comply.
- Auditees that received a financially qualified opinion with findings face the same challenges as those that received a financially unqualified opinion with findings in the areas of reporting on performance and compliance with key legislation. In addition, they were unable to produce credible and reliable financial statements. There are material misstatements in their financial statements, which they could not correct before the financial statements were published.
- The financial statements of auditees that received an adverse opinion with findings include so many material misstatements that we disagree with virtually all the amounts and disclosures in the financial statements.
- Those auditees that received a disclaimed opinion with findings could not provide us with evidence for most of the amounts and disclosures in the financial statements. We were unable to conclude or express an opinion on the credibility of their financial statements.
Auditees with adverse and disclaimed opinions are typically also:
- unable to provide sufficient supporting documentation for the achievements they report in their annual performance reviews
- not complying with key legislation