AG’s Report: Municipal finances a dumpster fire, while consultants laugh all the way to the bank

AG’s Report: Municipal finances a dumpster fire, while consultants laugh all the way to the bank

The Auditor-General has once again laid bare the financial accountability mess in the country’s local governments, while exposing how consultants made R1,26 billion in 2020/21, doing basic financial accounting tasks for which municipal officials are already being paid over R10-billion in salaries.

This amounts to over R11-billion paid for a financial management system that has only been able to produce credible financial statements in 25% of the cases, with one municipality even paying a consultant R34 million to do its tax returns.

Releasing audit outcomes on local government in Pretoria on Wednesday, auditor general Tsakani Maluleke said consultants had become a permanent feature in municipalities’ processes, with the annual cost of consultants doubling over the term of the previous administration to R1,26 billion in 2020/21.

The report shows that financial reporting consultants cost local government R5,31 billion over the term of the previous administration, and 70% of municipalities used consultants for every year of the term.

But Maluleke lamented that the expected benefits of using consultants to enable quality financial statements were not always realised.

For example, the financial statements submitted for auditing by 2020/21 audit outcomes on local government (8 121 or 59%) of the municipalities that used consultants had material errors.

“Even after corrections, 41% received modified audit opinions. When combining the money spent on finance units and consultants at municipalities, it is clear that financial reporting carried a substantial price tag in 2020/21,” she said.

The Auditor-General said there was nothing wrong with using consultants to help with a technically complex areas of their finances, but that it was a waste when a municipality could not even run a simple bank account properly.

“They go and hire consultants to do tax returns [and] their vat returns to Sars [SA Revenue Service]. There is a municipality that paid R34-million to a consultant because they agreed with the consultant that they will give them a percentage of what comes back from Sars,” she said.

No transparency, accountability or integrity

There has also been no significant improvement in the status of transparency, accountability, performance or integrity of local government.

The lack of accountability is so dismal that auditors were unable to establish from bank records what had happened to the funds of six out of 10 municipalities that received a disclaimer audit outcome across the country.

These municipalities did not use unique identifiers such as payment descriptions and descriptive references for bank payments, to enable meaningful matching and analysis between the bank statements and the financial system.

The AG said this will make it difficult for these municipalities to perform bank reconciliations, which are an important internal control to detect payments of which municipalities may be unaware.

“In such cases, fraudulent activities could go undetected, and funds meant for service delivery could be misappropriated without being picked up,” she warned.

At four of these municipalities, further analysis traced between 67% and 89% of the expenditure recorded in the financial system to bank statements.

The R6, 03 billion spent by these municipalities was used for employee costs, bulk purchases, payments to service providers, and statutory and other payments.

The A-G warned that payments to service providers pose the biggest risk for fraud, as the lack of supporting documents mean that we could not confirm whether municipalities had actually received the goods and services they had paid for.

Insignificant improvement

Five years ago, the audit report shows, there were 33 clean audits and this time (2020/21) there are 41 clean audits from mostly district municipalities, one metro, and very few local municipalities.

Maluleke said this meant municipalities with big budgets and the greatest impact on service delivery are not adequately represented in those 41 clean audits.

She said the culture of not submitting the financials or late submission, which is flouting of the law, was setting in again, as five years ago 90% municipalities submitted their financials in time for audit, but only 80% did so this time.

The AG reports that local government finances also remain under severe pressure due to non-payment by municipal debtors, poor budgeting practices, and ineffective financial management.

The financial position of 28% of South Africa’s municipalities was so dire that there was significant doubt about whether they would be able to continue operating in the near future.

This means such municipalities do not have enough revenue to cover their expenditure, owe more than they have, and therefore can no longer pay salaries and other obligations such as maintaining infrastructure assets such as roads, or provide water and other basic services.

Many of these municipalities have been in this dire financial position multiple times over the course of the administration.

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