PRETORIA - South Africa’s Auditor-General, Terence Nombembe, today addressed the media on the successes and challenges of his office in its efforts to continue ensuring a high-level relationship with all South African municipalities with a view to guiding them to achieve clean audits by 2014 as per the government’s target.
Nombembe cited the participation of not only municipal managers in the audit process, but also that of political leadership, with premiers, mayors, MECs and councillors pledging commitment, and therefore escalating the level of commitment, as one of the reasons for success at those municipalities and provinces that improved their audit outcomes in the previous financial year.
Presenting the national municipal audit outcomes for the 2008-09 financial year at a joint media briefing with Cooperative Governance and Traditional Affairs Minister Sicelo Shiceka, Nombembe said that overall, there has been a distinct (although marginal) improvement in audit outcomes from 2004-05 to the current financial year and emphasised that there was a great need to intensify efforts by all spheres of government for the 2014 target to be met.
“Where political leadership has shown keen interest and got involved in the key operations of their municipalities, implemented and monitored remedial action plans, the results have been encouragingly positive. We recently completed a successful countrywide roadshow during which we shared the 2008-09 audit outcomes with premiers, MECs, mayors, councillors and municipal managers and the response has been positive. There is awareness and overwhelming commitment from the leadership to improve future audit outcomes by ensuring that internal controls are improved,” said Nombembe.
He also mentioned that in a further effort to improve the working processes between the Auditor-General’s office and the municipalities, his office has developed a tracking system that can alert mayors and their administrations about matters of leadership, governance and financial management that could lead to an unfavourable audit result.
“The system will flag areas of concern which can then be discussed with the municipal leadership routinely throughout the year before audits are finalised. This way, municipalities will be able to timeously develop remedial action plans that will steer them towards clean audits. For example, we will guide mayors on what kind of information they should obtain from their officials to improve oversight; what kind of financial disciplines should be in place daily, weekly or monthly; confirm if daily (municipal) transactions are in line with what has been promised to communities for service delivery; and how a mayor could confirm if transactions are approved within legal and proper governance frameworks. Fundamentally, key internal controls need to be operating effectively and the auditors will provide insights as to the effectiveness thereof during the financial year, in order that the eventual audit outcome will not be a surprise to those charged with governance and oversight,” he continued.
As part of this drive towards clean municipal audits, the Auditor-General and his team have already started visiting and meeting both legislative and executive municipal leaders. The aim is to visit all of South Africa’s 283 municipalities before the end of 2011.
“We have embarked on this initiative with the full confidence and knowledge that all municipalities are capable of achieving clean audits. The challenges facing local government are not insurmountable and with the enthusiasm and commitment shown by those local government leaders we have already met, we are convinced that the drive towards clean audits is gaining momentum,” commented Nombembe.

Financial audit outcomes

Of South Africa’s 283 municipalities – six metros; 44 high-capacity municipalities; 105 medium-capacity municipalities and 128 low-capacity municipalities, the Auditor-General of South Africa (AGSA) analysed 247 (87%). Of the 56 municipal entities, 48 (86%) were included in the analysis.
The audits of 36 (13%) municipalities and eight (14%) entities were outstanding at 8 March 2010 due to financial statements not having been submitted, being submitted after the legislated deadline, or as a result of the AGSA’s internal quality assurance and monitoring processes.
Financially unqualified (with other matters) audit outcomes improved by 15% from 131 (in 2007-08) to 151 in the 2008-09 financial year. The most notable improvements are in KwaZulu-Natal and Gauteng.
According to Nombembe this indicates that improved audit results are achievable, “especially where leadership has kept to their commitments given during 2007-08 roadshows and to AGSA leadership during their door-to-door municipal visits”.
For those audits completed by 8 March 2010 Gauteng, KwaZulu-Natal, Limpopo and the Northern Cape are the only provinces that have registered a net gain in the number of improved municipal audit results over the previous year.
Notwithstanding the 15% increase over the previous year in the number of financially unqualified (with or without other matters) audits, the level of disclaimers of opinion and adverse audit opinions within local government is still high - currently 32% of completed audits. Provinces with the largest number of worst-case municipal audit opinions (disclaimed and adverse) are the Northern Cape (19), Free State (18) and Eastern Cape (17).
Clean audit opinions account for only 2% of the completed audits. These are audits where no findings were raised, inter-alia, on compliance with laws and regulations or incorrect disclosure in financial statements of irregular, unauthorised or fruitless and wasteful expenditure. Gauteng and the Northern Cape received two clean audit opinions each, while the Eastern and Western Cape received one each.
The Auditor-General cites, amongst other things, lack of basic controls such as document management; lack of management supervision of finance units; lack of discipline in preparing monthly financial statements with disclosure notes; lack of technical skills within finance departments; and audit committees not taking responsibility for reviewing the financial statements submitted for audit, as some of the areas that need special attention.
“Generally, where improvements were observed, it was as a result of the administrative and political leadership’s interest in accounting and audit matters - monthly monitoring and supervision of finance functions and the implementation of action plans to address the prior year’s audit issues. KwaZulu-Natal and Gauteng are good examples of this,” said Nombembe.

Audit of reported performance against predetermined objectives

Since 2005-06, the AGSA, in partnership with the National Treasury, has been gradually phasing in and explaining the essence of auditing performance information, i.e. the audit of reported performance against predetermined objectives. In the near future, The AGSA will issue an audit opinion on the performance information published by municipalities. The AGSA’s analysis of current trends emerging from audits has highlighted the following:

• on average, 92% of the municipalities and municipal entities did not fully comply with the regulatory requirements;
• for approximately 37%, the performance information reported was not meaningful or useful;
• for approximately 34%, the reported performance information was not supported by reliable evidence; and
• for approximately 35%, performance information was not received on time for audit purposes.

Nombembe said the importance of municipalities reporting meaningfully and accurately on service delivery cannot be emphasised enough. The weaknesses identified with regard to reported information against predetermined objectives indicate that the information presented in annual reports is not sufficiently reliable. The presentation of reliable information on service delivery is absolutely critical, especially for municipalities, which are the closest sphere of government to service delivery to communities. It is important that those charged with governance and oversight should note the link that exists between reporting on financial matters and reporting service delivery.
Returning to the audit of financial statements the Auditor General concluded: “While there has been a noticeable, overall movement towards positive results over the past five years, it is clear that we need to increase the momentum and work even harder to achieve and maintain clean audits by 2014 and beyond. We are committed to make our contribution in making sure this happens from the audit side. However, it is ultimately the municipal and provincial leadership that needs to act on the insights that we have provided and who need to see through the commitments that they have given.”

Media note: The Consolidated General Report on the Local Government Audit Outcomes 2008/09 is available on the AGSA website, www.agsa.co.za, under MFMA General Reports.