Wednesday, 31 March 2021

Pretoria: Auditor General (AG) of South Africa, Tsakani Maluleke, has expressed concern over the financial health of departments as unauthorised expenditure increased in the 2019-2020 financial year.

“The financial health of departments continued to be alarming. Unauthorised expenditure, which is mainly as a result of overspending of the budget, increased from R1.65 billion to R18.12 billion – of which R15.13 billion was as a result of the early payment of the April 2020 social grants in response to the COVID-19 lockdown measures,” Maluleke said.

Addressing a media briefing on Wednesday on the audit outcomes for national and provincial departments, she said the remaining R2.99 billion was overspending by 21 departments.

“Over a third of departments ended the year in a deficit totalling R21.2 billion. In addition, over 60% of the departments had insufficient funds to settle all liabilities that existed at year-end if the unpaid expenses at year-end (totalling R22.78 billion) were also taken into account,” the AG said.

This means that these departments started the 2020-21 financial year with part of their budget effectively pre-spent – 27 departments will have to use more than 10% of their 2020-21 operational budget (excluding employee cost and transfers) to fund the shortfall.

“At year-end, 87% of the departments had claims against them, totalling R147.12 billion. Claims are made against departments through litigation for compensation as a result of a loss caused by the department – the most common claims are medical negligence claims against provincial health departments,” Maluleke said.

The total claims for provincial health departments (including medical claims) stood at R105.8 billion.

“Departments do not budget for such claims, which means that all successful claims will be paid from funds earmarked for other strategic priorities, including the delivery of services, further eroding the ability of these departments to be financially sustainable.

“A third of the departments had claims against them in excess of 10% of their next year’s operational budget – for five health departments, the unpaid claims at year-end were more than the next year’s entire operational budget. This continuing trend of using the next year’s budget to pay the current year’s expenses and claims had a negative impact on departments’ ability to pay creditors on time and to deliver services,” she said.

Key public entities are also under financial pressure. Fifty-five (29%) public entities incurred expenses that exceeded their revenue.

“Their combined deficit for the year was R64.95 billion, of which 92% related to the Road Accident Fund. A total of 21 public entities disclosed uncertainty about whether they will be able to continue as a going concern.

“Many of them are key development and delivery entities that have been disclosing their vulnerable financial position for many years, including the Road Accident Fund, the South African National Roads Agency, the Property Management Trading Entity and a number of provincial public entities,” the AG said.

The financial statements of 17 public entities were not reliable enough for financial analysis – these included seven technical and vocational education and training colleges, the Passenger Rail Agency of South Africa and four provincial public entities in North West.

“Even though most public entities would be able to continue their operations through obtaining funding (loans, grants and overdrafts), delaying creditor payments, cutting costs and reprioritising projects, these negative indicators raise concerns about their financial viability.

“Government cannot afford to lose money because of poor decision-making, neglect or inefficiencies. However, we continued to see a rise in fruitless and wasteful expenditure, with 231 auditees losing R2.39 billion in the current year, of which R0.37 billion was to pay penalties and interest as a result of late payment to creditors,” Maluleke said.

Over the last three years, R7.44 billion of government expenditure was fruitless and wasteful.

“Often findings on non-compliance with supply chain management legislation are viewed and commented on as procedural issues or possible fraud. But the potential for losses to government due to the correct processes not being followed is often overlooked,” the AG said.

Two-thirds of departments and 44% of public entities did not comply with supply chain management legislation, resulting in unfair or uncompetitive procurement processes.

“Most often this means that not all potential suppliers were given a fair chance to compete for work. Less competition often leads to higher prices being paid for goods and services.

“There were 42% of departments and 21% of public entities that did not comply with legislation on contract management, such as monitoring the performance of suppliers in accordance with contracts – this also often results in financial loss,” Maluleke said.

State-owned entities

The AG said state-owned entities are in serious financial difficulty.

“South African Airways and LMT Products (a subsidiary of Denel) are under business rescue and South African Express is under provisional liquidation. These entities did not submit financial statements for auditing – for most of the South African Airways group we have not seen financial statements for three years,” she said.

Many state-owned entities disclosed uncertainty in their financial statements about whether they will be able to continue as a going concern.

These include the Petroleum Oil and Gas Corporation, the South African Broadcasting Corporation, Denel and three of its subsidiaries (Densecure, Denel Aerostructures and Denel Vehicle Systems), the Independent Development Trust, the Land and Agricultural Development Bank of South Africa, Pelchem and the South African Nuclear Energy Corporation.

“A similar disclosure was made in the financial statements of Eskom, which is one of the state-owned entities we do not audit. Government had already issued guarantees of R445 billion to 11 state-owned entities (of which R350 billion was to Eskom) and these entities had used the guarantees to obtain R374 billion in loans,” the AG said.

Slight improvement in audit outcomes

The overall audit outcomes for government departments for the 2019-20 financial year show that 66 auditees improved their outcomes, while 35 regressed.

“In this year, we have seen 66 auditees improve their audit outcome category, either they moved from unqualified to clean or qualified to clean or qualified to unqualified.

“However, that is set back by the regression, 35 of them went backwards into a less desirable outcome,” Auditor General (AG) of South Africa, Tsakani Maluleke said.

She noted that the main reasons for improvements is the stability and the filling of vacancies at key roles, specifically accounting officer and chief financial officer (CFO).

“Over the years our analysis has demonstrated a high correlation between the tenure of an accounting officer and CFO and the audit outcomes. Many of the disclaimers are those where you do not have a CFO that stays longer than 22 months on average,” Maluleke said.

In total, 111 of the auditees (26%) managed to produce quality financial statements and performance reports and to comply with key legislation, thereby receiving a clean audit.

“This is a slight improvement from the 98 (23%) in the previous year. These auditees represent 17% of the expenditure budget of R1 706 billion managed by national and provincial government.

“The total expenditure budget comprises the operating and capital expenditure budgets of the departments and public entities as included in their financial statements,” she said.

Countrywide, 74% of the auditees received unqualified audit opinions on their financial statements, a slight improvement from 71% in the previous year.

“The number of auditees that submitted quality financial statements increased – 49% of the auditees could give us financial statements without misstatements, but this figure is still very low.

“The auditees with modified audit opinions (in other words, qualified, disclaimed and adverse) are responsible for 33% of the expenditure budget,” the AG said

The quality of performance reporting showed an improvement, with 71% of the auditees now publishing credible reports compared to 60% in the previous year.

“However, the quality of the performance reports submitted for auditing remained poor (only 39% submitted good-quality reports) and even after auditees corrected the misstatements we identified, we reported material findings on 29% of the performance reports,” Maluleke said.

Overall, 69% of the auditees materially did not comply with legislation. This outcome is only slightly better than the 73% of the previous year.

Compliance with supply chain management legislation slightly improved from the previous year.

“It remains concerning that only 36% of the auditees are fully complying. This is in spite of all the reporting we have done in this area, the red flags we have raised and the many recommendations we have made.

“Uncompetitive and unfair procurement processes and inadequate contract management remain common. We identified non-compliance with the legislation requiring auditees to procure certain commodities from local producers at 40% of the auditees where we audited this area, which could result in government not achieving the objectives of this initiative,” she said.

The AG noted that there had been little action in addressing the concerns raised year after year about contracts being awarded to employees and their families without the necessary declarations of interest.

“We also found little action being taken to ensure compliance with the Public Service Regulations that prohibits employees of departments from doing business with the state from 1 August 2016.” Maluleke said.