TSAKANI MALULEKE: The good, the bad and the concerning in the latest audit report

On Wednesday, I tabled in parliament the 2020/2021 Public Finance Management Act general report audit outcomes of national and provincial governments and their entities.

The report presents a mixed bag of encouraging developments that we must take note of, combined with challenges that persist.

In the third year of the current administration, we continue to see improvements in the audit outcomes of national and provincial government. We commend the accounting officers and accounting authorities for their resilience and commitment to realising positive change in their outcomes. We also applaud the auditees for the continued increase in the number of clean audits.

Overall, 115 auditees obtained clean audit outcomes compared to 109 in the previous year. Together, these auditees are responsible for 19% of the R1.9-trillion expenditure budget managed by national and provincial government. Sixty-one of these auditees have managed to retain their clean audit status since the first year of this administration, and another 31 are close to obtaining this status. These auditees deserve special attention and encouragement.

In addition to these improvements, we commend auditees for the improvement in the submission of quality financial statements for auditing. In the year under review, 71% of auditees ultimately received unqualified audit opinions, meaning they published credible financial statements.

The report reflects slow but commendable progress in overall outcomes. However, we are concerned over a lack of improvement in state-owned enterprises, most of which did not obtain clean audits.

We register a similar concern in the case of the key service delivery departments within the health, education, human settlements and public works sectors, as they have the greatest effect on the lives of citizens.

The audit outcomes of these departments — which are jointly responsible for delivering essential services using almost a third of our government’s expenditure budget — are much slower to improve than other departments and entities.

Service delivery is of key concern to all South Africans, especially in a period like this, when already limited resources are stretched even further by the Covid-19 pandemic. As a result, we call on leadership to “accelerate improvements in accountability”, with particular focus on service delivery departments.

The improvements we have seen can be attributed to accounting officers and authorities as well as senior management being committed to ensuring that internal control processes were improved and that our recommendations were implemented. Furthermore, improvements were evident where accounting officers were adequately supported by their internal auditors and audit committees.

We are of the firm view that if all auditees were to religiously implement the basic disciplines of financial and performance management, with each of the different role players doing their part, the drive towards wholesale good governance in the public sector would be realised sooner.

In this 2020/2021 audit cycle, we audited 679 departments and entities, and our reports focus on 425 of these audits, accounting for most of the government’s expenditure budget and key services. There are 34 incomplete audits — 17 due to non-submission of financial statements, four because financial statements were submitted late and 13 due to delays in the audit process.  Auditees that do not present financial statements and performance reports for auditing, as required by legislation, effectively undermine the overall efforts made by many role players to improve transparency and accountability in the public service.

While submitting financial statements is the crucial first step for enabling accountability and transparency, institutions must also ensure that their financial statements are credible. Regrettably, more than half of our auditees submitted poor-quality financial statements for auditing. This means that if our audit teams had not identified errors in these financial statements and given auditees the chance to correct them, less than half of the auditees would have received unqualified audit opinions, compared to the 71 % that ultimately received this outcome.

It is simply not sustainable to rely on an audit to correct financial statements and improve the audit outcomes of public institutions. Though the correction process is not unique and we do not mind playing our part to strengthen the credibility of financial information, the concern is that, as seen at the peak of the pandemic, the lack of basic financial management disciplines makes our public institutions less resilient in situations that require agile and adaptable responses.

Another area of great concern is the 13 public entities that received adverse and disclaimed opinions. This is the worst audit outcome an auditee can get, as it means they could not provide evidence for most of the important amounts and critical disclosures in their financial statements. This significantly undermines the overall credibility of information available to users of financial statements.

The same 13 public entities received disclaimed opinions in the previous year as well. Another nine public entities that previously received disclaimed opinions failed to submit their financial statements for auditing by the legislated date. In addition, some experienced delays on their audits, mainly due to technical disputes or the late submission of information required by auditors. These include major entities that play a significant role in the economy, such as the Passenger Rail Agency of SA, the Independent Development Trust and Denel.

The financial viability of a number of departments is concerning. Key indicators of deteriorating financial health at departments include operating deficits (where expenditure exceeds income),  inability to pay creditors on time, and reported unauthorised expenditure, which remains high at a total of R3.21bn, all from budget overspending. Legal claims against government departments, particularly in the health sector, further reduced available funds for intended programmes.

Irregular expenditure reported in the financial statements increased to R166.85bn, from R109.82bn in the previous year. Such expenditure shows that auditees do not follow the established rules, especially regulations, when making procurement decisions.

While there is still much work to be done, it is encouraging to note that accounting officers are listening to our messages and heeding our calls. What we need to see is a sustained effort by all role players to “accelerate improvements in accountability”.

• Maluleke is the auditor-general of SA.