Auditor-General report

How bad is it really?

SALGA CEO, Xolile George, gives his opinion
Mr Xolile George
The initial public response to the recent Auditor-General report on municipal finances was something of a horror story - a picture of virtual collapse of financial management in many local governments, including the major cities. But a closer examination of the AG’s findings - and a better understanding of the nature of these audits - paints a different picture, writes SALGA CEO, Xolile George.

First, we need to address the misnomer that there is somehow a meaningful difference between a 'clean audit' and a 'qualified audit'. The reality is that there is not – and in any event, the concept of clean audits is a national government initiative and not necessarily an international accounting standard.

At the same time, we have to acknowledge that there are indeed problems, and some municipalities have a long way to go before they can reassure residents that public money is being properly managed.

But the management of local government finances is by no means bleak. And there are some significant improvements which should be celebrated:

• Almost half our municipalities (128 in total) received unqualified audits, where there financial statements contain no material misstatements and there was full compliance with the law. Thirteen of these municipalities received completely unqualified audits, whilst 115 municipalities have unqualified audits with findings.
• Less than 20% of municipalities received qualified audits – that is, there were material misstatements or insufficient evidence for the AG to conclude that specific amounts are not overstated or understated. This does not automatically translate into financial mismanagement – rather, it suggests shortcomings in applying financial procedures.
• Only 2% of municipalities (seven in total) received adverse audit reports.
• The number of municipalities whose audit reports have disclaimers has dropped from 77 in the last financial year to 35.
• Unauthorised expenditure has decreased from R6.3-billion to R4.3-billion, thanks to new system and controls and better financial management.

Of particular significance is the fact that 53 of the 61 KwaZulu-Natal municipalities (87%) received financially unqualified audits. This is a dramatic increase from the 38 municipalities (62%) which received unqualified audits in 2007/08. 

Municipalities in other provinces have also improved. Blue Crane Route in the Eastern Cape, for example received a disclaimer in 2004/05, but six years later, received an unqualified opinion. Richtersveld in the Northern Cape improved its audit opinion from an adverse opinion in 2004/05 to an unqualified opinion in 2010/11.

Granted, there are problem areas - particularly in the Eastern Cape, Free State and North-West, which received the majority of disclaimers. SALGA and its stakeholders will focus support initiatives to assist municipalities in these provinces to improve the audit findings.

We will also focus on the seven municipalities which received an adverse audit opinion, particularly those which have regressed from a qualified opinion to adverse.

So what are the key focus areas going forward? The AG's report is specific in this regard, and has the support of SALGA. It includes tightening supply chain management processes to close the space for corrupt practices, and ensuring better knowledge of good governance among officials and political leadership. At the same time, we have to acknowledging that the regulatory environment is constantly changing, and municipalities need time to adapt and embrace these new regimes.

Underpinning all this, as Finance Minister Pravin Gordhan highlighted, is the need for municipal officials to be held accountable, and for action to be taken against those who violate financial management regulations. As can be seen, there is still a long way to go before ratepayers feel a complete sense of trust in the people who manage the public purse. But it is a complete misnomer to suggest that all is lost. 

And we would all benefit from a more detailed examination of the situation, and a lot less exaggeration.

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This edition

Issue 68