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How the AG is trying to plug a torpedo-sized hole in state finances

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It is astonishing to read in the Auditor-General’s (AG’s) 2019 consolidated general report that public entities spent R1.747 trillion in the last fiscal year, reports Moneyweb.

But perhaps it shouldn’t be that surprising, given the 2019 national budget estimated spending of R1.665 trillion for 2018/19, which amounts to 33% of GDP.

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Auditor-General Kimi Makwetu, was sparing in his praise of public entities and their financial conduct

If we take the AG’s figures, the public sector is gobbling up 34.5% of GDP – and this figure is growing each year. That should concern us.

It should also concern us that more than a third of the national budget is going on salaries.

The 20 state-owned entities (SOEs) audited by the AG spent R347 billion in the last financial year.

Irregularities defined

At a media training session this week, representatives from the office of the AG explained the audit process followed, as well as the AG’s new powers to curb the alarming trends in irregular spending and material irregularities.

The two have quite distinct meanings:

  • Irregular spending (SI) is where there is non-compliance with legislation leading up to payment. For example, awarding a contract without a competitive bidding process. Everything paid out to the winning bidder will then be deemed irregular, even though the service was delivered as promised. In the last year, irregular spending amounted to R62 billion, up from R51 billion the previous year.
  • A material irregularity (MI) is where there was non-compliance with the law but goes a step further than IS to embrace fraud, theft and actual loss. For example, where an uncompetitive bidding process results in the award of a contract for R20 million when the same service could have been delivered for R18 million, resulting in a loss of R2 million.

In the last financial year the AG identified 28 material irregularities, representing a financial loss of R2.8 billion, of which R2.2 billion was logged to the Passenger Rail Agency of SA (Prasa).

“A prepayment of R2.6 billion was made to the supplier, but the auditee [Prasa] derived no value as the locomotives were not fit for purpose,” says the AG report. The supplier filed for liquidation in December 2018, dashing any hopes of financial recovery. The contract was set aside by the court in May 2019 after the matter was referred in 2015 to the Directorate for Priority Crime Investigation (the Hawks).

The greatest offender in terms of the number of material irregularities was the Department of Human Settlements in the Free State where contractors were paid for work not done, or duplicate invoices were paid out, and in some cases, retention amounts were paid out unlawfully.

In one instance, nearly R33 million was squandered after contractors were paid for work not done.

In another, the Gauteng Department of Health lost R149 million over an IT project for which no competitive bids were invited.

New powers

In terms of amendments to the Public Audit Act passed this year, the AG can now refer these matters to the police, the public protector and the special investigations unit, and recommend remedial action with timelines.

If no action is taken by the stipulated date, the AG must take action itself and instruct the accounting officer at the public entity to quantify and recover the loss. If that fails, the AG must issue a certificate of debt to the accounting officer or the relevant accounting authority. It then falls to the minister or other executive authority to recover the loss.

How this works in practice remains to be seen, says Alice Muller, national leader of audit services at the Auditor General of SA (AGSA). “Private auditors only have to comply with the Companies Act. We, as public auditors, have more legislation that must be complied with.”

This includes the Public Audit Act, the Public Finance Management Act and the Municipal Finance Management Act. And that’s not counting a tower of accounting and audit standards.

Muller believes state recoveries will increase 10-fold as a result of the new powers in terms of the Public Audit Act.

Drilling deeper into the material irregularities we learn that 39% of the cases involved unfair or uncompetitive procurement processes resulting in R438 million in overpriced goods or services. Another 39% of cases involved goods and services not delivered. And in 11% of cases, invoices were not paid on time.

Releasing the report last week, Auditor-General Kimi Makwetu said it was encouraging that unauthorised expenditure had declined by 23% from the previous year.

That’s where the praise ended.

In actuality, 74% of government departments had insufficient funds to settle their liabilities. This means they start the new financial year with part of their budget effectively pre-spent.

Fruitless and wasteful expenditure swallowed R849 million in the last financial year but swells to R4.16 billion over the last five years. The AG report also shows irregular expenditure in SOEs audited by private audit firms was R57 billion, of which R49.9 billion was at Transnet and R6.6 billion at Eskom.

Overall, audit outcomes across public entities regressed since 2015, with only 26% of auditees earning clean audits.

No state-owned entity managed to receive a clean audit.

The SA Post Office regressed, receiving a qualified audit opinion, and the Development Bank of Southern Africa received a financially unqualified opinion. Some SOEs enterprises were struggling to produce financial statements demonstrating their going concern status.

Makwetu recommends stabilising leadership at SOEs so they can tighten controls and implement action plans.

Given the parlous state of public finances, the AG’s new powers of enforcement will be a vital tool in reining in spendthrift public entities. And there’s every likelihood accounting officers and others involved in corrupt practices will end up in prison within the next 12 months.