Maluleke also said this number did not include Transnet with irregular expenditure of R56 billion and Eskom with R11 billion when she presented the audit outcomes of the past financial year on Wednesday. She said non-compliance with supply chain management is often called irregular expenditure.
However, Maluleke, who released her first report as the AG, did report “signs of improvement” in the national and provincial government audits, but said her office “cannot yet see the progressive and sustainable improvements required to prevent accountability failures and deal with them appropriately and consistently across national and provincial government”.
Key audit outcomes
According to the report, audit outcomes improved overall, with 66 departments or entities improving and 35 regressing. The main reasons for improvements were:
- Filling important management positions, especially of chief financial and accounting officers. Stability in key positions has been a driver of improving poor audit outcomes and maintaining good audit outcomes
- Commitment by accounting officers and senior management with direct involvement to ensure improvements in internal control processes and implementation of the AG’s recommendations
- Improvements in internal controls, including implementation of preventative controls.
Key features of audit results
- 111 (26%) departments or entities managed to produce quality financial statements and performance reports to receive a clean audit, a slight improvement from 98 (23%) in the previous year and representing 17% of the expenditure budget of R1.7 trillion.
- 74% of the departments and entities received unqualified audit opinions, a slight improvement from 71% in the previous year.
- The number of departments and entities that submitted quality financial statements increased.
- The quality of performance reporting improved in 2019-20, with 71% of the departments and entities now publishing credible reports, compared to 60% in the previous year.
- The quality of the performance reports submitted for auditing remained poor, with only 39% submitting good-quality reports. Even after misstatements identified by the auditors were corrected 29% of the performance reports still had material findings.
- Overall 69% of the departments and entities failed to comply with legislation compared to 73% in the previous year.
- Compliance with supply chain management legislation slightly improved from the previous year but only 36% of the departments and entities are fully complying.
- Uncompetitive and unfair procurement processes and inadequate contract management remain common.
Decrease in irregular expenditure
Irregular expenditure decreased to R54.34 billion from R66.9 billion in the previous year. This includes irregular expenditure (R7.71 billion) of departments and entities whose audits were completed after the cut-off date on 30 November, as well as unaudited amounts disclosed in financial statements.
However, Maluleke said this amount could be higher, as 31% of the audits were qualified because the amount disclosed was incomplete and/or disclosed that there was irregular expenditure, but the full amount was unknown. She said if the full irregular expenditure amount was disclosed there would not have been a decrease from the previous year.
The AG could not audit contracts to the value of R2.08 billion due to missing or incomplete information. Maluleke says departments and entities have a poor track record dealing with irregular expenditure and ensuring accountability. This is reflected in the year-end balance of irregular expenditure accumulated over many years not dealt with at R262.03 billion.
The report revealed widespread weaknesses in the basic internal controls, such as:
- Only 34% had effective action plans to proactively address the root causes of audit findings
- Only 42% had good controls
- Only 24% had good and proper processes for in-year and year-end reporting
- Only 25% had good controls to review and monitoring of compliance with legislation
- Only 8% had good IT general controls.
Maluleke says her office is concerned about the 21 departments and entities that received disclaimed or adverse opinions that could not be analysed and are responsible for 2% of the expenditure budget. She is also concerned about these state-owned entities in serious financial difficulty that did not submit financial statements for auditing:
- South African Airways that did not submit financial statements for the past three years and LMT Products, a subsidiary of Denel which is under business rescue
- SA Express is under provisional liquidation.
She also pointed out that these state-owned entities disclosed uncertainty in their financial statements whether they will be able to continue as a going concern:
- Petroleum Oil and Gas Corporation
- South African Broadcasting Corporation
- Denel and three subsidiaries (Densure, Denel Aerostructures and Denel Vehicle Systems)
- Independent Development Trust
- Land and Agricultural Bank of South Africa
- South African Nuclear Energy Corporation
Unauthorised expenditure, as a result of overspending on 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.
- More than 60% of the departments had insufficient funds to settle all liabilities if unpaid expenses totaling R22.78 billion are taken into account
- 27 departments will have to use more than 10% of their 2020-21 operational budgets
- At year-end, 87% of the departments had claims against them totaling R147.12 billion.
Maluleke said claims against departments through litigation for compensation as a result of a loss caused by the department totaled R105.8 billion, mostly for medical negligence claims against provincial health departments.
A total deficit of R64.95 billion was incurred by the 29% of public entities whose expenditure exceeded their revenue, with 92% of the total deficit related to the Road Accident Fund.
In addition, 21 public entities disclosed uncertainty about whether they will be able to continue as a going concern, including the Road Accident Fund, South African National Roads Agency, the Property Management Trading Entity and a number of provincial public entities.
The financial statements of 17 public entities were not reliable enough for financial analysis, including the Passenger Rail Agency of South Africa, seven TVET colleges and four provincial entities in the North West.
Fruitless and wasteful expenditure
Fruitless and wasteful expenditure is money that is lost to the state or that could be permanently lost if not recovered. In the current year, 231 departments and entities lost R2.39 billion in fruitless and wasteful expenditure, with R7.44 billion of government expenditure declared fruitless and wasteful over the past three years.