AG report reflects inconsistent implementation and accountability

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DUDUZILE RAMELA: Hello and thank you very much for staying with the Market Update on SAfm, brought to you by Moneyweb.

The 2024/25 general report of the Auditor-General of South Africa [AG] for national and provincial departments, public entities and legislatures, makes for despondent reading – for lack of a better expression.

A year into the seventh administration of the government of national unity, the report points to minimal progress towards improved audits.

Now, of the 417 auditees in the period under review, only 151 achieved unqualified audit outcomes with no matters [of significance]. Now, the 151 clean audits look after 12% of the national and provincial expenditure budget.

The 266 auditees that did not receive clean audits are responsible for 88% of the total expenditure budget.

They were found to lack institutional capacity to produce credible financial performance or ensure compliance with legislation.

Dr Thami Zikode is the acting head of audit at the Office of the Auditor-General, and he joins us now for more on the report. Thank you very much, Doc, for your time this evening. Non-compliance with legislation is reported to be persistent and carries a financial and non-financial cost. Talk us through both variables.

THAMI ZIKODE: Okay. Thanks a lot, Duduzile, for having me, and good evening to your listeners. I think the important issue here is that when one looks at the financial consequences of this non-compliance, it comes in a variety of ways.

And when the government actually gets to appoint service providers who lack skills or competence, there are additional costs that are incurred in terms of re-performing the substandard work by the appointed contractor. That’s the first part.

Then the second part [is that it] exerts a lot of fiscal pressure on the state because, as we understand, that majority of the departments and entities get funding from the state through their allocations.

And when poor quality spend occurs with no value creation they go back to the state with a big impulse to seek or ask for more funds.

That also comes with added cost, where later on the government is going to have to investigate the cost incurred to determine what exactly happened.

As part of that, there will be legal disputes that will ensue because the other party who is aggrieved has a right to approach a competent court of law to state their case – even though in some instances they might know that they are in the wrong.

There are also consequence management costs … appointing [people] to chair the disciplinary hearing and the like – most of the time [the relevant information] is not shared within a lot of these entities.

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Then there’s a huge cost that normally comes with the financial recovery process.

This normally involves the legal process where the courts will be approached at huge expense to try and recover those costs.

And lastly, in terms of the financial side, the increased audit fee is due to increased scrutiny. The more non-compliances we encounter, the more our risk assessment tells us that we need to do more work.

On the non-financial side there are the issues around  delayed service delivery to citizens, reputational damage plus disputes, possible fines and penalties – as well as the issue of the impunity that continues within the departments and entities because no one actually deals with the consequence management.

This also diverts these resources from crucial projects with long-term social and economic environmental impact.

So, in a nutshell, while the financial costs are immediately visible, the impact their office instantly feels, the qualitative impact, is enduring and far-reaching.

Unfortunately some of the vulnerable citizens affected by poor service delivery are no longer here to speak for themselves.

For example, someone who needed a life-saving procedure in any of our public hospitals and did not get that service on time, probably no longer needs it because they’ve passed on.

So those are the real costs of non-compliance that occurs in the government departments and entities.

DUDUZILE RAMELA: This lack of institutional capacity, what does that mean?

THAMI ZIKODE: There are a couple of issues when one looks at the lack of institutional capacity. For example, you have people who are appointed in particular roles to exercise certain responsibilities.

Take finance departments as an example.

You need to have people who will be able to ensure that as and when the expenditure is incurred, they are able to account for each and every expenditure correctly, completely, and in line with the applicable framework in a department or entity.

When one looks at procurement, you need procurement specialists who are going to advise on which process to follow and at what point you really need to abandon that process if, for example, you are bound to have non-compliance – thereby implementing some form of probity review of the process itself to see whether it complies.

Then you also have people who look at the pre-determined objectives. Normally that’s the team that will sit in the strategic planning unit. Those are the people who say, yes, we have spent and we’ve complied with the laws and regulation, but did this expenditure we incurred give us any real value for us to deliver on our mandate?

So that institutional capability, all of it, is institutional capability that needs to be there in the department itself, such that it’s able to ensure that the financial reporting processes are credible and non-compliance is prevented, and that the reporting on predetermined objectives is up to scratch.

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So it talks across a number of things.

There are governance and leadership issues that we’re talking about, capabilities and skills, people who are implementing the internal controls, people who have planning and budgeting skills, people who have monitoring and oversight experience.

And then we have people who need to manage revenue. Coupled with that, it’s audit committees and internal audits, internal auditors that have the expertise to provide the necessary support and guidance to the accounting authorities and accounting officers.

DUDUZILE RAMELA: Okay. Gotcha. Last month, actually in February, you heard the finance minister speaking on this issue of skills and strengthening so that such situations can be minimised if not completely avoided.

As for irregular expenditure for 2024/25 – it totalled over R42 billion, yet this figure is said to likely underrepresent the true extent of the problem. What does that mean? How so?

THAMI ZIKODE: I think there are a couple of issues that we need to understand when it comes to irregular expenditure.

Number one is that when one looks at the regulations and the guidance from National Treasury, there is irregular expenditure under assessment that gets disclosed.

In other words, at the point where we conclude the audits, that irregular expenditure is under assessment to verify or confirm whether it is indeed irregular or not. We are talking of an amount just in excess of R30 billion.

If that expenditure is confirmed as irregular, which we truly believe it is, you’re looking at a figure of just over R70 billion in irregular expenditure.

That’s the first part.

But then as the second part within the audit outcomes themselves, we have entities which have been qualified on irregular expenditure completeness.

In other words, what we’re saying there is that this irregular expenditure that they’ve disclosed is incomplete and as such needs to be qualified, because when we go and we test additional … or we test the whole population, there is a high likelihood that this irregular expenditure would be materially higher than what is disclosed.

[Therefore] this justifies the basis for qualification.

DUDUZILE RAMELA: Okay. Thank you so much for that explanation. I think as to the non-financial cost, you outlined it greatly for us and for many South Africans these are things that they can actually see, because the report speaks, one, of persistent delays and systematic failures in infrastructure delivery on maintenance. It also speaks of the chronic delays and systematic project failures in human settlements.

The AG has lamented the chronic delays and project failures one reads of in the human settlement sector. The sector recorded the longest average infrastructure project delays, with some projects being delayed for almost 20 years.

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It’s not unusual to hear people bemoaning that they do not have places to stay, and so they will then build an informal settlement here and there – and these consistently crop up.

What are some of the, should I say, recommendations – because with each report you do release recommendations? This is nothing new. It would seem the report is becoming grimmer and grimmer. And so what are some of the recommendations, please Doc, for us?

THAMI ZIKODE: I think maybe just to provide context quickly before I get to the recommendations, of the 152 projects that we tested, 146 had material findings. That is, 96% of the projects have been material findings.

These findings are common across all the provinces and sectors, and talk to the delays, cost overruns, poor quality standards and under-utilisation.

These project failures undermine service delivery – and that is a mainly affecting education, healthcare, housing, water and the transport sector.

So among the recommendations that we’ve made to government we say they need to go back and look at the whole infrastructure project management process to be able to pick up the systemic issues.

The reason why we said that is that the issues that we pick up involve problems in planning, problems in execution. You have problems in monitoring and oversight. You also have problems in corrective action and consequence management.

So we really need properly and suitably qualified engineers to oversee these projects.

We also need integration and intergovernmental planning to be able to deal with the projects.

Just to give an example, we found projects where there are housing units that are built, but when you go into those housing units there’s no water, there’s no electricity, there’s no sanitation.

That talks to an isolated or a silo mentality in terms of planning from the government side. So we also recommended that.

Then there’s also an issue of ensuring that as and when progress on the project is happening, there then occurs the issue of overseeing the projects – and holding some of these suppliers accountable in terms of enforcing consequence management, because when you have to appoint some service providers to replace other contractors, that means incurring additional costs.

But we have contracts. And in those contracts we do have clauses that talk to what should happen when a contractor fails to deliver or when the contractor delivers substandard items.

But all of those things are not enforced and we find it very strange that that is allowed to happen.

DUDUZILE RAMELA: Curious, indeed. Doc, thank you very much for your time. Doctor Thami Zikode is acting head of audit at the Office of the Auditor-General.

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