In our 2019-20 general report, we commented on the signs of improvement at some auditees, but cautioned that the sustainable solutions and financial management disciplines required to prevent accountability failures and financial losses were not yet in place and would require investment and commitment from all levels of government.
We also highlighted that state-owned enterprises and key service delivery departments were struggling, which was having a significant impact on government finances and service delivery. Lastly, we reiterated the need for there to be consequences for accountability failures, and implored oversight bodies and executive authorities to play their part in supporting the material irregularity process we implemented to strengthen accountability mechanisms.
In 2020-21, the economic downturn and covid-19 left departments and public entities with limited funds available to deliver on their mandates, while also having to reprioritise their budgets to respond to the pandemic and operate within the extraordinary circumstances it caused. The good news is that even in these difficult times, some auditees were able to focus on compliance and governance issues and ultimately improved their audit outcomes.
Although we celebrate and acknowledge the admirable effort that goes into every incremental improvement, our call – and the theme of this general report – is that there is a need to accelerate improvements in accountability. Progress is slow, and those auditees with the greatest impact on the lives of citizens and the financial health of government are lagging behind in the improvement trend.
In the 2020-21 audit cycle, we audited 679 departments and public entities, and in this report we focus on the results of 425 of these audits. The report includes information, statistics, insight and stories on the audit outcomes and state of these departments and public entities, with a particular focus on the key service delivery departments, state-owned enterprises, provincial government and information technology (IT).
We also report on the progress auditees have made in dealing with the shortcomings and risks we identified through our real-time audit of government’s covid-19 initiatives – this being our final report on covid-19 spending at national and provincial level.
As in previous years, we account for the implementation of our expanded mandate and share what we have identified and observed through the material irregularity process.
The remainder of this chapter provides a summary of the main results, messages and requisite call to action to national and provincial leadership and oversight structures.
In the third year of the current administration, we continue to see a net improvement in the audit outcomes in national and provincial government, as shown in the figure on the next page. The cut-off date for the audit outcomes to be included in this report was 15 October 2021, but to share the most updated information, the figure also includes the outcomes of eight auditees whose audits we finalised after the cut-off date.
The good practices at these auditees that resulted in improved audit outcomes were as follows:
- Accounting officers and authorities and senior management were committed to, and got directly involved in, ensuring that internal control processes were improved and our recommendations were implemented. There was also stability in these key positions.
- Internal controls were improved – this includes preventative controls being implemented.
- Accounting officers and authorities, executive authorities, internal audit and audit committees provided oversight, monitoring and assurance.
The 115 auditees (48 departments and 67 public entities) with a clean audit status represent 19% of the expenditure budget of R1,9 trillion managed by national and provincial government.
The number of clean audits increases every year due to significant effort and commitment by the leadership, officials and governance structures of these auditees. At least 31 auditees are very close to obtaining a clean audit status. Some have been working towards this goal for many years and, if they achieve it in 2021-22, we anticipate an uptick in clean audits.
However, it is often difficult to sustain a clean audit if financial and performance management systems and controls are not operating effectively. It is thus commendable that 62 auditees have managed to retain their clean audit status since the first year of the current administration.
When an auditee receives a clean audit, it means that their financial statements and performance report give a transparent, honest and credible account of their achievements, failures, problems and risks. In other words, these accountability reports present the true picture of that auditee, whether good or bad. This enables everyone with an interest in the auditee – particularly those who need to oversee the auditee’s performance and provide support for it to succeed – to judge how the auditee is doing and to take action where necessary. It also means that the auditee complied with the important legislation that applies to it and, where slip-ups did occur, they were rare or not material.
A clean audit is not always an indicator of good service delivery. However, we have seen that auditees that have the controls and systems in place to plan, measure, monitor and account for their finances and performance, and to stay within the rules, often also have a solid foundation for service delivery that will benefit the citizens of South Africa.
The audit outcomes of the key service delivery departments within the health, education, human settlements and public works sectors were poor when compared to other departments, and improvements were much slower. These departments are responsible for almost a third of the expenditure budget and are instrumental in managing infrastructure and delivering essential services. While the audit outcomes of public entities show a definite upward trend, this is not the case for state-owned enterprises, and many of these audits were not completed because the entities did not submit their financial statements for auditing.
At a time when departments, state-owned enterprises and public entities need to optimise how they use their resources by doing more with less, and when the public’s demands for service delivery and accountability are increasing, accounting officers and authorities should do everything in their power to get the most value from every rand spent and manage every aspect of their finances with diligence and care. Yet we continue to find evidence of serious weaknesses in financial management.
Credible financial statements are crucial for enabling accountability and transparency, but more than half of the auditees submitted poor-quality financial statements for auditing. This means that if misstatements had not been identified in these financial statements and the auditees allowed to correct them, only 182 auditees would have received unqualified audit opinions, compared to the 302 that ultimately received this outcome.
Most of the auditees that did not submit financial statements for auditing were state-owned enterprises. The Denel group did not submit financial statements for auditing due to financial and operational challenges, which resulted in a loss of key finance staff. The financial statements of the South African Airways group have been outstanding since 2017-18 because the board and business rescue practitioner decided not to submit financial statements due to the business rescue proceedings. The financial statements for 2017-18 were only submitted for auditing in September 2021. The financial statements of South African Express Airways have been outstanding since 2019-20 due to the entity being placed in provisional liquidation.
A disclaimed opinion is the worst audit opinion an auditee can get, as it means that they could not provide us with evidence for most of the amounts and disclosures in their financial statements. As a result, we could not express an opinion on whether the financial statements were credible. Twelve public entities received disclaimed opinions in 2020-21, including the South African Nuclear Energy Corporation, the National Skills Fund, four technical and vocational education and training colleges, and both the Free State and North West development corporations. All 12 public entities had also received disclaimed opinions in 2019-20. Another nine public entities that had previously received disclaimed opinions had either not submitted their financial statements for auditing by the cut-off date for this report, or had submitted them so late that the audit was still in progress. These entities include the Passenger Rail Agency of South Africa, the Independent Development Trust and the Compensation Fund.
If financial statements are not prepared, or are so poor that we cannot express an opinion on their credibility, the users of those financial statements (e.g. the executive, oversight, creditors and banks) are deprived of information on the state of the public entity’s finances. This has a significant effect on the accountability value chain.
The financial health of departments remains concerning. In 2020-21, unauthorised expenditure totalled R3,21 billion, all from overspending of the budget. Budget cuts and reprioritisation, along with emergency and unplanned spending in response to the covid-19 pandemic, meant departments had less funding available to fully cover their operational costs. Claims against the state further reduced available budgets, as most departments do not budget for such claims.
Even in these circumstances, good financial management should not suffer – instead, it should be reinforced to ensure that the limited funds available are spent wisely and within budget.
As a result of these factors, almost a third of departments ended the year in a deficit, which came to a combined R41,74 billion. In addition, over 60% of departments did not have sufficient funds to settle all their liabilities at year-end, with cash shortfalls totalling R33,29 billion. This means that the viability of these departments, and their ability to deliver on their mandates, is in question, as they started the 2021-22 financial year with part of their budgets effectively pre-spent.
The key service delivery departments have the poorest financial health of all, which affects their ability to deliver services to citizens. In total, these departments incurred 90% of all unauthorised expenditure and their deficits totalled
R15,65 billion. Five provincial health departments had deficits totalling R6,2 billion.
In 2020-21, the provincial health departments paid out R1,76 billion for medical negligence claims, while the estimated settlement value of unpaid claims at year-end was R124,15 billion (75% of the total claims against the state). Seven provincial health departments had unpaid claims at year-end that exceeded their entire operational budget for the next year.
This growing trend of departments using the next year’s budget to pay the current year’s expenses and claims adversely affected their ability to pay creditors on time, and continues to have a negative impact on service delivery.
State-owned enterprises are in serious financial difficulty. In addition to the well-known financial problems at South African Airways, Denel and South African Express Airways, the South African Broadcasting Corporation and the South African Nuclear Energy Corporation disclosed uncertainty in their financial statements about whether they will be able to continue their operations. We expect to see more such disclosures at some of the state-owned enterprises with outstanding audits.
Some state-owned enterprises continued to ask for – and receive – funding from government, diverting funds intended for primary service delivery.
Key public entities were also under financial pressure. If we exclude state-owned enterprises, the 31% of public entities with expenditure that exceeded their revenue incurred a total deficit of R7,58 billion. Thirteen public entities disclosed uncertainty about whether they will be able to continue their operations. Many of these are key development and delivery entities that have been disclosing their vulnerable financial position for many years, including the South African National Roads Agency, the Property Management Trading Entity and a number of provincial public entities.
Government cannot afford to lose money because of poor decision-making, neglect or inefficiencies. However, high levels of fruitless and wasteful expenditure continue, with 224 auditees losing a total of R1,72 billion in the current year. Again, key service delivery departments and state-owned enterprises were the main culprits, wasting a combined R0,90 billion (52%).
Over the last three years, R6,71 billion of government expenditure has been fruitless and wasteful, as it was made without reasonable care.
Auditees are required to plan what they must deliver every year and over the term of administration. In their annual performance reports, they account for whether they managed to achieve their targets so that the executive authority and oversight structures can call them to account and/or provide support where they struggle. Government also needs this information to track the progress made towards achieving its medium-term objectives (as included in the Medium-Term Strategic Framework), its long-term goals (as included in the National Development Plan) and the sustainable development goals.
Good planning, in-year performance management, and monitoring and reporting that is useful and reliable are crucial for achieving the intended outcomes of government programmes and service delivery. Performance information that is not credible hampers decision-making on important matters, such as funding allocation for government programmes, where intervention or reprioritisation is needed and where accounting officers and authorities are not performing.
It does not bode well for service delivery that 60% of auditees submitted poor-quality performance reports for auditing. The most common problem we identified was that the achievements reported were not reliable, meaning they were either incorrect or there was no evidence to support the achievement. We also found that the indicators and targets against which the achievements are reported were not useful, meaning that they cannot be measured or relied on, or that they were not relevant to the original commitments made in the performance plans. Not all auditees could correct the problems we identified, which resulted in 88 performance reports (28%) being published with significant flaws.
Only 14 key service delivery departments (36%) got it right. These departments deliver services that directly affect the lives of citizens, so they must be able to properly manage and credibly account for their performance to oversight and the public. The main problems we identified within these sectors were as follows:
- Data gathering for the performance report relies heavily on manual processes and is prone to human error that is not detected and corrected in time.
- Only in the health sector do all the provincial departments measure and report on the same performance indicators, referred to as ‘standardised indicators’. The education, human settlements and public works sectors do not have such standardised indicators, which reduces their ability to measure and reliably report on their progress towards achieving the service delivery targets set for this administration.
- For example, in the public works sector, the Northern Cape Department of Public Works and Infrastructure was the only provincial department to measure whether infrastructure projects were completed in time and within budget, and to include this information in its plans and reports, despite this being the sector’s most relevant area of performance.
The lack of credible data and information in these sectors also reduces their ability to deliver services, respond to any challenges that could arise and make decisions. For example, if a health department cannot reliably measure the number of tuberculosis patients being serviced by a specific hospital, that hospital may end up with either too little or too much medicine to treat those patients.
Based on the best information available on how these sectors have performed over the past two years, it is clear that the departments of health, human settlements and public works will struggle to achieve all their five-year targets. We also have significant concerns about infrastructure development projects, as well as delivery and maintenance of public sector infrastructure.
It is widely accepted that South Africa’s economic recovery from the devastation of the covid-19 pandemic and social unrest hinges on infrastructure development. One of the key initiatives in the South African Economic Reconstruction and Recovery Plan is aggressive infrastructure investment, which will lead to employment opportunities, skills transfer and development, and much-needed economic growth.
The health, education and human settlements sectors received R34,32 billion in grant funding for infrastructure projects to create sustainable human settlements, build healthcare infrastructure, and build and upgrade schools.
Although each sector has unique circumstances, infrastructure investment in these sectors faces the same problems. Over the past few years, we have reported on the internal control deficiencies that led to money being wasted and value not being derived because of inefficient and ineffective infrastructure delivery. But our call to address these deficiencies has not been heeded, and infrastructure projects continue to face the same delivery challenges that we have reported previously.
The unattended project deficiencies included:
- inadequate needs assessment and project planning
- ineffective monitoring of project milestones and contractors or implementing agents
- contractors underperforming without facing consequences
- contractors not being paid on time
- failure in coordination and collaboration between different levels of government, or between stakeholders in the same institution.
This resulted in:
- delayed project completion
- increased project cost and financial losses
- defects in build quality
- completed infrastructure not being commissioned or being underused.
The continued shortage of housing, good school infrastructure and access to healthcare facilities is a direct result of these project failures.
Poor-quality infrastructure also results in shorter lifespans for completed projects, which exposes the public to potential harm. In addition, the money wasted on such projects could have been spent on other government priorities.
The public works sector is responsible for providing and maintaining infrastructure that enables departments to deliver services to the public. Given the large number of properties under its custodianship (145 712 properties), the sector could be expected to spend a significant portion of its budget on facility management to ensure that these properties are regularly assessed and properly maintained. However, it actually allocates only 18% of its budget to facility management, while spending the largest portion (37%) on private leases.
According to the Government Immovable Asset Management Act, properties that have had their condition assessed at 20% are considered to be in poor condition and neither safe nor fit for use. However, 1 765 of the 2 160 properties in poor condition are still being used. This includes schools, which puts learners and teachers at risk of personal harm.
The sector owns over a thousand buildings that are not occupied, mostly because they do not meet the needs of departments. As a result, there are 3 704 buildings being leased from private property owners, of which 28% have expired lease contracts and are leased on a month-to-month basis. Some of these leases are very costly and escalate at a rate of 10% each year, which is generally above the inflation rate. As a result of the lack of competitive processes, the sector has incurred millions of rands in irregular expenditure and lost opportunities to negotiate these contracts to market-related levels.
Overall, 69% of auditees materially did not comply with legislation. This outcome is only slightly better than the 71% we recorded in the previous year.
The number of auditees at which we identified material non-compliance with supply chain management legislation declined from 37% in the previous year to 31%. However, this was partly because procurement decreased due to budget cuts. It is thus early days to celebrate an improvement in supply chain management compliance, especially given the many procurement failures observed during the height of the pandemic and reported in our special reports.
Uncompetitive and unfair procurement processes, inadequate contract management, and non-compliance with the legislation that requires auditees to procure certain commodities from local producers remain common. There has also been little action to address the concerns we have raised year after year about contracts being awarded to employees and their families without the necessary declarations of interest being made, and about non-compliance with the legislation that prohibits department employees from doing business with the state.
Irregular expenditure reported in the financial statements increased to R166,85 billion from R109,82 billion in the previous year. The National Student Financial Aid Scheme was responsible for R77,49 billion of the total, mainly because it did not consult with the respective minister on the funding rules and eligibility criteria for student bursaries, as required by legislation.
In reality, irregular expenditure could be even higher, as 30% of auditees were qualified because the amount they disclosed was incomplete and/or they had incurred irregular expenditure but the full amount was not known. We were also unable to audit R2,14 billion worth of contracts because information was missing or incomplete.
Auditees have a poor track record when it comes to dealing with irregular expenditure and ensuring that the relevant people are held accountable. The year-end balance of irregular expenditure that had accumulated over many years and had not been either recovered, condoned or written off stood at R488,14 billion.
Provincial audit outcomes
Provincial leadership and legislatures should focus on implementing sustainable solutions at provincial departments and public entities to improve the audit outcomes and delivery in the provinces. Our key provincial messages are summarised below, and we invite you to read our detailed insights in chapter 8.
Government departments and entities use information systems to process critical business transactions and report on operational and financial performance. Over the years, we have identified significant control weaknesses in government’s information systems, but the urgency to address these problems has been lacking, resulting in continued system vulnerabilities, project failures and financial loss.
The impact of these weaknesses was as follows:
Government continues to spend money on new and advanced systems to streamline its processes. However, due to significant system weaknesses, we could not rely on the transactions and data processed by most of these systems. The systems are also vulnerable to misuse, abuse and fraud.
- Hackers successfully exploited security weaknesses at some of the auditees we rated as having weak IT security. This resulted in some key government services not being available for a prolonged period and, in some cases, hackers using ransomware for financial gain.
- If a significant IT incident causes major business disruptions, auditees with inadequate or ineffective disaster recovery capabilities cannot resume normal business operations timeously, resulting in a loss of services or revenue.
- Poorly managed IT projects resulted in auditees incurring costs that could have been avoided. We identified that R1,7 billion had been spent on system implementation projects that did not meet business expectations.
- Auditees paid for software licences they did not need, resulting in expenditure that could have been avoided. We identified R46 million in such avoidable expenses.
The root cause of the prevailing weak IT control environment is poor IT governance processes. The accounting officers and authorities of departments and public entities are responsible for effective IT governance, but have not fulfilled this responsibility for a number of years.
In 2020, we tabled two special reports on the financial management of the covid-19 initiatives in national and provincial government based on our real-time audit of these initiatives. We continued to audit the 15 selected initiatives as part of our annual audits, and some of the problems we identified also affected the 2020-21 audit outcomes as well as the irregular and fruitless and wasteful expenditure disclosure of the relevant auditees, as detailed in this report.
According to the accounting records of our auditees and supporting expenditure information from external sources at 31 March 2021, as well as the May 2021 report from the Banking Association of South Africa on the credit guarantee scheme, only R218,54 billion of government’s R500 billion relief package had been used.
We are encouraged by the impact of this real-time audit, particularly the implementation of controls to reduce both the payment of benefits and grants to ineligible persons and the serious lapses in procurement and payment processes. We have also seen improvements in the planning, monitoring and management of some initiatives. Some auditees are moving swiftly to investigate the irregularities we identified, recover the financial losses and make sure there are consequences for those involved.
Our close collaboration with the Fusion Centre – and sharing our data and information on potential
fraud – has also borne fruit, as the Special Investigating Unit is investigating the companies and individuals we flagged for supply chain management irregularities. The Financial Intelligence Centre, Directorate for Priority Crime Investigation (the Hawks) and Department of Public Service and Administration are also taking action against individuals who received grants and unemployment benefits to which they were not entitled.
Most auditees still have a lot of work to do to implement all our recommendations for improving controls, and to effect consequences and recover losses where things went wrong. Where appropriate, we also raised material irregularities to ensure that these matters receive the necessary attention. We will continue to audit and report on the actions taken as part of our normal annual audits.
The weaknesses in financial management, controls, fraud prevention and legislative compliance, as evidenced by the audit outcomes and the special reports, resulted in material financial losses at some auditees. The amendments to the Public Audit Act, which came into effect on 1 April 2019, give us the mandate to report on these matters as material irregularities and to take action if accounting officers and authorities do not deal with them appropriately.
By 15 October 2021, we were dealing with 121 material irregularities at various stages in the process. We estimate the total financial loss of these material irregularities at R11,9 billion.
These material irregularities emerged in areas that were not complex, but in which auditees should have basic disciplines and processes in place – to procure at the best price, pay only for what was received, make payments on time, recover revenue owed to the state, safeguard assets, effectively and efficiently use the resources of the state to derive value from the money spent, prevent fraud, and comply with legislation.
They covered well-publicised matters such as procurement of overpriced personal protective equipment by various auditees; importing of unregistered medicine by the Department of Defence; losses resulting from the Beitbridge border infrastructure projects; debt-collection weaknesses and incorrect bursary pay-outs by the National Student Financial Aid Scheme; payments for poor-quality work on infrastructure projects and losses as a result of contractors not being paid; uneconomical use of resources, such as the losses suffered by the National Treasury on the Integrated Financial Management System project; and multiple lapses in the procurement and payment processes in the Free State and North West provinces and at the Passenger Rail Agency of South Africa.
If we identified a material irregularity, it means the preventative controls failed and the accounting officer or authority was unaware that it took place, or they knew there was an irregularity but did nothing about it, or they tried to address the matter but were unsuccessful.
While the best course of action would be to prevent these material irregularities from occurring, we are encouraged that most accounting officers and authorities are taking appropriate action to resolve the irregularities of which we have notified them. This signals a behavioural change towards responding to our findings.
We saw accounting officers and authorities being responsive and dealing swiftly with material irregularities, which resulted in losses being recovered, controls being improved and consequences being effected. As a result, 10 material irregularities were fully resolved in the past year.
However, we also noted some stumbling blocks – both internal and external to our auditees – to the timeous resolution of material irregularities. These include instability at the accounting officer and authority level, drawn-out investigation and disciplinary processes, delays in investigations being completed by the Special Investigating Unit and the Hawks, and delays in losses being recovered by the State Attorney. We are engaging with these institutions to find ways to reduce the delays.
We have been clear from the start that we will not hesitate to use our expanded powers if accounting officers and authorities do not deal with material irregularities with the required seriousness. In cases where accountability has failed, we have responded accordingly. In 2021, we issued our first four remedial actions – to the accounting officers/ authorities of the Passenger Rail Agency of South Africa (1), the Department of Defence (1) and the Free State Department of Human Settlements (2). The remedial action to the two departments included a directive to deal with the financial loss by the stipulated date, which, if not implemented, could result in a certificate of debt being issued.
We referred three material irregularities for investigation to the Hawks – one each for the Department of Defence, the South African Post Office and the Free State Development Corporation. We also included recommendations in the audit report of the Free State Development Corporation to resolve certain aspects of the material irregularity that will not be dealt with by the Hawks. In addition, we included recommendations in the audit reports to resolve material irregularities not appropriately being dealt with by the accounting officers of the departments of Defence, Cooperative Governance and Public Works.
The Public Audit Act amendments were intended to be a complementary mechanism to strengthen public sector financial and performance management so that these material irregularities can either be prevented, or can be dealt with appropriately if they do occur. The aim of our expanded mandate is thus to:
- promote better accountability
- catalyse the protection of resources
- enhance public sector performance and encourage an ethical culture
- ultimately, strengthen public sector institutions to better serve citizens.
This is what we are actively working towards and, as part of our call to action below, we are asking all role-players to support us in achieving this goal.
Our call to action
The improvements in audit outcomes and year-on-year increases in clean audits are a feather in the cap of this administration. Some auditees are close to achieving a clean audit status and just need to get over the very last hurdles.
As expressed in the theme of this report, we wish for these improvements to be accelerated in areas that affect service delivery.
The focus should be on improving the financial and performance management of the key service delivery departments and ensuring the success of their vital infrastructure programmes. It should also be on finding solutions for those state-owned enterprises that are a drain on the country’s finances and for the neglected government IT systems that have the potential to make a huge difference if correctly used, monitored and managed. The lessons learnt from the successes and failures of the covid-19 response should be used to strengthen the environment so that it is better prepared for the next disaster.
The measure of success for us, together with national and provincial government, will be evidence of a sustainable and measureable improvement to the lived experience of citizens.
This requires everyone to play their part to enable a culture of accountability. The work done on professionalising the public sector, led by the public service and administration minister, is an example of multiple departments and entities working together to build a capable, ethical and developmental state.
A culture of responsiveness, consequence management, good governance and accountability should be shared vision for all involved, including executive authorities, Parliament and legislatures, and the coordinating ministries. We urge them to also play their designated roles in the accountability ecosystem by supporting, monitoring and overseeing the much-needed improvement in – and resolution of – material irregularities. When the auditor-general’s powers of referral and remedial action (and to issue certificates of debt in future) are invoked, it not only reflects poorly on the accounting officer and authority, but also means that the whole accountability value chain has failed, up to executive and oversight level.
We encourage Parliament and the provincial legislatures, as well as political and administrative leadership, to play their part effectively and without fear or favour to ensure accountability for government spending and improvement in the lives of our country’s citizens.
We trust that the recommendations included in this report will be of value in this pursuit.
We remain committed to working tirelessly within our new mandate to strengthen financial and performance management in national and provincial government, emphasising the need for accountability and doing the basics right so that citizens can thrive and our nation can prosper.
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