Disputes mechanism and readiness for 2021/2022 MFMA report: AGSA briefing

Meeting report

The Chairperson said that the Auditor-General of South Africa (AGSA) would brief the Committee on two matters: AGSA’s new dispute resolution mechanism and its upcoming report on municipal audit outcomes for the 2021/2022 year.

AGSA briefing: Dispute resolution mechanism 
Ms Tsakani Maluleke, Auditor-General, AGSA, said that audit disputes and complaints were driven by:
● Differing legal interpretations;
● Differing accounting standards;
● Auditees’ desire for a clean audit; and
● The need for procedural fairness.

AGSA had sought to reform its dispute resolution mechanism to: 
● Resolve disputes more quickly to enhance the accountability cycle;
● Reduce over-reliance on external parties, especially National Treasury;
● Provide adequate leadership involvement; and
● Provide for a single process to deal both with Category 2 complaints and with disputes, including audit and material irregularity (MI) disputes. 

Progress towards implementation 

The new policy, which had been presented to the Committee in October 2022, had been approved with effect from 1 November 2022. Ms Maluleke outlined the steps that AGSA had taken to develop and implement the policy.

The new mechanism

The new dispute resolution mechanism would have the following benefits:
● A formalised process;
● A single process for Category 2 complaints and disputes;
● Decreased process duration;
● Full control over the process by AGSA, which would make the final decision (though with assistance from strategic stakeholders);
● Greater leadership visibility;
● Improved understanding of the process by all role-players; and
● Reduced need for litigation.

The key principles of the new mechanism were to:
● Safeguard the independence of AGSA;
● Eliminate referral of audit disputes to external structures for resolution or decision-making;
● Include multiple opportunities for an auditee to be heard;
● Ensure that resolution was always done in a professional manner;
● Cement the role of the engagement manager;
● Classify a disagreement as a “dispute” if the engagement manager could not resolve it;
● Enhance focus and attention to timely resolution of disputes;
● Apply the process to audit and audit-related services; and
● Emphasise that dispute resolution was the responsibility of those with direct knowledge of the relevant auditee.

Ms Maluleke also discussed the new procedure for escalating a dispute and the role of the Auditor-General and National Treasury in that procedure.

Nine disputes have been logged since the new policy was implemented. Four arose from the Public Finance Management Act (PFMA) audits, and the other five from Municipal Finance Management Act (MFMA) audits; seven were audit disagreements and two arose from complaints. AGSA had observed various benefits of the new mechanism in dealing with these disputes, notably an increased ability to avoid litigation, which AGSA believed should be a last resort.

(See presentation for details.)

Discussion 
The Chairperson said that the dispute resolution mechanism was a critical instrument for setting consistent standards and creating predictability and stability in the audit process. In implementing the new mechanism, AGSA asserted key principles as outlined in Section 188 of the Constitution. It should always be emphasised that AGSA’s audits were not a matter of choice but a constitutional imperative. AGSA and all auditees had to respect that imperative. The Constitution gave AGSA the sole responsibility for finalising and reporting on audits. The new mechanism provided a platform for allowing people to understand and agree on audit matters, and it was supported by Section 188 of the Constitution. This briefing was exactly what the Committee had wanted from AGSA following its engagements with AGSA in 2022 about the new dispute resolution policy.

Mr N Singh (IFP) welcomed the procedures that AGSA had outlined. He noted that AGSA had looked at international examples. Another organisation that came to mind was the South African Revenue Service (SARS), which probably faced many disputes. Had AGSA looked at SARS and considered how it dealt with disputes?

Ms Maluleke replied that AGSA had not done benchmarking with SARS – its benchmarking focused on global peers with explicit auditing mandates. AGSA would happily examine the process followed by SARS. She thanked Mr Singh for his suggestion.

Mr Singh said it was pleasing that AGSA dealt with only nine disputes. What was the maximum amount of time that it would take to resolve a dispute? The AG had mentioned its disputes with the Department of Agriculture and the Road Accident Fund (RAF).

Ms Maluleke replied that the RAF dispute had taken a long time to resolve. If one looks at Treasury’s Integrated Financial Management System (IFMS), it tells a long and noisy story. The RAF dispute was probably the most protracted dispute to date. It began when financials were submitted for 2021. After failing to reach agreement, AGSA and the RAF embarked on a dispute resolution process. AGSA had ultimately signed off on the audit at the beginning of December 2021, instead of at the end of July 2021 as planned. Then, after the audit report was released, the matter went to court. It remained in court and the matter was set down in the High Court for October 2023.

In the meantime, AGSA was vigilant in upholding its constitutional obligations. A process of judicial review did not suspend AGSA’s constitutional mandate. Based on legal advice and legal interpretation of AGSA’s constitutional obligations, AGSA’s stance remained that it should continue to audit the RAF and to finalise subsequent audit reports, including for this year. This year’s audit report should reach Parliament for oversight processes by 30 September, as law requires. That would happen while the judicial process was still in motion.

Mr Singh said that he expected that legal disputes would arise when certificates of debt were issued. What was happening with certificates of debt? How many certificates had been issued, and what responses had AGSA received? What action was being taken?

Ms Maluleke replied that certificates of debt increased the complexity and pace of disputes. Last year’s MFMA report contained details about which municipalities AGSA was concerned about. In one case, AGSA had issued a notification for a certificate of debt to a municipality, and the municipality had made it clear that it would lodge a legal challenge if and when AGSA went ahead with issuing the certificate of debt.

However, AGSA had not encountered any legal threats or challenges except for that notice. In general, most accounting officers acknowledged MIs and implemented AGSA’s recommendations. When AGSA issued a notification, the municipality responded with an indication of the action it intended to take, and AGSA gave the municipality the space to pursue that action. In most cases, accounting officers responded to MIs in the way that AGSA expected; they took the action that AGSA expected or at least committed to doing so.

Ms N Hlonyana (EFF) welcomed the presentation, which was focused and well presented. She understood that the dispute resolution mechanism included various layers that were put in place to ensure that both the auditor and the auditee were satisfied with the outcome. However, could Ms Maluleke explain in simple terms who was the final person who dealt with disputes between AGSA and municipalities?

Ms Maluleke replied that the head of audit would be the final person to deal with such a dispute. As in other disputes, the matter was dealt with by the auditor whom she, as Auditor-General, had designated and authorised to sign off on the audit. If there was still disagreement, then the matter would be escalated to the head of the portfolio. Between the head of the portfolio and the engagement manager, there was also a business unit leader, who represented the Auditor-General in that specific province. The business unit leader would also have the opportunity to engage on the matter. If disagreements remained, the dispute would be escalated to the head of audit responsible for local government. 

The Chairperson said that AGSA certainly needed to have the necessary capacity and preparedness to deal with disputes, which were driven mainly by MIs. AGSA had to be prepared to intervene as required if auditees attempted to evade accountability. Mr Singh had raised an important point that required attention going forward.

He thought that the dispute process was now clearer and more predictable. He hoped that AGSA would not have to “flex up” around these matters. That was why he had prefaced the discussion by emphasising the importance of constitutional prescripts. Whatever was happening, the Constitution could not be set aside. The Committee needed to lead based on the Constitution and the fulfilment of constitutional imperatives.

AGSA briefing: Readiness for 2021/2022 MFMA general report
Ms Maluleke said that AGSA was prepared to table its annual MFMA general report on 31 May as scheduled. AGSA had faced delays during the prior auditing period, largely due to an overhang from the COVID-19 pandemic, but those delays had been overcome through the hard work of AGSA’s employees.

Update on 2020/2021 audit outcomes

Ms Maluleke presented an update on local government audit outcomes from the prior audit period. In the MFMA report as tabled in 2020/2021, 257 municipalities were audited, with the following outcomes:
● 41 received clean audits;
●100 received unqualified audits with findings;
● 78 received qualified audits with findings;
● Four received adverse audits with findings;
● 25 received disclaimed audits with findings;
● Nine audits were outstanding.

As of 17 February 2023, three audits remained outstanding from 2020/2021. Of the six outstanding audits that had been finalised since the tabling of the report, one had been concluded with a disclaimer; the other five had received qualified audits with findings.

Key conclusions from the 2020/2021 audit

AGSA’s last MFMA general report had drawn attention to several challenges in local government, including poor accountability, service-delivery failures, poor governance, weak institutional capacity, and instability.

Other key messages in the 2020/2021 report included:
● There had been no improvement in audit outcomes over the administration’s term;
● Municipalities had seen little value from investments in financial reporting and they had used consultants ineffectively;
● Service delivery was negatively affected by poor performance planning and reporting and by the poor state of municipal infrastructure; and
● If the financial health of municipalities did not improve, municipalities would face reduced ability to operate and provide services.

The 2020/2021 report included a “call to action” to all accountability role-players, including:
● Councils, speakers, mayors and Municipal Public Accounts Committees should support disciplinary processes; the swift resolution of MIs; and timeous investigation of unauthorised, irregular, fruitless and wasteful expenditure;
● The broader accountability ecosystem should support and capacitate councils and administrations to implement recommendations and intervene more successfully; and
● Communities and community organisations should participate in public processes and ward committees and report abuse, mismanagement and service delivery failures.

Ms Maluleke summarised AGSA’s observations from financial and performance reporting in 2020/2021. She also provided an update on the responses to MIs identified in 2020/2021.

(See presentation for details.)

Discussion 
The Chairperson said that AGSA’s detailed presentation contextualised the upcoming MFMA report and provided the Committee with a reminder of last year’s outcomes. Ms Maluleke discussed both the financial side and the performance side. In the latter regard, it was important that AGSA was able to send people into the field to observe service-delivery performance in such areas as roads, water, and wastewater treatment. Those investigations helped confirm how expenditure was allocated and how it related to the needs of communities. Ms Maluleke had also discussed MIs, which were the basis of accountability, and she had emphasised AGSA’s commitment to ensuring financial accountability. This reminder about the 2020/2021 audit outcomes would prepare the nation for the 2021/2022 report, enabling comparison and reflection about how the broader ecosystem had contributed to audit outcomes over this audit cycle. Each individual auditee impacted the broader accountability ecosystem.

Mr Singh said that the Committee looked forward to hearing AGSA’s report on 31 May. He hoped that the municipalities that had received disclaimers or outstanding audits in 2020/2021 would not become known as “serial offenders”. If there were serial offenders, something drastic would have to be done.

He noted that, in 2020/2021, 11% of total financial reporting costs went towards consultants. Perhaps AGSA could tell the Committee whether the use of consultants had declined over the years. Some exercise should be undertaken to enquire with municipalities and find out why they continued to spend R1.28 billion on consultants. That issue should be looked at going forward.

He suggested that AGSA should also report to the Committee about the role of internal audit. One expected that all municipalities had internal audit functions. What were they doing, and were they competent? If internal audit functioned well, that would reduce the burden on AGSA.

Finally, he agreed with Ms Maluleke’s emphasis on performance and on value for money as measured by performance. He appreciated that AGSA now looked at government projects and their outcomes. However, performance remained problematic, to the extent that a radical solution might be required. For example, civil society could be called upon to monitor all municipal capital projects. He thought that some local councillors failed to carry out those responsibilities. Civil society organisations could monitor a given project, including related expenditure and contracts, and give the Committee an independent report. That could be quite productive, because people on the ground were very interested in how public funds were spent.

In addition, he thought that the Committee should engage with the Department of Planning, Monitoring and Evaluation (DPME). DPME generally focused on national and provincial government, but its mandate could also be construed to include the performance of local government, since DPME had overall responsibility for performance monitoring and evaluation of all government expenditure. He thought the Minister of Planning, Monitoring and Evaluation was very enthusiastic and eager to do things. He did not know whether AGSA and DPME had already interacted and to what extent.

The Chairperson said that the Committee should anticipate the trends presented on 31 May. The Committee highlighted pertinent issues, such as consultants and performance monitoring, which should be discussed in the meeting on 31 May. For the Committee’s benefit, perhaps AGSA could emphasise those issues when it presented its audit report.

Ms Z Kota-Mpeko (ANC) added that municipalities presented the most pressing problem in the realm of internal controls and audits. The management of municipal finances by mayors was a “thorn in the flesh” of Members of Parliament, who found it difficult to ensure that municipalities could account for the money they spent. She hoped the MFMA report would enable the Committee to identify which municipalities continued to present concern in this regard.

Ms Maluleke said that the Committee’s input helped AGSA to anticipate what information Members required and preferred from AGSA’s briefings. She would ensure that she provided a full response to their concerns in the meeting on 31 May.

The Chairperson said that the Committee should be encouraged that AGSA never failed to account to Parliament as required by legislation. AGSA’s MFMA reports helped the Committee understand where the country was headed at the local level. The Committee understood that, across the country, municipalities were facing similar problems – problems that required proper local leadership and managerial capacity. AGSA’s reports assisted Parliament in its attempts to ensure that local government worked for communities and that residents benefited from municipal services.

Committee matters
The Chairperson said he had met with the House Chairperson of Committees about the study tour the Committee proposed to undertake in Canada. He and the House Chairperson had agreed that the application should go forward, and the provisional plan was for the engagement to take place in the first week of July. AGSA had agreed to participate and the Committee would focus on critical issues such as performance monitoring.   

The meeting was adjourned.