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Taking the Auditor-General More Seriously
29 October 2007
Issued by: Derek Luyt and Jay Kruuse
Public Service Accountability Monitor (PSAM).
Tel: +27 (0) 46 – 603 8830/8358
Cell: +27 (0) 0722533957
Fax: +27 (0) 46 – 622 7215
You have to feel sorry for the hard-pressed staff toiling away in the offices of the Eastern Cape Auditor-General. No-one seems to take them seriously enough.
Every year they sift through the financial records of the province’s government departments, in accordance with the Public Audit Act. Then they submit detailed reports on the financial
management of each department to the legislature. These reports are important, because they give the clearest picture available to the public of how provincial departments are managing their – our – money. And yet no-one seems to take them seriously enough.
The Auditor-General examines the financial records of departments to see if they are complying, as they are required to do, with the legal requirements for financial management, and especially the Public Finance Management Act (PFMA). The aim of this Act is “to secure transparency, accountability, and sound management” of the finances of government departments. It’s a good and well-intentioned piece of legislation, but unfortunately few in the Eastern Cape government seem to be willing or able to enforce it.
The Auditor-General’s reports contain recommendations for improving, where necessary, the financial management of departments. In making these recommendations, the Auditor-General is acting on behalf of the public. After all, the departments are spending huge amounts of public money, and the public wants to know if its money is being properly used. The Auditor-General’s annual audit reports provide the answers.
But the most important question is this: Who ensures that the recommendations of the Auditor-General are implemented? Who, in other words, is responsible for ensuring that the public’s money is properly managed?
The answer, sadly, is that those responsible for ensuring that the public’s money is properly managed – Heads of Department and ultimately MECs – are not doing so. The Office of the Auditor-General is a Chapter Nine institution, and cannot make binding or enforceable decisions to compel departments and their accounting officers to implement its recommendations.
The Auditor-General’s recommendations should be implemented by responsible government officials or, ultimately, their political bosses. But they hardly ever are. It is not surprising, therefore, that the recently released Report of the ad hoc Committee on the Review of Chapter Nine and Associated Institutions noted that the “disregard by government departments and other public institutions of recommendations made by the Auditor-General in audit reports is a cause for concern”. Of course it is, not just for the Auditor-General, but for the public as well.
The Auditor-General recently released his 2006/07 audit reports on the thirteen Eastern Cape provincial departments. They do not make encouraging reading, especially as far as the reports on the major departments of Education, Health, Housing and Social Development are concerned. They reveal, not for the first time, numerous areas of noncompliance with the PFMA by accounting officers and officials working in these departments. This has a direct and detrimental impact upon the effective use of public funds and the delivery of social services to the citizens of this province.
Accounting officers commit “financial misconduct” in terms of Section 81 of the PFMA if they “wilfully or negligently” fail to comply with sections 38, 39, 40, 41 or 42 of the Act, or if they permit unauthorised, irregular or fruitless and wasteful expenditure. As the Auditor-General’s reports make clear, the accounting officers of the departments of Education, Health, Housing and Social Development have all been implicated in breaches of the PFMA.
The Auditor-General pointed out that the Eastern Cape Department of Education did not comply with sections 38 (1) and 40 (1) of the PFMA. Section 38 (1) prescribes the general responsibilities of the accounting officer, and section 40 (1) prescribes the reporting responsibilities of the accounting officer. The Department’s accounting officer also did not comply with section 40 (5) of the Act, because he did not submit a report explaining his inability to comply with sections 38 (1) and 40 (1) to the MEC and Provincial Treasury. The Auditor-General also identified fruitless and wasteful expenditure of R11 million, and irregular expenditure of R394,8 million in the Department’s records, yet there was no disclosure of this fruitless, wasteful or irregular expenditure in the Department’s annual financial statements.
As a result of these and other problems, the Auditor-General issued the Education Department with an “adverse opinion”, noting that its financial statements did not “present fairly, in all material respects, the financial position” of the Department. This is bad enough, but in the ten preceding years the Department received ten audit disclaimers. A disclaimer is issued when a department has been unable to provide the records needed by the Auditor-General to carry out its audit. The Auditor-General is then left with little or no option and issues a disclaimer which effectively means that no opinion can be expressed on the state of the department’s financial statements.
The Department of Health was also issued with an adverse audit opinion (having received nine disclaimers and one qualified audit in the preceding ten years), and the Auditor-General noted, amongst others, the following areas of non-compliance with the PFMA during the 2006/07 financial year:
The Department failed to ensure that records and documents were made available during the audit, as required by section 41 of the Act. Because of this, the Auditor-General noted that it was not possible to perform a “complete and proper audit.” This failure to provide information is considered financial misconduct in terms of section 81 of the PFMA; Proper invoices could not be produced for payments totalling R29,7 million, and so it was not clear that the people who received these payments “should have received them”. Further, there was no proof that goods and services for which the Department paid R126 million were actually delivered; Expenditure of R68.3m paid to suppliers for goods and services was unauthorized; The budgeted expenditure for programmes 2, 3, 4 and 8 was overspent by R85.3m and was considered unauthorized expenditure; The Department did not disclose fruitless and wasteful expenditure of R130 000 in its
financial statements. The Auditor-General discovered additional fruitless and wasteful expenditure of R616 802, but pointed out that, since the audit only checked a sample of the Department’s records, the “full extent of fruitless and wasteful expenditure is not known”; Bid committee minutes and original bid documentation for bid awards to the value of R40.9m could not be provided during the audit. “In these circumstances,” noted the Auditor-General, “the possibility of collusion, fraud and corruption cannot be excluded.”
The Department of Social Development also received an adverse opinion, (with seven disclaimers and one qualified audit in the previous ten years), and the Auditor-General noted, amongst others, the following areas of non-compliance, during the 2006/07 financial year: The Department was unable to provide accurate listing of payments made to the amount of R342.6m. The Auditor-General was therefore “unable to determine the completeness and accuracy of the transfer payments reported”; In terms of agreements between the Department and NGO’s, funding to the latter was to be based on actual service provided. However, the NGO’s were paid on the basis of their allocation, and not on the claims they submitted. This resulted in overpayments of R15.9m. Payments to NGO’s amounting to R55.7m were found to have been made without approval from the accounting officer and the chief financial officer as required by departmental procedures, and payments of R1.2m were made to NGO’s that appeared to have ceased operating However, the Auditor-General was unable to determine the full extent of such payments “without a complete investigation”; Various instances of irregular expenditure, including payments totalling R5.1m which could not be supported by adequate documentation and the absence of a competitive bidding process for services costing R7.4m. The Auditor-General noted, with regard to such irregular expenditure, that “No disclosure of the amounts was made in the annual financial statements and…it was not possible to determine the full extent of irregular expenditure”; The Department could not provide adequate documentation needed for the audit of compensation of employees, and it was not possible to determine the validity and accuracy of such payments. The total figure for compensation of employees included in note 4 to the annual financial statements was R222.3 million; An amount of R7.3m paid out as performance awards was made in the absence of approval from the executive authority. Such payment was regarded by the Auditor-General as irregular expenditure.
The Department of Housing managed its finances somewhat better than the other three departments, and it received a qualified opinion (having received nine disclaimers and two qualified audits in the previous eleven years). Nevertheless, the Auditor-General noted, amongst other problems, that the Department had not complied with all the requirements of section 38(1) (j) of the PFMA before transferring funds to municipalities.
In view of the numerous breaches of the PFMA identified by the Auditor-General in the Departments of Education, Health and Social Development during the audit of their 2006/07 financial records, the Public Service Accountability Monitor calls on their respective MEC’s and accounting officers – and the Provincial Treasury – to explain why disciplinary action (and criminal action where appropriate) has not been and should not be instituted against officials responsible for this non-compliance with the PFMA.
We are aware, of course, that this call is likely to fall on deaf ears. Given the dismal failure of the Eastern Cape government to implement either the recommendations of the Auditor-General or disciplinary action with regard to breaches of the PFMA and instances of financial misconduct committed in the past, one lesson becomes clear: the public, civil society and the media must strengthen their capacity to hold politicians and government officials accountable for their mismanagement of public money.
This message is contained in the “Report of the ad hoc Committee on the Review of Chapter 9 and Associated Institutions”. The Committee stated that the Auditor-General “has identified the need to inform the public of its work as a priority and has begun to engage with the media and with civil society in this regard. In the case of civil society, fostering such relationships may become increasingly important, particularly with regard to issues of corruption”.
For a start, the public should read the Auditor-General’s reports in order to appreciate more fully the seriousness of the problems associated with financial mismanagement in the Eastern Cape. By reading these reports, citizens will be better placed to insist that the Auditor-General’s recommendations are implemented by those responsible for doing so. They will also be better placed to insist that disciplinary action (and criminal action where appropriate) is instituted against officials responsible for non-compliance with the PFMA. It is their Constitutional right to do so.
Secondly, Heads of Department need to be more responsive to their oversight bodies, and to fully account to them for the management of their department’s finances. At the same time, members of these Standing Committees, including the Standing Committee on Public Accounts, need to be more assertive in insisting that Heads of Department be held accountable for improving the management of departmental finances. In particular, they need to ensure that departmental turnaround strategies, based on Auditor-General recommendations and designed to meet financial management shortcomings, go beyond the paper on which they are written.
It is high time that the Eastern Cape government started taking the hard-pressed staff toiling away in the offices of the Eastern Cape Auditor-General more seriously. But this is unlikely to happen until we, the public, do so too.
The PSAM has made the Auditor-General’s 2006/07 annual audit reports for the Eastern Cape Departments of Education, Health, Housing and Social Development available at www.psam.org.za. Click on the “What’s New” and “Reports and Papers” icons, or call 046-603 8358 for further information.
Here is the evidence
Media and Advocacy Head
Public Service Accountability Monitor (PSAM)
Tel: +27 (0) 46 – 603 8830/8358
Cell: +27 (0) 0722533957
Fax: +27 (0) 46 – 622 7215
The evidence President Mbeki needs to sack Health Minister Manto Tshabalala-Msimang is contained in Auditor-General’s reports.
If President Thabo Mbeki needs evidence for the removal of Health Minister Manto Tshabalala-Msimang, he need look no further than the Auditor-General’s and Annual Reports of South Africa’s national and provincial Health Departments.
These reports show that, during her time as Minister of Health, Tshabalala-Msimang has failed to ensure two things fundamental to the progressive delivery of health services in South Africa.
Firstly, she has failed to ensure adequate financial management within her Department, thus eroding the effective delivery of health services in the country.
Secondly, she has failed to ensure a reduction in the critical shortage of skilled health workers in South Africa, thus contributing directly to the continuing inadequacy of health services in the country.
As Minister of Health, Tshabalala-Msimang is ultimately responsible for the effective functioning of the Health Department, yet the national Department of Health has received qualified audit opinions from the Auditor-General (A-G) for the last three financial years. A qualified audit opinion is expressed when the A-G identifies deficiencies in financial management which have a negative impact upon the financial statements of a department.
The National Department of Health transfers approximately 90% of its annual budget to the nine provinces by way of the Division of Revenue Act (DoRA). This Act requires the Department to maintain acceptable levels of monitoring and control over conditional grant funds transferred to provinces. These funds are intended to realize citizen’s rights to access acceptable levels of health care, as required by our Constitution.
In 2003/04, the Department transferred R7 billion (91,4 percent of its budget) to provincial Health Departments. The A-G noted “fundamental deficiencies and non-compliance with the provisions of the Division of Revenue Act”, including that “financial and operational monitoring of compliance with conditions of conditional grants were not adequately performed by the department.”
In 2004/05, the A-G noted once again that transfer payments of R7,4 billion (87.4% of its budget) had been made to provincial departments and that there were “material areas of non-compliance with certain provisions of the Division of Revenue Act” due to “capacity constraints in the department.”
In 2005/06, the Department transferred R8.8 billion (89 percent of its budget) to the provinces, and again the A-G noted areas of non-compliance, including payments of R1.3 billion made “prior to the approval of business plans”. Amongst other things, the A-G also found:
– late or non submission of monthly financial reports by provinces resulting in the national department not being able to properly monitor expenditure;
– late or non submission of quarterly performance reports by provinces, resulting in the national department not being able to properly monitor the performance of provinces;
– quarterly visits to provinces were not always conducted.
The Minister has also failed to ensure that her accounting officer has maintained oversight over the financial management of provincial departments. In the 2003/04 financial year, six of the nine provincial departments received qualified audit opinions. In 2004/05 four provinces received qualified audit opinions, and in 2005/06 five provinces received qualified audit opinions. Some provincial departments have even received audit disclaimers (issued where the A-G does not express an opinion due the extent of financial irregularities/deficiencies identified). The Eastern Cape Department of Health has received seven audit disclaimers during the eight years Minister Tshabalala-Msimang has been in office.
With regard to the staffing of the public health system, while Minister Tshabalala-Msimang’s Department is in the process of finalizing a national human resources plan, the fact remains that the vacancy rate of skilled health workers in the South African public health sector has grown from 27,2 percent in 2005 to 33,3 percent by the end of March 2007. It has taken far too long to implement an effective human resource plan aimed at ensuring the recruitment and retention of staff. The Minister must be held accountable for her Department’s inability to reduce the critical shortage of health workers in South Africa, which contributes directly to the inadequacy of heath care services in the country.
Minister Tshabalala-Msimang has clearly failed to address the most critical aspects facing the public health system in South Africa. She has failed to ensure acceptable levels of financial accountability in the Department, failed to exercise oversight with respect to poorly performing provincial Health Departments and failed to implement an effective staff recruitment and retention strategy.
South Africa’s health services have been compromised as a direct consequence of these failures which are a matter of public record, and President Mbeki should be aware of them. South Africa faces extraordinary challenges in delivering health care to its people. It is President Mbeki’s responsibility to ensure that the post of national Health Minister is filled by someone capable of meeting these challenges.
The recent raids and seizure of documents from the Department of Health’s offices in Bisho by the Joint Anti-corruption Task Team is a significant step in the fight against drug-depot fraud in the province. These raids were conducted after an investigation into R10 million that was allegedly paid to a pharmaceutical company (Resmed) for medicines that were not supplied.
Whist congratulating the efforts of the Scorpions on their investigation, the PSAM calls on the Interim Management Team (IMT) to follow-up these raids by taking steps to improve the state of financial management within the Department of Health. The IMT should also take steps to ensure that proper financial controls are put in place within pharmaceutical depots.
For the past nine financial years the Eastern Cape Auditor-General’s office has pointed to the existence of serious financial management problems within pharmaceutical depots run by the provincial Department of Health.
The Auditor-General has drawn attention to the failure of these depots to submit their financial statements for auditing since 1994. Effectively, this means that neither the department of Health nor depot managers can properly account for transactions involving the purchase of medicines in the province for the past 9 years.
Despite recommendations by the Auditor-General that the department adopt the nationally approved medical accounting system (MEDSAS) and procedure manual (MEDLOG), it had still not ensured proper financial reporting by pharmaceutical depots by 2002.
The PSAM is concerned that the state of financial mismanagement within these depots has led to a situation of extremes where, on the one hand, clinics and hospitals across the province have reportedly run out of supplies while, on the other hand, medicines have been left to expire in the Port Elizabeth depot.
The fact that the provincial Health department has only now recognised these depots as potential ‘red flags’ for the presence of corruption and bribery demonstrates the department’s failure to take the Auditor-General’s recommendations seriously. If these recommendations had been taken seriously the department would have been in a position to implement preventative measures, including an early warning system, that would enable it to identify opportunities for fraud before they occurred.
What is of additional concern to the PSAM is the fact that the total stock of medicines for the province in 2002 amounted to approximately R24 million (according to the Department of Health’s Annual Report). This means that if the reported fraudulent transactions worth R10million (involving Resmed) being investigated by the Scorpions were processed in a single year, this would have had the effect of reducing the stock of pharmaceutical supplies available to clinics and hospitals in the province by a staggering 42 percent.
Researcher: Case Monitoring
Public Service Accountability Monitor (PSAM)
Tel: (046) 603 8358
Fax: (046) 622 7215