In our previous general report, we urged leadership to ensure sound financial management to improve audit outcomes and enhance the lives of the people in the province through firm commitments from political leadership, supported by decisive action from the administration and monitoring by portfolio committees. We indicated that sustainable improvements in audit outcomes would only be achieved when all roleplayers in the accountability ecosystem did what they needed to do. The lived experience of the people in the province has not significantly changed as the provincial executive leadership’s commitments are all still in progress. Financial management improved slightly due to the administrative leadership’s action, but at a very slow pace.

Overview

Over the past three years, the number of auditees that received clean audits increased from none in 2019-20 to three in 2021-22. The highlight of 2021-22 was the provincial cooperative governance and traditional affairs department achieving its first clean audit, the Fleet Management Trading Entity sustaining its clean outcome for a second year, and the provincial treasury reclaiming its clean audit status after a regression in the previous year. The achievements of the Fleet Management Trading Entity and the provincial treasury were driven by staff commitment and effective leadership in monitoring compliance with laws and regulations and action plans throughout the year – practices that should be replicated across the province. To sustain its outcome, the cooperative governance and traditional affairs department should now prioritise the daily disciplines relating to record keeping, review and monitor performance information, and fill critical positions that are vacant.

The provincial social development department improved to an unqualified opinion with findings due to the administrative leadership’s determination to address the previous year’s qualification. To sustain this improvement, the department will have to implement preventative controls to address internal control weaknesses relating to performance reporting as well as compliance with laws and regulations.

Most auditees were not able to reach the desired clean audit status and stagnated on either financially unqualified opinions with findings (27%) or qualified opinions (40%). The quality of financial statements remains a concern as material adjustments were required to 53% of the financial statements submitted for auditing. Political and administrative leadership did not institutionalise internal controls to ensure that they created an environment conducive to credible financial reporting, as not all misstatements could be corrected, which was an indication that action plans developed to improve audit outcomes were not effective. This was attributable to a lack of effective oversight and consequence management to improve accountability for a sustainable impact on service delivery and contributed to the poor quality of the financial statements, continued irregular expenditure, and poor financial health at most auditees.

Performance information also did not receive the required attention over the past three years as only eight auditees (62%) were able to credibly report on their performance in 2021-22. The Free State Development Corporation did not submit its annual performance report due to the delayed submission of its financial statements. The annual performance reports of seven auditees (54%) required material corrections so as not to have a negative impact on their audit outcomes. This points to an overreliance on the audit process to identify the errors that need to be corrected for auditees to publish credible performance reports. The achievement of planned performance indicators also remained a challenge due to poor financial and project planning and management, which slowed down service delivery and had a negative impact on the lived experience of the people in the province. For example, the provincial human settlements department spent most of the housing grants received but delivered significantly fewer houses than the target, while some of the completed housing units did not have running water or a functioning sewer system. Overall, poor project planning and management hampered auditees’ ability to successfully deliver projects on time and within budget, as there were no consequences for their poor performance. They also did not hold contractors accountable for poor performance as they did not levy penalties and terminate contracts timeously.

The provincial education department did not achieve its targets for the National School Nutrition Programme, as learners at 90% of the schools we visited did not receive meals on the days they were required to attend school during the covid-19 pandemic. At 50% of the schools we visited, learners did not receive meals that met their daily recommended nutritional requirements. The provincial health department also underspent on medicine and health services due to inadequate procurement planning and contract management, facilities being under resourced, and a backlog in procuring and supplying medical prosthetics, which resulted in people in the province not receiving essential medication on time or at all. Departments’ reported achievements contradicted the lived experience of people in the province. For instance, the poor condition of provincial roads led to continuing community protests, but the provincial police, roads and transport department overachieved on its road maintenance targets in 2021-22 and has spent 95% of the grant funding received for road maintenance since 2019-20. The cumulative impact of poor procurement decisions and the incorrect use of panels of suppliers over a number of years resulted in the department being unable to make up road maintenance backlogs.

We have notified accounting officers and authorities in the province of 14 material irregularities since we began implementing our expanded powers in 2018-19. Six of these material irregularities were resolved as the accounting officers took appropriate action. The unresolved matters related to debts not recovered, payments for goods or services not received, and standing-time extensions not in terms of the contract. Most accounting officers and authorities took the material irregularity process seriously and were responsive in addressing the reported instances. Some were proactive and referred irregularities, which have not yet been confirmed as material irregularities, to public bodies for further investigation.

The accounting officer of the provincial health department is taking appropriate action to address the two material irregularities raised on infrastructure projects for payments made on work not done, by implementing controls to prevent similar instances. These include appointing building professionals in the infrastructure unit to ensure that each staff member oversees a manageable number of projects. The accounting officer also terminated the contract of the implementing agent responsible for the projects and reported the two material irregularities to the South African Police Service and the Special Investigating Unit for investigation. The contractors were back on site to complete the project and correct the discrepancies between the work done and the payments made, which should ultimately result in the prevention of losses on these projects.

The accounting officer of the provincial human settlements department and the accounting authority of the Free State Development Corporation were slow to address the material irregularities we raised, which resulted in one material irregularity being referred to a public body for further investigation, two being issued with remedial action, and one being referred and having remedial action issued. We engaged the executive authorities responsible for these two auditees to urge them to intervene and to oversee the material irregularities for which remedial actions were issued. Failure to implement the remedial actions will trigger further mechanisms in terms of our expanded mandate.

There was an overall improvement in compliance with legislation, attributable mostly to the auditees that improved to a clean audit status. Irregular expenditure has fluctuated over the three-year term, decreasing from 2019-20 to 2020-21 but increasing again from R2,22 billion to R2,42 billion in 2021-22 due to irregular expenditure incurred in prior years reported and identified in 2021-22 at the provincial public works and infrastructure department (R0,44 billion).

Over the past three years, the provincial departments of human settlements and of police, roads and transport repeatedly incurred some of the highest irregular expenditure in the province. These two departments did not address their continued supply chain management weaknesses nor hold officials accountable to prevent irregular expenditure from being incurred. Implementing consequences remained a challenge for most auditees as investigations were often not performed, making it more difficult for auditees to identify losses incurred, and negatively affecting service delivery. The lack of consequences over a number of years has ingrained a culture of impunity and a complete disregard for the rule of law at all levels of staff.

Urgent intervention is required to improve the province’s financial health, with most departments exhibiting negative indicators in this regard, creating significant uncertainty about their ability to deliver services in future. The province’s financial health continued to deteriorate due to a lack of accountability for government spending. Therefore, a significant portion of departments’ 2022-23 budget will be required to settle their current obligations, reducing their ability to effectively deliver on their mandate. Departments had a cash shortfall of R5 billion, including funds to be surrendered exceeding cash on hand by R2,64 billion. The combined bank overdraft balances of the provincial departments of education and health, which increased from R1,13 billion in 2019-20 to R1,26 billion in 2021-22, put further pressure on the entire province’s financial wellbeing. Outstanding claims against the provincial health department amounted to R4,58 billion, increasing from R3,43 billion in 2019-20, with R551,47 million that had not been budgeted for being paid out in 2021-22, compared to R200,54 million in 2019-20. The total claims represented more than 100% of the next year’s budget, excluding employee costs. If these claims materialise, it could further derail service delivery. The provincial treasury, in particular, should promote effective financial management at all auditees to direct the already shrinking public purse to key service delivery imperatives. Without improved fiscal discipline, the departments’ financial health will continue to deteriorate.

The provincial treasury supported some departments to address the previous year’s audit findings, which contributed to improved audit outcomes. However, the support provided to prevent and investigate unauthorised, irregular, and fruitless and wasteful expenditure was not successful, as limited investigations were conducted, consequence management was not applied, and high amounts of such expenditure were incurred again. The provincial treasury has committed to implement action plans to clear the backlog of irregular expenditure investigations by 2024-25, to reduce unwanted expenditure by at least 30%, and to pay focused attention to procurement practices to reduce irregular expenditure.

Support provided to municipalities by the provincial treasury and cooperative governance and traditional affairs department also did not achieve the desired effect as unfavourable audit outcomes persisted. These two ministries committed to support municipalities to develop and adhere to basic disciplines, safeguard information, and submit financial statements within legislated deadlines. The provincial treasury also committed to capacitate disciplinary boards at municipalities to enable consequence management.

The premier’s office continued to emphasise consolidating the department’s leadership and oversight role by strengthening provincial decision-making capabilities at various stakeholder levels, such as the president’s coordinating council, heads of department forum and provincial clusters, as well as holding frequent provincial and local government interactions. The quality and relevance of the performance indicators set as targets hampered these efforts, as the focus was on measuring, for example, the number of reports issued instead of the quality of content and the successful implementation of proposed actions. The provincial legislature should also improve its follow-up procedures to ensure that resolutions and recommendations are implemented. The premier has committed to a continued improvement in all audit outcomes (qualified auditees to move to unqualified opinions with findings); sustained clean audit outcomes at the provincial treasury, the Fleet Management Trading Entity and the provincial cooperative governance and traditional affairs department; and increasing the number of clean audits to an additional four, including at the provincial legislature. In addition, to ensure accountability, all auditees will be required to submit their financial statements by 31 May 2023 and their annual reports will be tabled in the legislature within the legislated timeframe.

Call to action

At the heart of achieving sustained clean audit outcomes is a leadership tone that promotes ethical behaviour and embeds the discipline of monitoring preventative controls, such as keeping track of the initiatives developed in action plans. Political and administrative leadership should promote accountability by prioritising consequence management, improve financial health, and focus on service delivery to better the lives of all people in the province. Coordinating ministries should continue to strengthen their interventions and support to sustain the improving trends and address the lack of consequences.