**4.2 The kind reports on corporate governance**

The King Reports on Corporate Governance, which represent South Africa's corporate governance framework, have undergone some changes over time. The King *Addressing the Endemic Consequences of Corruption in the South African Local Government… DOI: http://dx.doi.org/10.5772/intechopen.108154*

Committee on Corporate Governance in South Africa, under the chairmanship of the former Judge Mervin King, was formed in 1992 at the instance of the Institute of Directors in South Africa to consider and address corporate governance for South Africa. The purpose of the King Report is to promote the highest standards of corporate governance in South Africa. The first King Report was released in 1994 followed by several updates (i) the King Code of 2002 (King II Report), (ii) King Report III of 2009 and (iii) King Report IV of 2016 [10].


The King Code of Corporate Practices and Conduct and the Protocol on Corporate Governance in the public sector concentrate on the following broad areas [16]:


#### **4.3 Oversight and reporting**

The responsibilities and duties of municipal managers as expressed in the MFMA are emphasised by the basic values and principles governing public administration as set out in Section 195 of the Constitution. Section 32 of the MFMA, and the supporting regulations, requires management interventions aimed at investigating any 'unauthorised, irregular and fruitless and wasteful expenditure, the possible abuse of the SCM system (including fraud and improper conduct), and allegations of financial misconduct and possible fraud [18]'. A municipal manager is to start an investigation into any misuse of funds, and appropriate actions should be taken based on the outcomes of these investigations. The municipal manager has the responsibility to prevent irregularities and take action when they occur.

The Consolidated General Report on the Local Government Audit Outcomes for a financial year as published by the Auditor-General of South Africa provides an account of municipal financial expenditure and performance during the review period [18, 19]. The findings and recommendations of the report aim towards 'empowering oversight structures within municipalities but also oversight structures external to the municipality such as the Select Committee on Finance and the Select Committee on Appropriations' [18]. The AGSA report recommendations provides for planning of areas in need of oversight focus and support as well as processes and activities in need of possible investigation and management interventions [18].

#### **4.4 South African municipal performance**

A so-called 'disclaimed opinion' is the worst possible AGSA audit opinion for a municipality to receive, as it signifies the inability of that municipality to provide AGSA with evidence for most of the amounts and disclosures in its financial statements [20]. Analysis of the AGSA reports on municipal financial performance for the periods 2015/16−2020/21 indicates that there has been no improvement in the number of municipalities that have received a disclaimer of audit opinion, as illustrated in **Figure 1**.

Various authors as well as the AGSA in its 2019 report of municipal performance for the period 2019/20 [4] stated that the poor audit outcomes over the years are mainly attributable to three factors, namely:

• 'Sluggish response by local government to implement recommendation made in the various AGSA report, in particular pertaining to leadership and improved internal control deficiencies. The slow response to improve the key internal controls by management for not achieving a clean audit was cited as one of the main reasons. In this case it showed the following: 85.7% (6) of the metros, 77.2% (122) of the local municipalities and 68.6% (24) of the district municipalities [18]'. 'Local government leaders, including senior management and supporting officials, are failing to ensure effective monitoring and evaluation processes, effective internal control measures and sadly also fail at instilling consequence management and corrective actions [21]';

*Addressing the Endemic Consequences of Corruption in the South African Local Government… DOI: http://dx.doi.org/10.5772/intechopen.108154*

#### **Figure 1.**

*Municipalities with Disclaimer Audit Findings 2015/16−2020/21. Source: Authors' own compilation based on AGSA report for period 2015/16–2020/21.*


The AGSA has identified numerous failures to implement consequence management, this created an environment where staff continued to transgress without any consequence due to inefficient and ineffective oversight structures. As reported by AGSA in 2022, a staggering 60% of municipalities did not comply with legislation on effecting consequences. At 54% of municipalities, the non-compliance was material. The most common findings involved irregular, unauthorised and fruitless and wasteful expenditure not being investigated. Taking irregular expenditure as an example, by 2020−2021 year-end, 51% of municipalities failed to investigate their findings included in the 2019−2020 irregular expenditure year-end balance of R110,18 billion and 41% of municipalities failed to investigate fruitless and wasteful expenditure [5].

#### **4.5 Consequence management for corrupt actions**

Introducing consequences against officials responsible for non-compliance will assist municipalities to recoup financial losses as a result of corrupt actions by such officials and also serve as a detergent for others to contravening legislation. This will also serve as an indication of municipal commitment to prudent financial management practices [5].

Consistent and deliberate actions against corrupt officials who 'intentionally fail to comply with legislation or who are guilty of fraud or misconduct' [26] will further improve accountability for government spending. In line with the PFMA, MFMA and supporting regulations, contraventions resulting in unauthorised, irregular and fruitless and wasteful expenditure, as SCM system abuse and/or manipulation, should be investigated for all and any signs of improper conduct or fraud. It is also important that these investigations, where unlawful actions become evident, should result in appropriate actions and sanctions [26].

According to AGSA, auditees at 13% of municipalities were not equipped with the requisite policies, processes and means of investigation and reporting possible transgressions or fraudulent activities, including poor record keeping [26]. 'Although 87% had the required mechanisms, these had not necessarily been successfully implemented [27]'.

AGSA, in agreement with the principles set out in King IV, concludes that 'the leadership sets the tone at the top at any organisation [4]'. Strong internal audit and oversight to ensure financial accountability will ultimately result in clean financial audits [28]. The AGSA report clearly states that '… when the leaders of an organisation's are operating in an unethical manner, have a carelessness for the principles of good governance, applying sound compliance and control systems; and are not obligated to transparent practices and accountability, it could filter down to the lower levels of the organisation and thus impact negatively on service delivery [4]'.

#### *4.5.1 Municipal council*

In terms of Section 4(2) of the Local Government: Municipal Systems Act 32 of 2000 (MSA), the municipal council as the executive and legislative authority of the municipality is the highest authority in the municipality and has substantial 'powers of approval and oversight responsibilities' [2, 29]. MSA 2000, Section 6(2) provides that municipal administrations 'are to be receptive to the progressive needs of the respective communities it serves; to stimulate an ethos of accountable service delivery among the municipal officials; to conduct the approved practices to avoid corrupt undertakings; to encourage co-operation and interaction with local communities; to give the local community clear and reliable information regarding the level and pre-determined standard of service delivery; and to ensure that the local communities and respective organisations are well informed in the affairs of local government [30]'.

#### *4.5.2 The speaker*

The Speaker of a municipal council provides a political oversight function to monitor the conduct of municipal councillors and its committees [31]. Including in such powers, is effective consequence management of reporting of offences against councillors, by making sure that such reports are addressed in an appropriate manner and resolved [32].

*Addressing the Endemic Consequences of Corruption in the South African Local Government… DOI: http://dx.doi.org/10.5772/intechopen.108154*

#### *4.5.3 Executive mayor*

In line with the requirements for good corporate governance outlined in the King IV Report, the executive mayor is accountable to Council, the community and other stakeholders at a strategic level for:


#### *4.5.4 Municipal manager*

In terms of Section 62 of the MFMA, the municipal manager has statutory responsibilities with regard to the general financial management of the municipality [24, 34]. This includes the responsibility for managing the financial administration of the municipality by taking all reasonable steps to ensure that the resources of the municipality are used effectively, efficiently and economically and ensuring that the municipality has and maintains effective, efficient and transparent systems of financial and risk management and internal control to prevent unauthorised, irregular or fruitless and wasteful expenditure. The MFMA, Section 32 in particular, and its regulations clearly stipulate that management should investigate matters such as 'incurring unauthorised, irregular and fruitless and wasteful expenditure, the possible abuse of the procurement system (including fraud and improper conduct), and allegations of financial misconduct and possible fraud' [35]. A municipal manager is to institute an investigation into any misuse of funds, and appropriate actions should be taken based on the outcomes of these investigations. The municipal manager has the responsibility to prevent irregularities and take action when they occur [2, 34, 35].

In addition, the Municipal Manager has the responsibility to ensure that disciplinary or, when appropriate, criminal proceedings are instituted against any official of

the municipality who has allegedly committed an act of financial misconduct or an offence. In this regard, it is important to take note that Section 14(a) of Schedule 1 of the Municipal Systems Amendment Act, 2011 [34] provides that any breach of the Code of Conduct for Municipal Officials is grounds for dismissal.

#### **4.6 Auditor-general expanded mandate**

Over the years, AGSA has been reporting on audit findings at municipal level pertaining to fruitless, wasteful and irregular expenditure, highlighting the limited or even total lack of action to address the financial mismanagement identified or to hold those who contravene the legislation to account. The failure of municipalities to use the existing accountability mechanisms in local government gave way to the Portfolio Committee on COGTA support for the amendment of the Public Audit Act 25 of 2004 to provide the AGSA with more power to improve accountability in the public sector. AGSA mandate was expanded by amendments which became effective on 1 April 2019, to go beyond audit and reporting to strengthen accountability mechanisms [36].

AGSA's expanded role is focused on addressing material irregularity. Material irregularity is articulated as an deed of any non-compliance with or infringement of the respective legislation, theft, fraud or the abuse of an assigned duty as identified during an audit as executed in terms of the Public Audit Act that stemmed in or is likely to effect in any form of material financial loss, the misuse or the loss of any material public resource or a significant damage to a public sector institution or the general public [37].

AGSA's role is to detect material irregularities and to assist the municipal managers to bring it to their attention that the identified irregularities could bring an impact on the finances, other resources and the delivery of services. But also, to empower the municipal managers to undertake the applicable steps in terms of legislation to correct the irregularities. This approach is an effort to minimise the adverse outcome of the irregularities on municipalities by setting the correct attitude towards accountability, the significance of the need for consequence management, and to inspire a behavioural change at all levels [37].

AGSA report recommendations are no longer the type of recommendations resulting from their audits, but rather focus on providing municipal managers with actions to deal with a specific Material Irregularity (MI), including steps to be taken to recoup financial losses or to recover from substantial harm [37], reinforce internal control measures towards prevention of further losses and harm [37, 38] as well as consequence management actions. The recommended actions are inclusive of utilisation of internal disciplinary processes and/or handing over the matter to a law-enforcement agency for further investigation and possible prosecution [5, 37].

It is positive to note that the 2022 AGSA Report on the MFMA states that there has been a change at municipalities to pay at a more progressive manner attention to the findings and recommendations made. Increasingly, there has been a noticeable change in the behaviour from indecisiveness to action by municipal managers [5].

#### **5. Provincial government intervention—Section 139 of the constitution**

Section 139(4) and (5) of the SA Constitution, along with MFMA Chapter 13, regulates interventions aimed at a consistent and foreseeable municipal response to prevent severe financial challenges as well as operational issues from threatening

#### *Addressing the Endemic Consequences of Corruption in the South African Local Government… DOI: http://dx.doi.org/10.5772/intechopen.108154*

prudent financial management and services delivery [25, 39]. The section aims at promoting sound financial management, failing which allows for a municipal council to be dissolved by the relevant provincial government or by national government. Section 139 therefore aims to ensure that local government entities remain committed to their constitutional obligation towards serving the people of South Africa and their Constitutional rights [40].

In 2021, the Department of Cooperative Governance and Traditional Affairs (COGTA) reported that 64 municipalities were 'dysfunctional' [41]. These municipalities had become dysfunctional to such an extent (with very poor governance practices in place, weak institutional capacity, poor financial management and the resultant corruption and political volatility), that national and/or provincial government had to step in towards restoring the requisite levels of financial management, good governance and service delivery. In such cases, administrators are then appointed to manage and oversee the day-to-day running of these dysfunctional municipalities [5].

It is important to note however that, apart from the guidelines in Section 139 itself, there are no other administrative practices or guidelines or policies which should be followed which covers the entire Section 139 framework. Even though for example the MFMA provides for the compiling of a financial recovery plan in the instance of a Section 139(5) intervention along with some guidance towards evaluating financial difficulties in a municipality, these are only guidelines. There is no formal regulation in respect of Section 139(1) interventions, leaving a serious interpretation gap for these interventions to succeed as intended [40].

Although the majority of the dysfunctional municipalities were in in a general dire state, in most cases a single event or so-called specific 'trigger' gave rise to a Section 139, such as a series of violent community service-delivery protests or an Eskom threat to cut off electricity supply to the municipality. Often Section 139 is not instituted even when municipal wrongdoing is identified, but this trigger or singular event is often the real spark needed for the Section 139 intervention. 'Without that trigger, it is not clear that all of the interventions would actually have taken place' [40].

In their 2018 study, the Public Affairs Research Institute [39, 40] reported three factors as being indicative of sustained success of a Section 139 intervention: 'the state of the affected municipality's affairs prior to the Section 139 intervention, the ability of the appointed Section 139 administrator to successfully resolve the address the root causes and challenges, and the performance of the municipality once the Section 139 process is terminated [40]'.

The worse the levels of financial mismanagement, collapse of infrastructure and breakdown of local government structures and processes, the less likely the municipal council will be able to return to financial and operational stability. Research reveals that interventions initiated before the total collapse point was reached were much more successful in aiding the municipality to return to stability after the Section 139 intervention [40].

Research also reveals that the administrator is incapable of bringing about the desired changes, in fact in many cases the administrator actually added to the woes and made the situation worse (by accident or by design). Ledger and Rampedi [39] are of the opinion that the undertaking is unassumingly beyond an individual person who now has the responsibility to manage seven or eight senior managers and then put in a determined effort to tackle years of mismanagement and corruption. This often to be conducted in a significant hostile environment and the perceived noncooperation from those managers [39].

Correct application of the MFMA in Section 139(5) interventions would provide powerful tools to address mismanagement and provide a disincentive to future mismanagement [39]. These tools are not being taken advantage of in fact, 'there is need to do things differently [41]'.
