Understanding the Public Finance Management Act & Municipal Finance Management Act

Welcome to the auditor general of south africa when it comes to public finance management there are some terms that are often misunderstood we’d like to offer some clarity on irregular expenditure and material irregularity on the face of it they sound the same but there are some substantial differences and they originate from two different pieces of legislation start

With irregular expenditure this simply refers to instances where the requirements of legislation were not followed in the process leading up to any payment the public finance management act or pfma and the municipal finance management act or mfma regulate all national provincial and municipal government expenditure respectively and clearly states the procurement

And payment process to be complied with let’s illustrate a contractor has been awarded a contract to build a school the procurement process for awarding the construction contract did not comply with legislation and regulations on supply chain management so all payments to the contractor will be considered irregular expenditure once irregular expenditure has been

Identified the accounting officer or authority must investigate to determine the root cause and impact by considering the following first did the non-compliance result in a loss then was any fraud corrupt and criminal activity involved and should an employee or employees be held accountable if there was no loss or fraud corrupt and criminal activity the irregular

Expenditure may be condoned by the relevant authority the necessary disciplinary action should be taken against the employee or employees responsible this should act as a deterrent for any further irregular expenditure now let’s explore material irregularity like irregular expenditure material irregularity also starts with the non-compliance or contravention

Of legislation but extends further it can be applied to suspected fraud and suspected theft as well as breach of fiduciary duty let’s expand on the main features of material irregularity for any non-compliance to be considered a material irregularity it must have resulted in or is likely to result in a material impact this must have been identified during an

Audit what is impact this is a financial loss the misuse or loss of a material public resource or substantial harm to a public sector institution or the general public here’s another way of looking at irregular expenditure and material irregularity they differ in terms of value irregular expenditure is the total expenditure to date material irregularity on

The other hand may not always have a value as there are other non-financial material impacts for instance substantial harm to the general public cannot always be quantified but if the material irregularity relates to financial loss then this has an actual or likely value an award of 20 million rand was made to a supplier that did not have the required cidv

Grading for the construction of a building extensive remedial work to the value of 10 million rand was subsequently carried out and paid by the order t to rectify defects through different suppliers in addition to the 20 million rand all payments to the supplier that did not have the required cidb grading would be irregular expenditure amounting to 20 million

Rand whereas the financial loss would be 10 million rand let’s be clear just because a transaction is classified as a regular expenditure does not make it material irregularity here are some quick examples of material irregularity if a competitive bidding process is not followed as required by legislation and results in an order t paying excessive amounts for

Goods or services this is material irregularity when an invoice is not paid within 30 days resulting in material interest being charged and paid to a supplier this is material irregularity an ineffective system of expenditure control resulting in payment for goods or services that have not been received that’s the essence of irregular expenditure and material

Irregularity if you need any further information on these concepts or any other public finance matters please visit www.agsa.co.za

Transcribed from video
Understanding the Public Finance Management Act & Municipal Finance Management Act By National Treasury of the Republic of South Africa