Analysing the effectiveness of the South African public sector financial governance structures

Abstract

Public institutions are characterised by the nature and scope of their constitutional mandate and powers to deliver particular services to the general public, whereas private sector enterprises exist to create wealth for owners and providers of capital. However, as stated by the United Nations Economic and Social Council (UNESCO), both categories of institutions follow similar good governance principles and processes. In order to guide scholarly inquiry into the nature and scope of particular governance arrangements, it is important to focus on the framework that guides good governance structures, processes and praxis. A good governance framework generally direct the relationship between principals, those who are charged with policy-making, financial and fiduciary responsibilities, and agents to provide public services. In the public sector, both principals and agents need to act as good stewards for the utilisation of public financial and other resources. Principal-agency and stewardship theories thus serve as sound theoretical underpinnings of good corporate and financial governance in public sector settings. The theoretical underpinnings of good corporate and financial governance are necessary to assess the macro framework directing governance of public sector institutions. Such a macro framework typically consists of statutory and regulatory frameworks as well as generic principles and standards for public finance in order to improve accountability and responsiveness. The macro framework furthermore comprise of micro-level frameworks that determine the internal structures, functioning and processes of public institutions, inclusive of effective institutional financial control systems and processes. In the South African Government, the National Development Plan: Vision 2030 (NDP) and the Medium-Term Strategic Framework (MTSF) serve as macro-level good governance frameworks for corporate governance. Institutions such as National Treasury, the Auditor-General, and the Department of Trade and Industry issue regulations and instructions that serve as frameworks that guide public institutions on financial management praxis at a micro level. Recent reports of the Auditor-General highlight several challenges and weaknesses in public financial governance structures that result in irregular, fruitless and wasteful expenditure as well as adverse audit outcomes. Some of these challenges and weaknesses include failure to maintain effective internal controls for good corporate and financial governance, inadequate identification and management of financial risks, the inability to ensure that the institution implements and fully complies with legislative requirements, inadequate management of conflict of interests and ethical performance, as well as the inability to ensure that the integrity of financial information is achieved. It is thus evident that public institutions in general fail to comply with the principle of good corporate governance and that they do not adhere to best practice as far as financial management is concerned.