Auditor-General of South Africa v Member of the Executive Council for Economic Opportunities, Western Cape and Another

The Auditor-General audited the financial statements of the Western Cape Provincial Department of Agriculture for financial years ending 31 March 2017 and 31 March 2018. The Department made payments to Casidra SOC Limited and the Deciduous Fruit Producers Trust (Hortgro) for various agricultural projects including a Vegetable Industry Project, LandCare Projects, Flood Relief Project, Drought Relief Scheme, and Fruit Industry Project. The Auditor-General determined these payments totaling R274,340,625 (2017) and R259,191,000 (2018) were incorrectly classified as transfers rather than payments for goods and services, and concluded they should have been classified as payments to implementing agents under the Modified Cash Standard issued by the National Treasury. The Auditor-General issued qualified audit reports and classified the amounts as irregular expenditure. The MEC for Economic Opportunities brought a review application to set aside the findings in the audit reports, arguing the Standard was not legally binding and that no principal-agent relationships existed between the Department and Casidra/Hortgro.

• Whether the Modified Cash Standard issued by the National Treasury was legally binding on provincial departments
• Whether the legal relationships between the Department and Casidra/Hortgro constituted principal-agent relationships within the meaning of the Modified Cash Standard
• Whether payments to Casidra and Hortgro should be classified as transfers or as payments for goods and services in the Department's financial statements
• Whether the exercise of the Auditor-General's functions constitutes administrative action subject to the Promotion of Administrative Justice Act (PAJA) or is subject to legality review

The appeal was dismissed with costs, including the costs of two counsel. The High Court order setting aside the Auditor-General's findings in the audit reports was upheld.

The binding legal principles established are: (1) National Treasury Instructions issued under s 76 of the PFMA are legally binding on departments and render standards such as the Modified Cash Standard legally enforceable. (2) Under the Modified Cash Standard, a principal-agent relationship exists only where an agent is authorized to create, alter or discharge legal relationships between the principal and third parties (representation). Labels used by parties and provisions describing entities as "implementing agents" are not determinative - substance prevails over form. (3) Where contracts do not authorize an entity to bind a department to third parties, but rather the entity contracts in its own name with beneficiaries and service providers, no principal-agent relationship exists for purposes of the Modified Cash Standard, and payments may properly be classified as transfers rather than payments for goods and services. (4) The exercise of the Auditor-General's constitutional and statutory auditing functions does not constitute administrative action under PAJA. The Auditor-General, as a Chapter 9 institution independent of executive administration and accountable only to Parliament, performs functions that are subject to review under the principle of legality rather than PAJA.

The Court raised two cautionary observations for future consideration: (1) While Casidra and Hortgro did not charge fees in the normal sense, they included costs of administration in the project budgets. The Court noted that paying for costs of administration may possibly amount to payment for services, but as this was not addressed in the affidavits, the Court did no more than raise a caveat for future consideration. (2) The Court acknowledged that the Auditor-General appeared to have concerns about procurement procedures "down the line" with regard to these arrangements. While this was not addressed in the papers, the Court noted that any legitimate concerns in this regard may be addressed by appropriate measures under the relevant legislation. The Court also observed that it was unfortunate and not in keeping with the duty of an organ of state that is party to legal proceedings that the National Treasury did not participate in the proceedings to assist the court with material information at its disposal, particularly given that the Modified Cash Standard had emanated from the National Treasury.

This case is significant for establishing that: (1) The Auditor-General, as a Chapter 9 institution, exercises constitutional functions that do not constitute administrative action under PAJA but are subject to legality review, following the approach in Minister of Home Affairs v Public Protector; (2) It provides important guidance on the interpretation and application of the Modified Cash Standard, particularly regarding when principal-agent relationships exist for financial reporting purposes - substance prevails over form and labels used by parties; (3) It clarifies that the Modified Cash Standard's concept of principal-agent relationships is limited to situations where the agent is authorized to create legal relationships between the principal and third parties (representation), not merely implementation of projects; (4) It demonstrates the importance of proper classification of government expenditure as either transfers or payments for goods and services, with significant consequences for irregular expenditure findings; (5) It affirms the independence of the Auditor-General as a constitutional watchdog over public finances, while also confirming that the Auditor-General's decisions remain subject to judicial review on legality grounds.