LIMITATION OF THE PRINCIPAL-AGENT THEORY TO EXPLAIN THE PROBLEM OF NON-COMPLIANCE IN SOUTH AFRICAN MUNICIPALITIES

Abstract

The obstinate problem of non-compliance with municipal finance legislation in South Africa has been largely explained as a principal-agent problem. Accordingly, the municipal officials as agents are depicted as potentially non-compliant, dishonest and corrupt. Notably, measures that have been established to address problems of non-compliance have been disproportionately focused towards municipal officials. This intrinsic bias against municipal officials is flawed and inadequate for the context and dynamics at play in the problem of non-compliance with municipal finance legislation in South African municipalities. In particular, the assumption that the non-compliance occurs because the municipal councils are unable to effectively control the behaviour of the bureaucrats is not borne out by reality. This article aims to highlight the theoretical limitations of the principal-agent theory in order to explain the problem of non-compliance with municipal finance legislation in South Africa. Drawing on reports of the Auditor-General, the article shows the contribution of the municipal council in the problem of non-compliance. The article concludes that municipal councils are not unable but unwilling to exercise oversight obligation and duty and thus must be regarded as complicit and culpable in the problem of non-compliance in South African municipalities. Keywords: Auditor reports, Municipal councils, Non-compliance, Oversight, Principal- Agent Theory