South African Local Government Efficiency and the Effect of Audit Outcome

While extensive research has explored municipal efficiency, the influence of audit outcomes on municipal performance remains underexplored. This study addresses this gap by investigating the relationship between operational efficiency and audit outcomes in South African local government. Using a second- stage Data Envelopment Analysis (DEA) fractional regression model for the period of 2017–2022, we find that audit outcomes do not have a direct effect on municipal efficiency. However, the interaction between audit outcomes and municipality type shows noteworthy patterns. Specifically, before the COVID- 19 period (2017–2019), metropolitan municipalities had higher efficiency scores than district municipalities, based on the types of audit outcomes received. During the COVID- 19 period (2020–2022), the interaction terms showed that metropolitan municipalities experienced significant declines when they received disclaimers or qualified audit opinions—suggesting that these adverse audit outcomes contributed to the poor performance of municipalities. Additionally, our analysis underscores the influence of contextual factors—such as population age, managerial positions, and number of households—on municipal efficiency. The findings have important public policy implications, suggesting that enhancing audit processes and strengthening governance mechanisms, particularly in metropolitan municipalities, could improve service delivery and efficiency, especially during crises like the COVID- 19 pandemic.