Action Plan for clean audit; Plan to assist municipalities struggling to submit Annual Financial Statements: by Department of Cooperative Governance

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Cooperative Governance and Traditional Affairs

12 November 2012
Chairperson: Ms DG Nlhengethwa (ANC)
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Meeting Summary

The Department of Cooperative Governance explained its post audit Action Plan based on the recommendations made by the Auditor-General on its 2011/12 performance. The presentation provided an overview of the 2011/12 audit report and findings. COGTA received an unqualified audit opinion with matters of emphasis on: internal controls, predetermined objectives, Annual Financial Statements (AFS), performance reports, annual report, procurement and contract management, expenditure management and asset management. In response to the findings, a post audit action plan had been developed and an implementing committee had been established to attend to it. The plan covered the following specific focus areas: performance management, financial management and reporting, information technology, human resources, asset management, internal audit and risk management, departmental policy and PFMA compliance.

The Auditor-General in his findings stated that out of a total of 84 planned targets, 36 were not achieved during the year under review. In response, the Department had introduced monthly early warning mechanisms in the form of monthly monitoring reports which raised flags on projects that were lagging behind.

In the discussion, Members asked questions on the use and cost of consultants, double-packing of personnel, the signing of delivery agreements; achievement of targets and the management of security contracts in the Department where internal staff were used as security guards. In response to the comment made that most government departments exhausted their budgets yet the deliverables were not met, COGTA said it had developed an early warning system which was on a monthly rather than a quarterly basis. This was intended to respond to the issue of performance which was lagging behind. COGTA needed to start leading by example in regards to consequences.

In a presentation on the support given to municipalities which were having trouble submitting Annual Financial Statements, the Department of Cooperative Governance explained the broad support plan (involving leadership, governance and financial management), what had been done to support municipalities, the support role of the National Treasury, the audit status of the municipalities and a list of municipalities that failed to submit their Annual Financial Statements in 2011/12. As at 2 November 2012, there were 12 municipalities whose Annual Financial Statements submission to the National Treasury were still outstanding: Ngwathe Local Municipality, Nala Local Municipality, Masilonyana Local Municipality, Greater Sekhukhune District Municipality, Bela-Bela Municipality, Dikgatlong Municipality, Renosterberg Municipality, Kamiesberg Municipality, Karoo Hoogland Municipality, Mier Municipality, Kannaland Municipality and Swellendam Municipality.

Members asked questions about the quality as against quantity of support, delivery agreements, the consequences for non-performance, the payment of performance bonuses to officials who did not submit annual financial statements and the prioritization of provinces and municipalities; and compliance with the Municipal Systems Act on the appointment of Municipal Managers, Chief Financial Officers and other strategic appointments. Much was said on monitoring and oversight, but why was very little said on consequences for municipalities and officials who failed to submit AFS? What steps were taken against officials who failed to collect debt owed to the municipality? How many municipalities paid Municipal Managers bonuses when they failed to submit AFS? If there were any of such cases, it was important for COGTA to inform provincial treasuries and take the monies back. On the issue of governance, the efficacy of the structures and positions in municipalities was more important than their existence. It was easy for an Municipal Public Accounts Committee (MPAC) to be established but its operation was the challenge. How was COGTA monitoring and controlling the quality of its support?

Meeting report

Introduction by the Chairperson
The Chairperson welcomed members and expressed her disappointment that the officials from the Department of Cooperative Governance were not yet present for the meeting. No apologies had been received from either the Office of the Minister or the Office of the Director General.

The officials from COGTA came in late and informed the Chairperson that the Deputy Director General was on his way to the meeting. The Chairperson said that in as much as the Committee was lenient, it was not going to accept such behavior the next time.

Mr Nkosi ZMD Mandela (ANC) asked if it was not the Minister who was supposed to be briefing the Committee. It was bad enough that the Minister was not coming, worse still the DG could still not make it to the meeting. At what level was the Committee going to be interacting?

The Chairperson replied that the Constitution provided that the Executive Member had to account to Parliament meaning it was the Minister. However, the Minister could have other commitment so the Committee could permit the DG to come in. The Chairperson asked the members if the meeting should be adjourned because of the absence and unpreparedness of the officials from COGTA.

Mr P Smith (IFP) said that it was unfortunate that the DG or his deputy were not present but because it was the end of the year and the Committee was not going to have much time again, it was advisable for the meeting to proceed. The Chairperson could later speak to the Department to sort out the protocol issues. A different approach could then be adopted next year.

Mr Mandela said that the dissatisfaction of the Committee caused by the absence of the Executive Member had to be noted and it had to be pointed out to the Minister that the Committee was not pleased with their conduct.

The Chairperson asked the officials from COGTA to proceed with the presentation.

Action Plan based on the recommendations by the Auditor General
Executive Manager: Finance and Supply Chain Management, Ms Lerato Thwane, provided an overview of the 2011/12 audit report and findings, actions to address internal control deficiencies and actions to respond to findings.

Overview of the 2011/12 Auditor-General report
COGTA received an unqualified audit opinion from the Auditor General. The AG raised some matters of emphasis which had to do with internal controls, predetermined objectives, Annual Financial Statements (AFS), performance reports, annual report, procurement and contract management, expenditure management and asset management.

Auditor-General Findings
The AG found that in terms of leadership, the Accounting Officer of the Department did not exercise effective oversight responsibility regarding finance, performance management and compliance. Management did not prepare regular, accurate and complete financial and performance reports that were supported and evidenced by reliable information. Also management did not review and monitor compliance with laws and regulations. With regards to governance, the Accounting Officer did not also ensure that there was an adequately resourced and functioning internal audit unit. The AG was unable to obtain all information necessary for the validity, accuracy and completeness of actual performance. It was found that the Accounting Officer did not ensure the maintenance of an effective, efficient and transparent system of internal control regarding performance.

The AG in his findings outlined lapses in the submission of Annual Financial Statements, performance reports and the annual report. In terms of procurement and contract management, goods and services with a transaction value of above R500 000 were purchased without obtaining the required price quotation. Invitations for competitive biddings were not always advertised and tenders were awarded to suppliers whose tax matters had not been declared by SARS. A human resource plan was not in place and persons in charge at pay points did not always certify that the employees receiving payments were entitled thereto.

Response Actions
In response, a post audit action plan had been developed based on the AG’s management report which addressed the internal control deficiencies in all areas. An implementing committee had been established to attend to the post audit action plan. This plan had been approved by the Senior Management Committee which monitored the implementation of the plan on a monthly basis. The plan covered the following specific focus areas: performance management, financial management and reporting, information technology, human resources, asset management, internal audit and risk management, departmental policy and PFMA compliance. The draft guidelines on performance planning, reviewing and reporting had been developed and were going to become standard operating procedures.

With regards to procurement and contract management, COGTA had ensured the prevention of irregular expenditure and had standardized the use of a checklist to ensure compliance. Contract management was going to monitor all contracts and a dedicated payments review team was going to focus on the detection and reporting of irregular expenditure. The HR plan was currently in place and there were now procedures to facilitate and monitor the payroll certificates on a monthly basis.

The AG found that out of a total of 84 planned targets, 36 were not achieved during the year under review. In response, the Department had introduced monthly early warning mechanisms in the form of monthly monitoring reports which raised flags on projects that were lagging behind.
           
Ms Thwane concluded by saying that it was important for the Committee to note the progress on the circulated detailed post audit action plan which detailed the progress and the level at which the corrective actions had been implemented.

Discussion
Mr J Matshoba (ANC) said that when the Committee visited the Department, there were 32 people who were double-packing. The number had now risen to 56. What was COGTA doing to remedy the situation? The use of consultants was prevalent and it was unnecessary. How much did COGTA spend on consultants? There were people paid to do the work which was now being done by consultants. Was it because the people employed did not have the necessary skills or was the job too technical for them?

Ms Thwane replied that on the outsourcing of internal work and the double-packing in the Department, it was completely a matter of skills. The Department had a CFO and a Chief Audit Executive. The work which was outsourced was the work which was to be done by the internal audit unit which did not have sufficient staff. There were many investigations going on in the Department and this created a lot of work for the unit thus necessitating the outsourcing of some of the work. The outsourcing contract was a three year contract which cost about R7 million. In terms of double-packing, the Minister and the management of the Department had decided that some of the skills and people be deployed to the Municipal Infrastructure Support Agency (MISA) and the Community Works Programme (CWP).

Mr Matshoba asked if Ms Thwane was sure that all the staff who were double-packing were now being fully utilized.

The Deputy Director General, Mr
Muthotho Sigidi, who had just arrived at the meeting, replied that all the workers were deployed except for only one of the workers whose deployment was still being processed.

Mr Mandela said that the problem with the presentation was the exclusion of delivery agreements. He asked how the Department and its officials could be held accountable for the delivery which they had committed themselves to if the Committee was not presented with delivery agreements. It was challenging to notice that most government departments exhausted their budgets yet the deliverables were not met.

Ms Thwane replied that in terms of the delivery agreements, COGTA’s annual performance plan looked at all the deliverables which came out of the Minister’s delivery plan and agreements. The Department then made additional objectives to these delivery plans and agreements. The delivery agreements were largely included in the performance agreements and targets. Accountability was therefore managed through the Department of Performance, Monitoring and Evaluation.

The Chairperson asked Ms Thwane to give more details on the point that out of a target of 86 projects only 36 were achieved.

Ms Thwane replied that the Department had developed an early warning system which was on a monthly rather than a quarterly basis. This was intended to respond to the issue of performance which was lagging behind.
 
Ms I Ditshetelo (UCDP) asked when the payment review teams were established and if it was the first time that the Department was using such committees. What measures were used in the past? Were the members of the teams from the present staff or did it include consultants. With regards to COGTA staff who had been used as security officers, did these staff have security skills or were they taken just because they were within the Department?

Ms Thwane replied that COGTA had had a post audit action plan in the past but after some reviews, it was noticed that the implementation was not vigorous and monitored. The focus teams were then created to ensure that the effects of the post audit plan could be felt. COGTA was trying to do more even though it already had the plans and teams in place. The creation of the payments review committee was meant to respond to the detection of payroll and financial management issues as identified in the audit opinion.

Mr Smith said that from the presentation, the only challenge which was going to be carried over to the next year was the extension of the security contract. Was this the only matter identified by the AG which was going to be carried over into the next year? Were all the other issues confidently dealt with? With regards to performance targets, did COGTA have workshops with the Auditor-General on how to address the challenges? The problems as indicated by the presentation did not tie up with the information in the other documents given to the Committee. With regards to monthly monitoring and reconciliation of accounts, the Department was supposed to have had such structures a long time ago as that was standard procedure. What had prompted the Department to start doing monthly reconciliations? Why were performance agreements not signed on time? What corrective actions had been taken for the financial issues of the previous financial year? Why did COGTA not have an accurate and complete audit register and why had the process of addressing it, not yet started?

Ms Thwane replied that COGTA was working towards making sure that the matters of emphasis identified by the AG were not going to occur again. COGTA was leading the Clean Audit programme so it was working towards receiving its own clean audit. There was work in progress and the occurrence of irregular expenditure was significantly less than the previous years because it was now being detected and handled. In terms of performance targets. COGTA had had workshops with the AG. This challenge was that the guidelines were National Treasury guidelines and the AG could only do his audit based on those guidelines. The workshops had been with the National Treasury and the AG to advocate for a different set of guidelines which were suitable for a policy making department.

Ms Thwane said that the Department did quarterly verifications and that was followed by the internal audit review. There were standard operating procedures which COGTA was using but because of the quality of the AFS, there was the need to emphasise the issue of monthly reconciliation of accounts.

Mr J Steenhuizen (DA) said that the issue about the security staff was a serious issue as an individual needed to be registered and trained to be a security guard. What process was used to identify the personnel within COGTA? Who backed up the security personnel? Was a cost benefit analysis done on outsourcing as opposed to using internal staff? The AG had spoken repeatedly about the lack of consequences in municipalities, which COGTA had oversight on. What corrective actions had been taken with regards to competitive bidding and the non-compliance with tax matters? How many disciplinary cases were going on, what had the consequences been in each of the cases and what date were the processes going to be finalised? COGTA needed to start leading by example in regards to consequences.

Ms Thwane replied that with regards to the security staff, COGTA had previously been using the services of a service provider but it had now decided to advertise the positions and had hired security staff. It did not just take existing staff that had no security skills to fill the positions. The aspects of qualification, registration, training, costs and back-up were thoroughly considered. The internal security costs were slightly more than the outsourced serviced but there were also issues of consistency, familiarity and challenges with the outsourcing of the service.

On consequences within the Department, Ms Thwane said the supply chain management transgressions which COGTA had experienced were mainly related to the Community Work Programme (CWP) which the Department took over. Each and every transaction transgression was investigated by internal audits which made recommendations to the DG on issues of accountability and consequences. Disciplinary procedures were recommended. She did not have the exact figures as to the details of the disciplinary matters but the information on the figures and exact consequences could be provided to the Committee.

Mr Smith asked why officials were paid performance bonuses when they had not even signed performance agreements.

Mr Sigidi replied that one of the issues relating to performance agreements had to deal with people who were deployed so it was difficult to say that the agreements were being signed in a particular office. On performance bonuses, if an official had not signed any performance agreement, it meant that there was not going to be any assessment made thus there was no one who was assessed and got a performance bonus when they did not sign a performance agreement. Mr Sigidi said that he chaired all the assessment sessions of the Department and even performance agreements which were submitted late were not considered. Disciplinary actions were to be taken against staff who submitted their performance agreements late as an issue of compliance. On the overall performance of the Department, the view was that the Department had not achieved all the activities that were in the annual performance plan. This meant that it was very difficult for anyone to receive a performance bonus. At the level of DDGs, only one was recommended to get a performance bonus.

Action Plan to support Municipalities that fail to submit Annual Financial Statements (AFS)
Mr Sigidi said that the broad support plan had clustered activities for support under three areas: political and administrative leadership; governance; and financial management. The Action Plan identified the stakeholders responsible for particular actions in the drive to support municipalities to achieve a favourable audit opinion. The plan was a collaborative effort as it drew inputs from municipalities and stakeholders involved. The support plan was not only focused on municipalities that failed to submit their AFS. It considered all municipalities irrespective of their audit outcomes.

Leadership support
In terms of leadership support to municipalities, COGTA had supported municipalities in the appointment of their senior managers. By March 2012, 202 Municipal Managers and 218 Chief Financial Officer positions had been filled. As at March 2012, the following municipalities either did not have either a Municipal Manager or a CFO or both: Bela-Bela, Ngwathe, Sekhukhune, Nala, Renosterberg, Kamiesberg and Dikgatlong. As at the end of September 2012, 219 out of 278 Municipal Manager posts were filled and all 278 CFO posts had been filled. In collaboration with the South African Local Government Association (SALGA), COGTA was involved in training and induction support to councillors who were the political leadership of municipalities.

Governance Support
COGTA had supported the establishment of oversight structures for proper financial management. 245 Municipal Public Accounts Committees had been created and municipalities had achieved 96% in the establishment of their audit committee and 79% for internal audit committees. COGTA had trained municipal officials on ethics management and good governance.

Financial Management Support
COGTA, in collaboration with SALGA, was conducting workshops on Credit Control and Debt Collection policy guidelines. In this regard, 39 municipalities participated in KwaZulu Natal, 18 in the Northern Cape, 18 in the Eastern Cape, 8 in Limpopo, 13 in the Western Cape and the figures from Mpumalanga were still to be confirmed. These workshops were going to be conducted in all the nine provinces.

The role of the National Treasury
The National Treasury and provincial treasuries had been monitoring and giving support to municipalities in the compilation of their financial statements. The support was provided by the deployment of financial experts through the Municipal Finance Improvement Programme (MFIP) and the use of consultants. The National Treasury had also provided COGTA with information relating to the municipalities which could not submit their AFS by 30 August 2012.

Audit Status of Municipalities that failed to submit their AFS
As at 2 November 2012, there were 12 municipalities whose AFS submission to the AG was still outstanding: Ngwathe Local Municipality, Nala Local Municipality, Masilonyana Local Municipality, Greater Sekhukhune District Municipality, Bela-Bela Municipality, Dikgatlong Municipality, Renosterberg Municipality, Kamiesberg Municipality, Karoo Hoogland Municipality, Mier Municipality, Kannaland Municipality and Swellendam Municipality.

Mr Sigidi said that the use of consultants for the compilation of AFS was a stop gap measure to address backlogs in municipalities. The appointment of Municipal Managers, CFOs and competent finance staff in municipalities were critical steps towards the establishment of sound financial management and the ability to timeously compile AFS. However, the real test of the efficiency of these interventions and investments was going to be evidenced in the consistent improvement of audit outcomes in the future.

Discussion
Mr Steenhuizen said that he was worried that the focus was on the quantitative rather than qualitative aspects of support. It was easy for an MPAC to be established but its operation was the challenge. How was COGTA monitoring and controlling the quality of its support. Who bore the cost for the Municipal Finance Improvement Programme (MFIP) and the deployment of consultants as many municipalities were dependent on grant funding? On the use of consultants as a stop gap measure, most often when consultants were used, the posts were not vacant but the occupants just did not have the required skills. Much was said on monitoring and oversight, but why was very little said on consequences for municipalities and officials who failed to submit AFS?

Mr Sigidi replied that with regards to who bore the cost of the MFIP, the advisers were paid for by the National Treasury. MISA took the infrastructure part of the funding and the National Treasury was in charge of the finance part. Mr Sigidi said that when he interacted with the National Treasury to give him the names of the municipalities which had not submitted AFS, his concern was whether the North West Municipalities had submitted. The indication from the National Treasury was that they had not received anything from the North West. COGTA was therefore going to continue to follow up on the matter.

On the point raise about the focus on quantity rather than quality, Mr Sigidi said that he agreed that COGTA had been cautioned on the issue several time to not just ensure the establishment of a committee but to also look at the efficacy of such structures. The main issue of relevance to COGTA was whether the MPACs and audit committees were assisting municipalities in submitting their AFS on time or improving financial management within the municipality. With regards to MPACs, such an assessment could only be done at the end of the current process. The impact of these structures was also linked to the appointment of Municipla Managers and CFOs. It was important to link all these appointments and structures to good governance and better financial management. Currently, the impact on quality was information which COGTA did not have.

Mr Smith said that it would have been useful for the Committee to have a specific understanding of what was the issue with the municipalities that failed to submit AFS. How proactive was COGTA in advance of the problem arising in preventing the non-submission of AFS and reports? How many municipalities paid Municipal Managers bonuses when they failed to submit AFS? If there were any of such cases, it was important for COGTA to inform provincial treasuries and take the monies back. It was a characteristic of weak leadership for poor performance to have bonuses. On the issue of governance, the efficacy of the structures and positions in municipalities was more important than their existence. There had to be outcomes as a result of structures such as MPACs. How many municipalities had not submitted their AFS by the due date which was 30 August and not 2 November?

Mr Sigidi replied that on the issue of senior managers receiving performance bonuses even when they failed to submit their AFS, COGTA did not have the information. The Department was however going to look for the information so that it could provide it to the committee. From his experience in the municipal environment, there were instances where an official failed to perform just on one area of his many targets. He could fail to perform on financial management but could perform so well in the other aspects which made the aggregate of his performance require that he gets a performance bonus. This was a scenario where the guidance from the Committee was needed.

On the number of municipalities that had not submitted by the due date of 30 August, Mr Sigidi said he did not have the figures but he was going to find out and provide the information to the committee. The invite from the Committee for the presentation requested for only those which were currently not submitted.

Mr G Boinamo (DA) said that the action plan to support municipalities which failed to submit AFS by the due date was not clearly outlined in the presentation. Why was the action plan not clearly articulated? Where there any consequences on the management and municipalities which failed to submit their AFS on the due date? What steps were taken against officials who failed to collect debt which were owed to the municipalities?

Mr Sigidi replied that with regards to the consequences in failing to submit AFS, COGTA did not have any instrument to ensure retribution in the event of a municipality failing to submit its AFS. On the steps taken against officials who failed to collect debts owed to the municipality, it was difficult to say that just because a municipal official did not issue an invoice to debtors, that particular action was to be taken against him. It was important to first of all confirm whether the credit control policies and by-laws of the municipality were in place to ensure such collection. If debt collection was part of the employee’s job description, the management of the municipality had to take action.

Ms Ditshetelo congratulated COGTA on the progress with regards to the appointment of Municipal Managers and CFOs. Why was no mention made of the municipalities in the North West which were in crisis?

The Chairperson said that inasmuch as it was a good thing that there was progress in the filling of strategic posts in municipalities around the country, it was important for COGTA to state if the posts were filled in accordance with the Municipal Systems Act and all other legislative compliance. Had COGTA engaged with the provinces with regards to the support and intervention in municipalities?

Mr Sigidi replied that with regards to the filling of posts in compliance with the Municipal Systems Act, he could not say with certainty that they had been filled in line with the Act. The information which the Department had received was just to indicate that the posts had been filled. The Act indicated that the MEC had to give a report to the Minister and those reports had not been received. COGTA however had an official who monitored the appointment of Municipal Managers, CFOs and other strategic appointments.

The Chairperson said that the DDG should go back and verify if the posts had been filled in line with the Municipal Systems Act.

Ms C Mosimane (COPE) asked what informed the programmes by SALGA and COGTA. Was there a fact finding commission which could help with issues of prioritization? There were some provinces and municipalities which needed urgent attention.

Mr Sigidi replied that on what informed the training on credit control policy, there were no criteria which were used to determine where the training should start. All the provinces had been informed and dates were requested from these provinces. KZN was the first province.

Ms Ditshetelo, in a follow up question, asked Mr Sigidi if COGTA did not foresee that the provinces which had issues such as the North West were going to be reluctant to give the dates for the training on credit control policies.

Ms Mosimane said that the response from Mr Sigidi indicated that there was a leadership problem in the municipalities. There was need for prioritising.

Mr Sigidi replied that he had told the provinces and municipalities that people were not going to come if they did not indicate that there was a problem – but the same people were going to come for “the funerals of these municipalities”. COGTA did not want to go municipality funerals but they wanted to be proactive and be able to give assistance to the municipalities which required assistance. COGTA’s plan was to go to all provinces. All the provinces had been attended to with the exceptions of Gauteng and North West. COGTA had indicated to the provinces that by the end of January 2013, the training should be complete in all the municipalities. The interaction was helping to provide additional information for the credit control policy. The credit control policies had to be reflected in the by-laws of the municipalities.

The Chairperson said that the presentations and the engagements were very informative. She was impressed with the performance of Ms Thwane and she was due for a promotion.

The Chairperson reminded members that dates had been proposed for the Committee’s study tour. It had been agreed that early January 2013 was the appropriate time for the tour.

The meeting was adjourned.

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