South African Local Government Association (SALGA) Performance Audit: hearing
Public Accounts (SCOPA)
15 August 2006
Meeting Summary
A summary of this committee meeting is not yet available.
Meeting report
STANDING COMMITTEE ON PUBLIC ACCOUNTS
15 August 2006
SOUTH AFRICAN LOCAL GOVERNMENT ASSOCIATION (SALGA) PERFORMANCE AUDIT: HEARING
Chairperson: Mr N Godi (PAC)
Documents handed out:
SALGA Annual Report 2004/5 (available at
http://www.salga.net/)
Auditor-General
Report
SUMMARY
The Committee met with the core management of the South African Local
Government Association to answer questions on the Auditor-General’s performance
audit of the Association. The Auditor-General was present to answer any queries
and provide additional input. Salga had failed to ensure that measurable
objectives were included in its business plans. Salga had failed to ensure that
debts raised were timeously collected. The Auditor-General had recommended that
the debt collection system be improved. Record keeping of financial transaction
also had to be improved. An improved financial management information system
had to be installed. Budgeted amounts had to be linked to specific objectives
in order to facilitate control of expenditure. A comprehensive human resource
strategy had to be formulated and implemented. Job descriptions should be
formulated and implemented. A performance management system was necessary to
improve management output.
Members asked numerous questions including the failure to apply for a tax
exemption, detail on the merger process, the role of the Department of
Provincial and Local Government, the use of consultants to fulfil an internal
audit function, performance management systems, the problem of unauthorised
expenditure, lack of bank reconciliation in certain regions, the presence of an
internal audit function, overexpenditure related to the 2004 Conference, the
proposed integrated financial system and the payment of income tax by
councillors.
MINUTES
The Chairperson reminded Members that the intention of the Committee was to
maintain oversight of the financial management and administration of public
sector entities. Vigorous engagement with investigated entities was required at
certain times in order to ensure adherence to prescribed rules and regulations.
Councillor Amos Masondo (South African Local Government Association (Salga)
Chairperson) asked whether the Association could make some preliminary comments
before Members asked specific questions. A new Chief Financial Officer had been
appointed in 2005. Revenue was derived from member municipalities in the form
of levees, grants and donor funds. Salga’s National Executive Committee had
instituted a forensic audit after observing certain irregularities in financial
management. Findings had been conveyed to the National Prosecuting Authority
(NPA) for further investigation. The Association awaited the results of the
investigation.
Non-compliance with laws and regulations-Mr E Trent
Mr E Trent (DA) noted the recent adjustments in the Association’s management
structure but asserted that non-compliance with laws and regulations could not
be ignored. The Auditor-General’s Report had pointed out the Association’s failure
to apply for an income tax exemption. An agreement with the North-West Salga
branch had not been signed. Clarity was sought on the two indiscretions.
Dr Makhosi Khoza (Salga-Chief Executive Officer) concurred that the Association
had neglected to apply for a tax exemption previously but the omission had
since been rectified. The Salga Chairperson of the North-West province had
since signed the Memorandum of Understanding.
Mr Trent asked whether the tax exemption remained a contingent liability. He
asked whether sufficient planning had pre-empted the merger process. The lack
of a three-year strategic plan was a weakness.
Dr Khoza stated that the internal audit process had been outsourced to Gobodo
in June 2005. No plan to manage the merger process had been formulated despite
the presence of a Memorandum of Understanding. The new management team had
continued with the merger process. Salga’s management structure had been
altered. Previously Directors had operated at the provincial level with limited
accountability. Presently, deputy CEOs operated at the provincial level. All
provinces were represented on the Salga National Executive and a plan would be
formulated to manage the merger process.
The Chairperson asked whether the Department of Provincial and Local Government
(DPLG) had played a role in assisting the Salga merger process.
Cllr Masondo declared that the Association enjoyed a sound relationship with
the Minister of Provincial and Local Government. Salga participated in the
Local Government Min/Mec. The Department had not provided capacity building or
training services. Salga remained an independent organisation and efforts to
consolidate the Association were an internal affair.
Mr Trent asked whether an internal audit function existed prior to the
appointment of consultants.
Mr Sabelo Wasa (Executive Director-Finance and Corporate Services) replied that
an internal audit function existed prior to the appointment of consultants.
Mr Trent stated that the internal audit function had to be credible in order to
provide credibility to the audit process in general. Pre-determined objectives
had to be in place to evaluate compliance with the Public Finance Management
Act (PFMA).
Ms L Mashiane (ANC) asked whether the use of consultants was a temporary
measure.
Mr Wasa responded that the outsourcing of the internal audit was an interim
measure. An in-house function would be established.
Mr Trent noted the lack of information on performance management.
Dr Khoza stated that pre-determined objectives were in place but an action plan
still had to be devised. Therefore, no information on performance had been
submitted to the Auditor-General.
Mr L Van Vuuren (Auditor-General’s Office) stated that the PFMA stipulated that
Annual Reports had to focus on adherence to performance objectives. Salga’s
Annual Report contained a section on objectives but the detail provided was not
aligned to the PFMA requirements.
Dr Khoza responded that the advent of new Salga management had delayed the
placement of adequate performance measures in the 2004/5 Annual Report. The
anomaly would be rectified in the next report.
The Chairperson concluded that measurable objectives were now in place but had
not been present when the Auditor-General had conducted the audit.
Mr Trent noted the lack of monitoring controls in terms of procurement
management. No meaningful policy was in place and a plan to rectify the anomaly
was necessary. An attempt had been made to purchase a building without
authorisation.
Dr Khoza stated that a unit had been established to oversee the supply chain
management process. The contract to purchase the building had been cancelled by
mutual agreement between the parties and a total of R7 million had been
recovered.
Mr Trent acknowledged the positive development in securing the R7 million
deposit but asked whether a sound supply chain management policy was in place.
Dr Khoza declared that deviations arose from time to time but a code of conduct
had been formulated.
The Chair sought clarity on the level of officials involved in the foiled bid
to purchase a building and how the money was recovered.
Cllr Masondo responded that the matter was under investigation by the NPA and
no additional information should be divulged at this juncture. The officials
involved occupied a high level in the organisation.
Mr Trent asked whether any additional legal costs had accrued in the recovery
of the deposit.
Mr Wasa stated that no interest had been paid and the matter had been settled
out of court. No legal costs had arisen.
Mr S Fakie (Auditor-General) referred to contingent liabilities and noted that
a R148 million liability had not been accounted for. He asked whether an
exemption had been granted by the South African Revenue Service (SARS).
Mr Wasa stated that the SARS would provide feedback on the exemption in due
course. The Association’s attorneys had advised that the R148 million did not
have to be provided for. The case was pending and the expected timeframe was
two years. The case could be thrown out of court.
Ms Mashiane requested that the Committee be informed on a regular basis of
developments in the legal case.
Internal controls-Mr B Pule
Mr B Pule (UCDP) asked for detail on systems of internal control and risk
management in Salga. The performance audit report declared that revenue and
debtors had been understated. A total of R74 million had not been declared. He
asked whether Salga had sufficient systems in place to address issues of
revenue and debtors.
Mr Wasa stated that membership fees received from municipalities would now be
dealt with on an accrual basis as opposed to cash. An improvement in invoices
and statements had been recorded.
Dr Khoza added that Salga remained a voluntary organisation and consequently
debtors were difficult to reflect.
Mr Pule asked whether Salga made a concerted effort to persuade non-member
municipalities to join.
Cllr Masondo confirmed that the Association attempted to increase the
membership base on a regular basis.
Mr Pule noted the lack of supporting documentation to financial transactions
and the existence of unauthorised orders.
Dr Khoza asserted that the newly appointed deputy-CEOs ensured a higher level
of compliance with regulations. The Audit Committee consisted of three Chartered
Accountants and a lawyer and would identify problems before they manifested. A
specific unit would focus on supply chain management.
Mr Pule noted that no bank reconciliation had occurred in the Limpopo Branch.
The performance audit had identified three bank accounts not accounted for. He
asked what actions would be instituted to improve monthly reconciliations.
Mr Wasa stated that the financial unit’s capacity had been improved.
Information on bank recalls would be provided to Members.
Mr Pule asked for detail on steps taken to address shortcomings.
Cllr Masondo stated that the forthcoming Salga Annual Report would be an
improvement on the previous one.
Mr Pule sought detail on internal controls, general entries and supporting
documentation.
Mr Wasa responded that systems were in place and adequate staff had been
appointed.
Mr Trent asked whether a forensic audit team was in place to investigate
anomalies in financial management. The failure to cancel invoices after payment
could result in double payments.
Mr Wasa declared that a forensic audit had been completed and the outcome
forwarded to the NPA. No evidence of double payments existed at this stage.
Mr Nkem-Abonta (ANC) stated that no measurable objectives appeared in the
Annual Report and the budget was not aligned to a plan. The internal control
system was weak. Individuals responsible for indiscretions and irregular action
should be identified. Accountable officials had to be disciplined when the need
arose.
Cllr Masondo reiterated that findings of the forensic audit had been forwarded
to the Scorpions and the investigation was ongoing.
Mr P Gerber (ANC) supported calls for the identification of those responsible
for the aborted purchase of a building.
Mr Nkem-Abonta declared that concerns also lay with the overall managerial and
administrative systems.
The Chairperson stated that further detail could not be provided as the matter
was subject to a NPA investigation.
Dr Khoza stated that the National Executive Committee had recently met to
approve the operating budget based on input from the provinces.
Inappropriate accounting standards-Mr T Bonhomme
Mr T Bonhomme (ANC) asked what systems were in place to ensure availability of
supporting documentation.
Mr Wasa asserted that adequate systems were in place to avoid a repetition of
previous anomalies. The rate of acquisition of membership fees had dramatically
improved from 40% to 146% in two years. The 146% figure also included recovered
debt.
Ms Mashiane asked why municipalities that owed money were called debtors as
membership of Salga remained voluntary.
Mr Wasa declared that municipalities that did not pay levees would be regarded
as debtors.
Mr Bonhomme asked whether any internal action had been taken against those responsible
for wasteful and unauthorised expenditure.
Dr Khoza noted that wasteful expenditure was difficult to quantify and identify
and would require extensive research of past activities in order to assess the
scope of unnecessary expenditure.
Mr Trent referred to interest paid by Salga and asked why this had occurred as
the Association was not entitled to borrow money or pay interest.
Cllr Masondo noted that a general perception prevailed that expenditure at the
2004 Conference had been excessive but no quantitative exercise had transpired
to determine the percentage of over-expenditure.
Mr Fakie stated that fruitless and wasteful expenditure arose from poor
internal controls and lack of adequate adherence to rules and regulations. An
investigation of the Conference would have to focus on whether Salga received
value for money. Such a finding could only determined by means of comparison
with similar events. It appeared as though no proper procedures had been
followed.
Cllr Sophie Molokoane (Chairperson-Working Group on Finance) noted that the
Conference in question had been a special event with a high number of delegates
that had required a large budget.
Mr Trent asked what interest had been paid on as the PFMA stipulated that Salga
should not borrow money.
Mr Wasa replied that interest had been paid to the Revenue Service in the form
of penalties. The recent merger of provincial Salga offices had resulted in the
absorption of previous outstanding debts. Interest had previously been received
for donor funds deposited in one bank account. Such deposits had now been
divided into separate accounts.
Mr Bonhomme asked for an exact figure on the cost of the Conference.
Mr Wasa replied that such an amount could be provided in writing.
Mr Bonhomme asked for clarity on circumstances surrounding unauthorised
expenditure.
Mr Wasa stated that cases of unauthorised expenditure had been referred to the
forensic auditors for investigation.
Dr Khoza responded that consultants had been contracted to investigate tax
returns for councillors but had received far more than originally intended. The
matter was part of an investigation by the NPA.
Ms Mashiane proposed that Members receive regular updates on the implementation
of new systems. She asked whether measurable objectives were incorporated into
business plans.
Dr Khoza stated that a business plan was in place with key indicators.
Performance management agreements were in place and staff appraisal occurred on
a quarterly basis. Skills shortfalls had been identified and would be
addressed. The Association would ensure that political bodies remained informed
of developments. 80% of the Salga budget was derived from municipal
subscriptions. An approved budget process would be followed in future.
Ms Mashiane sought clarity on the integrated financial system.
Mr Wasa replied that financial reporting would be linked to various regions and
would incorporate various components. A new information technology system would
be installed.
Mr Fakie advised the Association that proper planning should occur to acquire
an appropriate IT system.
Mr Wasa declared that the acquisition of a new system would involve lengthy
consideration. Meetings would be held with those municipalities that had
recently installed new IT systems.
Mr Trent asked how financial arrears from municipalities would be addressed.
Dr Khoza responded that a campaign had been launched to improve the rate of
payment of subscriptions and positive results were accruing.
Mr Fakie advised that the audit committee should splay a role in the
acquisition of new IT equipment. The opinions of the end users should also be
garnered.
Mr Wasa responded that the relevant Sector Education and Training Authority
(SETA) was involved in the process to improve supply chain management. A salary
benchmarking exercise had been completed and salaries would remain within the
imposed framework. Salaries that had been out of the prescribed range could not
be reduced but no further increases would accrue until the target had been met.
Human Resources-Ms L Mashiane
Ms Mashiane sought detail on the high number of vacancies and the lack of
proper job descriptions.
Mr Wasa stated that the high number of vacancies was due to the timing of the
performance audit that highlighted the problem when appointments could not be
made. Job descriptions would be compiled to assist in the benchmarking process.
The majority of positions had now been filled.
Ms Mashiane noted that an approved training and development policy was not in
place.
Mr T Mofokeng (ANC) asked for further detail on the policy governing the
payment of taxes by councillors and whether disciplinary action had been taken
against those receiving inflated salaries.
Cllr Masondo stated that the paying of income tax by councillors remained a
personal responsibility. The salary issue would be dealt with by the Salga
management. Training systems were in place.
The Chairperson declared that Salga remained an important body essential to
improving Local Government in general. Service delivery had to be improved. The
forensic audit had been undertaken at the initiative of the Salga management.
Outsourcing had to be conducted in a transparent manner. Members wanted to
witness the rebirth of a well-managed organisation. Non-compliance to rules and
regulations was a source of frustration. A high turnover of staff should be
avoided in order to instil stability. Commitment from the Salga management was
required to improve service delivery at the local government level.
The meeting was adjourned.
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