South African Local Government Association (SALGA) Performance Audit: hearing

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.