South African Local Government Association 2004/05 Financial Statements: briefing

PROVINCIAL AND LOCAL GOVERNMENT PORTFOLIO COMMITTEE AND LOCAL GOVERNMENT AND ADMINISTRATION SELECT COMMITTEE
5 September 2006
SOUTH AFRICAN LOCAL GOVERNMENT ASSOCIATION 2004/05 FINANCIAL STATEMENTS: BRIEFING

Chairperson: Mr S Tsenoli (ANC)

Documents handed out;
SALGA presentation

SUMMARY
The Committee met with the South African Local Government Association to receive a progress report on steps taken to improve financial reporting systems. All Association offices had been unified in 2002. Three provincial offices namely Gauteng, Western Cape and KwaZulu-Natal had initially refused to be incorporated into one system. New organisational structures were introduced in 2005. An Association audit committee was established. The Association formulated a detailed action plan to prevent future disclaimers by the Auditor-General. Municipal membership fees were now accounted for on an accrual basis.

Members asked various questions including the prevalence of acting municipal managers, whether due diligence audits had been conducted in the initial six provincial offices, what alternative revenue income streams could be introduced, the period of time contemplated to continue with an outsourced internal audit function, whether disciplinary action would be taken against negligent and fraudulent accounting officers and the need for regular progress reports.

MINUTES
The Chairperson stated that the intention of the meeting was to receive a progress report from the SA Local Government Association (SALGA) on steps taken to address previously identified shortcomings. 2006 was a crucial year for Local Government. SALGA served as the voice of Local Government and had to promote municipalities’ interests. SALGA had to play a key role in poverty eradication.

SALGA presentation
Mr Sabelo Wasa (Chief Financial Officer) stated that SALGA had formulated a business plan at a recent strategic planning session. A proposal had been made in 2002 to unify all SALGA provincial offices. Six provincial offices had agreed to the proposal with Gauteng, KwaZulu-Natal and the Western Cape abstaining until March 2005. Provincial offices tended to be headed by junior officials. Most provincial offices continued to be audited independently while the national office was audited by the Auditor-General. A new management team took office in January 2005. New organisational structures were implemented in March 2005. Due diligence audits were undertaken in KwaZulu-Natal, Gauteng and the Western Cape upon incorporation into the unified system. The internal audit function was outsourced while in-house capacity was enhanced. The Audit Committee comprised three chartered accountants, an advocate and the Chief Financial Officer of a Metro Council. A supply chain management unit was established. A detailed action plan to avoid future disclaimers was formulated. Previously membership levies were accounted for on a cash basis. Membership levies were now accounted for on an accrual basis.

Discussion
The Chairperson noted that quarterly reports were now submitted to the Department of Provincial and Local Government (DPLG) and National Treasury. He asked what procedure had been followed before. Sound relations should exist between SALGA and the Department. Clarity was sought on the Auditor-General’s change of mind regarding the cash basis accounting system for membership levies. Initially, the cash-based system had been accepted.

Mr Z Ntuli (ANC) referred to a recent KwaZulu-Natal oversight trip and noted the predominance of acting municipal managers. Clarity was sought on the reasons for the lack of permanent appointments. A pool of qualified managers should be developed to improve service delivery. Apathy prevailed in many municipalities in terms of applications to access the Municipal Infrastructure Grant (MIG).

Mr P Smith (IFP) noted that the responsibility to review the existing financial systems rested with the new incoming management. He asked whether due diligence audits had been instituted in the six provincial offices that had agreed to the restructuring proposal. More detail on the action plan was required.

Mr D Worth (DA) asked for further information on the contingent liability as expressed in the latest Annual Report. He asked what alternative revenue strategies would be contemplated to increase SALGA’s income.

Mr A Moseki (ANC) asked when the temporary measure to outsource the internal audit function would cease. He asked whether the weakness in financial expertise existed at both national and provincial levels.

Ms K Magau (ANC) asked whether the procedure to terminate one contract and then proceed to award the contract to another service provider was correct.

Mr J Le Roux (DA) asked whether disciplinary steps had been taken against the accounting officers whose incompetence and negligence resulted in the disclaimer.

Mr M Swathe (DA) highlighted the importance of the SALGA national executive in addressing shortcomings. He asked whether research had been conducted at the provincial level to establish problems.

The Chairperson asked when the forensic audit had been completed.

Mr Wasa stated that membership levies had not been covered by National Treasury or Public Finance Management Act (PFMA) regulations. The initial position adopted was that municipalities could not be owners and debtors to the Association. Therefore, levies were conducted on a cash-basis. However, in 2005, the Auditor-General ruled that accounts had to be managed on the accrual basis with invoices sent to members.

The Chairperson asked whether the Association expected outstanding membership fees to be paid by municipalities.

Mr Wasa reminded Members that SALGA was a voluntary organisation without any specific mechanism to ensure fee payments. Non-payers could not be sued for non-payment.

Dr Makhosi Khoza (SALGA Chief Executive Officer) declared that SALGA had to generate added value to municipalities in order to maintain its relevance. All three categories of municipalities had to be present in a province. The recovery rate of subscriptions at the end of 2004 stood at 40%. Management of financial resources was problematic. A forensic audit had been undertaken. The recovery rate for subscriptions was now over 100%. Nine southern African countries wanted to twin with the Association. The Auditor-General had previously declared that a clear implementable action plan was required to improve the financial situation. The plan could be forwarded to Members. The initial six provincial offices had not been audited by the Auditor-General. Inadequate internal capacity had existed in the provincial offices to address the financial shortcomings. Systems were in place to promote efficacy. A Technical Executive Committee had been established to deal with audit-related matters. The Association intended that all political structures would function at an optimal level.

Mr Wasa stated that due diligence audits were completed in six provinces. Timeframes were in place to govern the implementation of the action plan. The necessary resources had been allocated.

The Chairperson asked whether control measures were in place to ensure compliance with regulations.

Mr Wasa ensured Members that the Association was compliant with international accounting standards in terms of asset registration. Quarterly reports were submitted in accordance with PFMA stipulations. A three-year internal audit plan had been formulated. A risk management plan and fraud prevention strategy was in place. The Audit Committee Chairperson was in constant contact with the SALGA management. A supply chain management unit had been established. The decision to list or delist from the PFMA rested with the Minister of Finance. Alternative revenue strategies were dependent on SALGA’s delisting from the PFMA. The two original communication companies that had their contract terminated by the SALGA management had sued the Association for loss of revenue. The contract had been declared illegal as no approval had been acquired from the Minister and National Treasury. The contract value of R148 million had been disclosed in the financial statement as the matter still had to be finalised. The second appointed service provider had also been informed that their contract was invalid. The outsourcing of the internal audit function was a temporary arrangement. The risk assessment process had taken longer than envisaged. The contract with the auditors had been extended by one year to ensure that the in-house function was implemented correctly. SALGA’s own internal staff carried out provincial office accounting work. One financial system had been instituted that facilitated monitoring of all offices. Budgets were in place to train provincial finance officers and deputy CEOs. All policies and procedures had to be understood by responsible personnel. Disciplinary action could not be imposed on accounting staff unless adequate training had been provided in terms of the Labour Relations Act.

Mr C Clerihew (DPLG Financial Consultant) concurred that SALGA provided quarterly reports to the Department. Previously, lack of administrative capacity had undermined attempts to provide regular reports. Inadequate internal control measures had threatened financial transfers to the Association. Numerous requests for additional funding by SALGA had been rejected. The collection of membership fees at the time had to be improved. Lack of competent skills and adequate experience had prevented efficient functioning at the national and provincial levels. The Thswane municipality’s internal audit unit had assisted SALGA to develop charters and training methodologies. R7 million had been forwarded to SALGA to assist with restructuring endeavours in 2002. The status of members as debtors remained a point. Presently, reporting was vastly improved. The Minister had recently been briefed by the SALGA management on progress to enhance financial reporting and had expressed satisfaction with the current situation. A request had been provided to delist SALGA from the PFMA.

Mr S Mshudulu (ANC) stated that an implementable programme of action was needed to improve the financial reporting system. Members had to monitor the implementation of the programme.

Mr A Moseki (ANC) declared that human resource capacity had to be developed to facilitate efficient administration in SALGA.

The Chairperson declared that progress had been made although certain areas for improvement remained. Proper recruitment was important to ensure changes were sustainable. A meeting between the Committee and the political leadership of SALGA was required in the near future to gauge progress. SALGA had to formulate and impose best practice on local government.

The meeting was adjourned.