ATC101116: Report Oversight Visit to Audit-challenged Municipalities in Mpumalanga

Standing Committee on Auditor General

Report of the Standing Committee on the Auditor–General on Oversight Visit to Audit-challenged Municipalities in Mpumalanga, dated 16 November 2010

 

The Standing Committee on the Auditor General, having undertaken oversight visits to audit challenged municipalities in Mpumalanga from 26 – 30 July 2010, reports as follows:

 

1. Introduction

 

The Auditor General of South Africa is busy with a campaign that was initiated by the Department of Co-operative Governance and Traditional Affairs (Cogta) called “Operation Clean Audit by 2014”. The campaign is directed mostly at municipalities that are experiencing “audit” challenges. A large number of municipalities received disclaimer audit opinion from the Auditor-General for the 2008/09 financial year. This is the worse audit opinion that is given by the Auditor General.

 

Section 2 of the Public Audit Act, 2004, mandates the Standing Committee on the Auditor – General “to assist … the Auditor – General in order to ensure …the effectiveness of the Auditor – General”. In order to contribute to this object of the Act, and to support the “Operation Clean Audit 2014 “ campaign, the Committee accompanied the Auditor – General in visiting some of the municipalities with negative audit opinions challenges, in Mpumalanga. The Committee hoped that information obtained through this oversight will assist the Committee to fully understand challenges that are facing municipalities with negative audit opinion.

 

2. Delegation

 

The Chairperson of the Committee, Adv T M Masutha (ANC); Prof LBG Ndabadaba (ANC); Ms D N Nxumalo (ANC); Ms J E Sosibo (ANC); and Mr N Singh (IFP) formed the delegation. This delegation was accompanied by the following Parliamentary officials: Mr. J Ramrock (Committee Secretary); Mr. M Hlekiso (Committee Researcher); and Ms C Adams (Committee Assistant).

 

3. Findings of the Committee

 

3. 1 Mbombela Local Municipality

 

3.1.1 Summary of Findings

 

The Delegation, together with officials from the Office of the Auditor–General, met the Executive Mayor of the Mbombela local Municipality (MLM), the Acting Municipal Manager, the CFO and members of the MLM’s Audit Committee. The AG’s office presented the following key controls identified to be applicable to the Mbombela Local Minicipality:

 

Key Control	Responsible Person	Frequency
Segregation of duties:
·         Each of the four (4) functions, namely authorising; executing; custody of assets, and recording should be allocated to four (4) individuals. Alternatively only the authorising and executing functions may be allocated to one (1) individual.	Chief Financial Officer (CFO)	By end of August 2010
Physical security of assets:
·         A properly secured filing room/facility where all face value documents and records (e.g. payment vouchers) are properly filed should be available. ·         Access to the filing room should be restricted to the assigned individual who will be responsible for the receiving, issuing and safe custody of the documents. ·         A document register detailing a trail of valuable documents (audit trail of the movement of documents) should be introduced as a matter of urgency.	Municipal Manager (MM)                     Municipal Manager                     CFO	Immediately                 Daily               Immediately
Supervision and monitoring:
·         A review of accounts (management) and supervision of the recording and operations of day-to-day transactions (supervisors) should be performed and be evident by way of individuals signatures.	Management (All section 56 managers)	Reviews: Monthly   Supervision: Daily
Comparison and reconciliation:
·         Frequent and timeous comparison and reconciliation should be performed, e.g.: Ø       Stock and fixed assets (physical) to records (theoretical) Ø       Clearing of suspense accounts Ø       Electricity distribution losses Ø       Bank and investments records to external statements, e.g. bank reconciliations Ø       Records of creditors to supplier statements Ø       HR system to Finance system Ø       Vat 201 returns with records.	CFO	Monthly
Personnel:
·         Attention should be given to selection, training and qualifications of personnel, as well as personnel qualities. The quality of any system is dependent upon the competence and integrity of those who carry out control operations.	Municipal Manager	Ongoing
Performance information:
·         Ensure that proper processes and policies are developed to ensure that information reported is accurate and complete. ·         Monitoring and evaluation of performance reports against output, indicators, targets and pre-determined objectives as determined in the IDP	Municipal Manager           Municipal Manager	By end of August 2010         Quarterly

 

 

The municipality received a qualified audit opinion for the 2008/2009 financial year, and under spent by R48.2 million which was provided of the conditional grant. Some of the challenges that were mentioned by the Mayor, included: the dismissal by Council of the previous Mayor; the suspension of the Municipal Manager; and staff capacity problems.

 

The MLM reported that issues raised by the Auditor–General in the last audit report have been implemented, including the establishment of an Audit Performance Committee, and that positive results were expected in the following financial year’s report.

 

 

3.2 Bushbuckridge Local Municipality

 

3.2.1 Summary of Findings

 

The Committee and the Office of the Auditor–General, met with the Mayor of the Bushbuckridge Local Municipality (BLM). The AG’s office proposed some key control measures that would assist the municipality in going forward. Furthermore, the measures would empower the Mayor in monitoring operations within the municipality.

 

The BLM improved from a qualified opinion in 2007-2008 to financially unqualified audit opinion with other matters as a result of implementing effective action plans to address audit findings with ongoing progress monitoring by the municipal leadership. There has been no significant overall improvement in the municipalities’ audit outcomes over the last five years. In fact, Bushbuckridge was put under (Provincial) administration in 2004-2005. Adequate leadership involvement and oversight assisted the municipality in receiving financially unqualified audit opinion. This resulted in an environment conducive to good financial management and service delivery. Bushbuckridge is one of two municipalities in the province that were assisted by consultants and actually improved on their audit outcomes.

 

Audit outcome report of 2008-2009 reveals that Bushbuckridge Municipality unspent government grants totalling approximately R 40,2 million. Bushbuckridge Municipality used consultants as a result of staff skills shortage, in spite of the fact that most of their critical post was filled. The use of consultants was triggered mainly as a result of lack of expertise to apply the General Recognised Accounting Practice (GRAP).

 

 The Mayor shared some of the challenges that the municipality faced: suspension of the Municipal Manager (under-spending of conditional grant, mentioned as one of the reasons); un-budgeted projects; and staff capacity problems. The Mayor also mentioned that issues raised in the AG’s report for the 2008/2009 financial year were being addressed; including the establishment of the Internal Audit Committee and that more positive results are expected for the next financial report. The Committee was satisfied with an active role that was being played by the Mayor in the BLM.

 

 

3.2.1 Committee Recommendations

 

The Committee recommends the following:

·         Bushbuckridge Local Municipality (BLM) should assess whether the ongoing use of consultants for accounting –related services is the most economical and effective way of addressing their needs, also taking into account the need for continuity and sustainability of the function the consultants are engaged to perform;

·          BLM should ensure that consultants transfer skills to build sustainable finance departments; and

·         The Mayor and the Municipal Manager, with the assistance of the provincial treasury, should monitor and evaluate the effectiveness of the services rendered by consultants with reference to the audit outcomes and transfer of skills.

 

 

3.3 Nkomazi Local Municipality

 

3.3.1 Summary of Findings

 

The Committee, together with the Office of the Auditor–General, met with the Executive Mayor of the Nkomazi Local Municipality (NLM). The Committee explained the reasons behind the oversight visit, which was to give support to the functions of the Auditor–General and also to give support to the “Operation Clean Audit by 2014” campaign. The AG’s office addressed the Mayor on some of the issues that resulted in negative audit opinions in the previous financial year/s and made concrete proposals that, if implemented, it could assist the NLM towards a clean audit opinion.

 

The NLM improved from a disclaimer in 2007-09 to qualified audit opinion due to the appointment and strict supervision of consultants to assist with the implementation of the General Recognised Accounting Practice (GRAP) and the preparation of the current year’s financial statements. The Municipality executive was committed in the monitoring of activities in the action plan. The provincial treasury committed itself to assist the NLM to improve its financial management and governance arrangements with aim of achieving clean audit opinion. Nkomazi Municipality, in turn, undertook to create and monitor their action plan to address the audit opinion of 2007-08 with the process being overseen by the Municipal Council. The effect of the provincial treasury’s intervention in response to the 2007-08 audit findings, as well as the Municipality’s action plan has improved, hence the slight improvement from a disclaimer in 2007-08 to qualified audit opinion for the 2008/2009 financial year. The significant weaknesses that drive the NLM audit outcome qualification, is evident that the Chief Financial Officer (CFO) have not implemented basic accounting disciplines.

 

Fruitless and wasteful expenditure incurred by the NLM amounting to R3,245 million due to interest on late payments and overpayments to suppliers, as tender amounts were exceeded. Fruitless and wasteful expenditure means expenditure that was made in vain and would have been avoided had reasonable care been exercised. Audit outcome report of 2008-09 reveals that Nkomazi Municipality unspent government grants totalling approximately R19, 938 million. Under-spending of government grant, in relation to the budget of a municipality, means operational or capital expenditure incurred by the NLM during the 2008-09 financial year, is below the total amount of the grant or allocation, as the case may be.

 

The NLM has ineffective information system controls that may contribute to financial management weaknesses, inaccurate financial and performance information, poor performance of the entity, and fruitless and wasteful expenditure, and may even contribute to non-compliance with applicable laws and regulations. Furthermore, weak information system controls make the systems vulnerable to be used to perpetrate fraud.

 

Nkomazi Municipality used consultants as a result of the lack of expertise, in spite of the fact that most of their critical posts were filled. In other cases, consultants were appointed as the Chief Financial Officers and financial personnel did not have the necessary skills and or capacity to draw up financial statements that complied to GRAP, as well as to draw up and maintain adequate fixed asset registers. Some of the other challenges faced by the NLM included the following: the suspension of the Municipal Manager; poor assets registering; and staff capacity (with a specific focus on the Finance section).

 

The Mayor informed the Committee that improvements have been made on the issues raised by the Auditor-General in its 2008/09 report. This included the establishment of the Internal Audit Committee and capacity building for officials. Value documents and records with supporting documentation are properly filed and secured in his office. Access to the filing room is firmly restricted and a document register detailing the trail of the movement of documents is in place.   Assistance has also been sought from the Provincial Department of Co-operative Governance and Traditional Affairs Committee to second officials to the NLM. It was reported that projects that were budgeted for have been implemented. The Committee commended the Mayor on the monitoring and hands-on role he was playing.

 

3.3.2 Committee Recommendations

 

The Committee recommends the following:

·         The Nkomazi Local Municipality should assess whether the ongoing use of consultants for accounting –related services is the most economical and effective way of addressing their needs, also taking into account the need for continuity and sustainability of the function the consultants are engaged to perform;

·         The Nkomazi Local Municipality should ensure that consultants transfer skills to build sustainable finance department; and

·         The Mayor and Municipal Manager of the Nkomazi Local Municipality, with the assistance of the provincial treasury, should monitor and evaluate the effectiveness of the services rendered by consultants with reference to the audit outcomes and transfer of skills.

 

 

 

Report to be considered.