ATC101116: Report Oversight Visit to the Audit-Challenged Municipalities in Limpopo
Report of the Standing Committee on Auditor–General on the oversight visit to the Audit-challenged Municipalities in Limpopo, dated 16 November 2010
The Standing Committee on the Auditor-General, having undertaken oversight visits to audit challenged municipalities in Limpopo from 2 – 6 August, 2010, reports as follows:
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 Limpopo. 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.
The Chairperson of the Committee, Adv T M Masutha (ANC); Prof LBG Ndabadaba (ANC); Ms D N Nxumalo (ANC); Ms J E Sosibo (ANC); Ms S R Tsebe (ANC) formed the delegation on this oversight visit. 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 Office of the Auditor–General
3.1.1 Summary of Findings
The Committee was briefed by the Office of the Auditor-General on the audit outcomes of the municipalities in the Province of Limpopo. Some of the salient points mentioned included the following:
· The Provincial Department of Education received a disclaimer for the 2008-09 financial year , a number of documents were not provided and fraud is suspected;
· The Province is growing and currently has 30 municipalities, 14 of these municipalities received disclaimers for the 2008/09 financial year;
· Introductory meetings are being held between the municipalities and AG where “letters of engagement” are signed;
· Municipalities had a 40% staff vacancy rate previously, this has decreased to 20% as at July 2010;
· The Province of Limpopo asked that all provincial entities be audited, this is informed by “Operation Clean audit by 2014” campaign;
· The un-availability of municipal senior management, including Mayors in the meetings with the AG, remains a major problem;
· Effect of shifting of staff, from one position to the next, creates instability among staff and municipalities as a result;
· Problems are experienced from schools that were not registered (and therefore not recognised) with the Department of Education, which resulted in non-payments by the Department to municipalities for services, like water and sewerage ,rendered on their behalf;
· Some municipalities are not viable as they are able to pay salaries of staff and councillors only.
· Large influx of foreigners from countries like Zimbabwe to some of the municipalities, add more burden on service delivery and is a factor to resultant service delivery protests;
· Overall, there has been a positive trend as far as the audit outcomes are concerned. The use of consultants by some municipalities contributes to this positive trend. In a few cases, however, the use of consultants did not have the desired effect. None of the municipalities moved from an unqualified audit opinion or qualified audit opinion to either a disclaimer or an adverse audit opinion.
The AG’s office concluded, by remarking that it is possible to obtain an unqualified audit report if the basics in internal control systems, specifically document control, are in place and constantly monitored by the leadership. A general lack of capacity and skills to fully comply with the prescribed accounting framework was the main contributing factor to the high incident of audit qualifications.
3.2 Ba-Phalaborwa Local Municipality
3.2.1 Summary of Findings
The Committee, together with the Office of the Auditor–General, met with the Executive Mayor, the Municipal Manager and the Audit Steering Committee of the Ba-Phalaborwa Local Municipality (PLM). The Committee explained the reasons behind the oversight visit, which mainly, 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 PLM on some of the issues that requires attention and proposed corrective measures that will assist towards clean audit opinion, including key controls like: Segregation of duties, physical security of assets; supervision and monitoring; comparison and reconciliation; personnel and performance information. The PLM received a disclaimer audit opinion in 2006-07. However, the municipality was not audited in 2007-08, due to the unavailability of its annual financial statements. This was mostly as a result of lack of accounting capacity and skills to deal with technical accounting issues. The lack of routine reconciliations of balances and accounts by officials, lapses in the control activities as well as inadequate monitoring were also factors contributing to the unavailability of annual financial statement and audit outcome.
The PLM did not provide its annual statement to auditors, including management information, for the financial year 2007-08. As a result auditors were unable to produce a audit report of the municipality for the year ended 30 June 2007. This is contrary to section 126 (1) (a) of the MFMA, which requires the Accounting Officer of a municipality to prepare the annual financial statements of the Municipality and, within two months after the end of the financial year to which those statements relate, submit the annual financial statements to the Auditor – General for auditing. Ba-Phalaborwa Municipality owes approximately R793, 673 in outstanding audit fees to the Auditor-General.
Some of the challenges faced by the PLM included the following: struggle with legacy problems; collecting of revenue remains a problem; the role of the local rate payers association; and slow payment by Dept of Education for services rendered.
The PLM reported that it has implemented all the issues raised by the AG in the last report, including the establishment of the Audit Steering Committee. Some of the Officials from the Office of the AG will form part of this Committee. It was reported that almost all outstanding fees owed to the AG have been paid. The asset register is in place and that the working relationship between the PLM and the Office of the Auditor–General has been improved. The PLM has won the annual “Cleanest Municipality in the Country Award” in three occasions in the past. It was reported that refuse management is extended to rural areas as well. The PLM expect a clean audit opinion for the following financial year of the PLM.
The Committee was satisfied with the progress made by the PLM and in addition noted that females are well represented in leadership structures.
3.3 Makhado Local Municipality
3.3.1 Summary of Findings
The Committee, together with the Office of the Auditor–General (Auditor-General), met with the Executive Mayor, the Municipal Manager and Members of the Audit Steering Committee of the Makhado Local Municipality (MLM). The reasons behind the visit to the MLM were given by the Committee. The Auditor-General briefed the meeting on some of the reasons behind the negative audit opinions received by the municipality. Among others, the reasons included the failure to provide documentation to support the determination of value of assets; and poor maintenance of asset register. The AG made positive proposals and actions that would assist the municipality towards a clean audit opinion outcome.
The MLM received a disclaimer audit opinion for the 2006/2007 financial year. However, in 2007-08 it received an adverse audit opinion. This was caused mostly due to lack of accounting capacity and skills to deal with technical accounting issues. The lack of routine reconciliations of balances and accounts by officials, lapses in the control activities as well as inadequate monitoring were also factors contributing to the negative audit outcome
Makhado Local Municipality did not provide timeously to auditors the clear trail of financial statement and management information. Auditors were unable to express audit opinion on the financial statement of the MLM for the year ended 30 June 2007.
The audit outcome report of 2007-08 reveals that auditors were unable to confirm or verify by alternative means the existence, completeness and valuation of rights and obligations regarding property, plant and equipment valued at R743,6 million. The asset register was not maintained in a logical format to facilitate the verification and identification of the assets of the municipality. Due to inconsistence between the valuation roll and the asset register of the municipality, land registered in the name of the municipality at R25 million could not be confirmed as being correctly valued in the financial statement.
Supporting documentation for receipts and receivables was not submitted to auditors. There was also an unreconciled and unexplained difference of R22,6 million between debtors age analysis and the accounts receivable of R68 million as disclosed in the financial statement. Consequently auditors were unable to confirm the occurrence, cut-of , completeness and accuracy of the rights to receivables of revenue of R148,9 million and the existence, completeness, valuation and allocation and rights to receivables of R68 million.
The MLM did not disclose irregular expenditure of R378, 516, which was incurred during the financial year. This is contrary to section 125(2)(d) of the MFMA, which requires disclosure of irregular expenditure in the annual financial statement. The municipality did not have an audit committee in operation throughout the financial year. The annual report was not submitted to the auditors for consideration prior to the date of the auditor’s report. Auditors experienced significant difficulties concerning delays or the unavailability of expected information and or the unavailability of senior management during the audit. Makhado Local Municipality owes approximately R270, 160 in outstanding audit fees to the Auditor – General.
Some of the challenges mentioned by the municipality included: new Municipal Manager (who joined the MLM in April 2010); local rate payers association (some issues raised by them were political and not administrative); and very high turn-over of Chief Financial Officers.
The MLM reported that it has implemented approximately 95 per cent of the outstanding issues that were raised in the last report of the AG. These included the compilation of the asset register and the establishment of an Internal Audit Committee. Projects in rural areas are on-going, in-spite of objections from the rate payers association. The Departments of Education and Public Works have pledged to pay all outstanding fees owed to the MLM for services provided. There is a Bid committee in place and it is monitoring the processing of tenders.
3.4 Capricorn Local Municipality
3.4.1 Summary of Findings
The Committee, together with the Office of the Auditor–General, met with the Municipal Manager, the CFO and members of the Audit Steering Committee of the Capricorn Local Municipality (CLM). The Committee explained the reasons for the visit to the municipality, including the support of the Committee for the “Operation Clean Audit by 2014 “campaign.
The AG’s office addressed the municipality on some of the negative issues that formed part of the previous audit report. Proposals were made to the CLM by the AG’s office on positive measures to be taken in order to improve future audit outcomes.
The CLM received disclaimer audit opinions for the last couple of years including for the 2007/2008 financial year. This is mostly attributed to lack of accounting capacity and skills to deal with technical accounting issues. The lack of routine reconciliations of balances and accounts by officials, lapses in the control activities as well as inadequate monitoring were also factors contributing to the negative audit outcome.
The CLM did not provide to auditors the clear trail of financial statement and management information needed. Auditors were unable to express audit opinion on the financial statement of the municipality for the year ended 30 June 2007. The municipality was not able to provide supporting information or reasonable explanations for restatement of comparative figures which were stated in the financial statement of 30 June 2008.The municipality was also unable to extract a general ledger from the accounting system that provided sufficient details to allow auditors to apply appropriate audit procedures for all the balances reflected in the annual financial statements. Consequently, auditors could not perform the necessary audit procedures to confirm completeness, accuracy, cut-offs and classification of total revenue and total expenditure in the statement of financial performance. Supporting documentation for receipts and receivables was not submitted to the auditors. There were unreconciled and unexplained figures, which were stated in the annual financial statements. The municipality did not submit an implementation plan, detailing further progress towards full compliance with the Generally Recognised Accounting Practice (GRAP), to the National Treasury and the relevant provincial treasury.
The internal audit function did not operate in terms of an approved internal audit plan.
Significant difficulties were experienced during the audit concerning delays or the unavailability of expected information and the unavailability of senior management.
Some of the challenges mentioned by the municipality included:
· High turn–over of Chief Financial Officers;
· Leave encashment;
· Legacy and staff capacity problems;
· By-passing of municipality by some mines regarding water supply (they deal directly with Department of Water Affairs), resulting in revenue lost to the municipality; and
· Problems with traditional leaders in collection of revenues for services rendered.
The CLM reported that it has put in place some of the key internal control systems that there were asked for in the previous audit report. The Audit Steering Committee was established by the CLM and poor filing system has been corrected. It was further reported that whistle blowing and fraught reporting has also been put in place to curb possible corruption.
The AG’s office mentioned that it was satisfied with the progress made in addressing the issues that were raised by the Auditor-General on its audit outcomes.
3.4.2 Committee Recommendation
The Committee recommends the Mayor and the Municipal Manager should, with the assistance of the provincial treasury, monitor and evaluate the effectiveness of the services rendered by consultants with reference to the audit outcomes and transfer of skills.
3.5 Molemole Local Municipality
3.5.1 Summary of Findings
The Committee, with the Office of the Auditor–General, met with the Chief Financial Officer (CFO) of the Molemole Local Municipality (MoLM) and no reasons were given for the absence of the Mayor and the Municipal Manager of the MoLM. The Committee explained the reasons behind the visit to the municipality. The AG’s office informed the Committee that it is common that the Mayor and the Municipal Manager of the MoLM. The AG advised that the presence of key officials throughout the audit process is critical to ensure that the audit outcomes of the any municipality are improved in the future. Furthermore, the AG express their concern regarding the up-coming meeting where the “Letter of Engagement” was to be signed by the municipal leadership and the AG’s office since the Mayor and the Municipal Manager usually do not attend meetings with the AG.
The MoLM received a qualified audit opinion for the 2008/2009 financial year. This is mostly due to lack of accounting capacity and skills to deal with technical accounting issues. The lack of routine reconciliations of balances and accounts by officials, lapses in the control activities as well as inadequate monitoring were also factors contributing to the negative audit outcome. The MoLM did not provide to auditors the clear trail of financial statement and management information needed. Auditors were unable to express audit opinion on the financial statement of the municipality for the year ended 30 June 2007.
The MoLM records did not allow the application of alternative audit procedures. Consequently, the auditors were unable to confirm the valuation, existence and completeness of trade creditors amounting to R3,5 million as disclosed in the financial statements. Included in the bank reconciliation of the municipality’s main account were unknown deposits to the amount of R2,5 million. The money was deposited in the municipality’s account before year-end but was not recorded in the accounting records of the municipality. The accounting system in use by the municipality incorrectly calculated input VAT at a rate of 9 per cent instead of the legislated rate of 14 per cent as per the Value Added Tax Act, No. 89 of 1991. As a result the municipality was claiming less VAT input than it was entitled to.
The above VAT rate error affected both capital and revenue expenditure, and the extent of the error could not be quantified. The supplementary information did not form part of the financial statements and was presented as additional information. These schedules were not audited and there was no audit opinion expressed thereon.
The Molemole Local Municipality did not have an internal audit function in operation throughout the financial year. Significant difficulties were experienced during the audit concerning delays or the unavailability of expected information or the unavailability of senior management. The MoLM did not submit an implementation plan, detailing progress towards full compliance with GRAP, to the National Treasury and the relevant provincial treasury. The MoLM owes audit fees of R167, 216 to the Auditor – General for the financial year in question.
Some of the challenges mentioned by the CFO included: severe shortage of senior staff; no support given to CFO from the Mayor and the Municipal Manager; delay with filling of staff vacancies; and irregular meetings with AG.
The Committee expressed its serious concern about at the un-explained absence of the Mayor and the Municipal Manager in the meeting.
4. Committee Recommendations
The Committee recommends the following:
4.1 The Mayor and the Municipal Manager of the Molemole Local Municipality should submit, in writing, an explanation to Parliament on why:
o They did not attend the previous meetings between the Municipality and the Office of the Auditor-General, and
o They did not attend the meeting/oversight visit between the Municipality, Parliament, and the office of the Auditor-General;
4.2 The explanation, that is required in terms of 6.1 (above), should reach Parliament within 30 calendar days after the adoption of this report by the National Assembly; and
4.3 The explanation, that is required in terms of 6.1 (above), should also be submitted, in writing, to both the Select Committee on Finance and the Select Committee on Appropriations (in the National Council of Province).
4. Conclusion and Further Recommendations
The Committee further recommends that:
· all outstanding audit fees owed to the Auditor–General of South Africa by municipalities, be settled within the next six (6) months,
· appropriate measures be taken against municipalities that refuse or are reluctant to settle outstanding audit fee accounts,
· municipal leadership improves its organisational structure by addressing areas of responsibility and establishing lines of reporting in order to support effective internal control over financial reporting and
· municipal leadership and management rectify staff shortages as a matter of urgency.
Report to be considered.
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