ATC121106: Report of the Standing Committee on the Auditor–General on Oversight visits to Audit-Challenged Municipalities in North West Province and Kwazulu-Natal, dated 21 September 2012
Standing Committee on Auditor General
REPORT
OF THE COMMITTEE ON THE AUDITORGENERAL ON OVERSIGHT VISITS TO AUDIT-CHALLENGED
MUNICIPALITIES IN
The Committee on the AuditorGeneral, having
undertaken oversight visits to audit challenged municipalities in
1. Introduction
The Committee on the AuditorGeneral (the Committee)
agreed in their Business Plan, to accompany the Auditor-General in visiting
audit challenged municipalities in the country. The visits would expose Members
in grasping the challenges faced by those municipalities and also see how the
Auditor-General assist them. Most of these municipalities owed audit fees to
the Auditor-General and are, in many cases, unable to pay, thereby compromising
the Auditor-General and duties performed by the Auditor-General. Section 2 of
the Public Audit Act, 2004, mandates the 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 also
support the Clean Audit 2014 campaign, the Committee accompanied the
Auditor General in visiting some of the municipalities with negative audit
opinions challenges, in North West Province.
The Committee joined the roadshows of the Auditor-General (AG) from 16
to 18 April 2012 on audit outcomes for 2010/11 of the following municipalities
in the
The provisions of the establishment and the mandate of the Committee are
outlined in the Public Audit Act 25 of 2004 (PAA).
Section 10(3) of the PAA prescribes that the
National Assembly (NA) must provide for a mechanism to maintain oversight over
the AG in terms of section 55(2
)(
b)(ii) of the
Constitution.
Section 2(c
)(
i) and (ii) provide that the Committee must assist the AG
in order to ensure the independence, impartiality, dignity and effectiveness of
the AG; and to advise the NA.
Therefore,
the Committee assists the AG to improve the effectiveness of the public audit
service.
The AG, accompanied by the
Committee, visited the above municipalities in
2. Delegation
The Committee Delegation consisted of: Adv T M Masutha
(ANC) Chairperson and leader of Delegation
;Ms
S R
Tsebe (ANC); Ms D N Nxumalo (ANC); Ms S Shope-Sithole (ANC); Mr N Singh (IFP)
and Mr J H Steenhuisen (DA).
The delegation was accompanied by the following
Parliamentary officials: Mr. J Ramrock (Committee Secretary); Mr. M Hlekiso
(Committee Researcher), and Mr. S Mthonjeni (Committee Assistant).
3. Findings
of the Committee
3.1 Office of the Auditor-General:
3.1.1 Summary of Findings
Officials of the
Auditor-General of South Africa (AGSA) assigned to the
The
implementation of the Generally Recognised Accounting Practice (GRAP) standards
has also proven to be a challenge to the municipalities. In most cases there
seem to be a misunderstanding of the standards. In terms of GRAP an entity
shall present a comparison of the budget amounts for which it is held publicly
accountable and actual amounts, either as a separate additional financial
statements or as additional budget columns in the financial statements
currently presented in accordance with SA Standards of GRAP. The standard goes
further in prescribing the nature and extent of this disclosure. As this
disclosure will form part of the financial statements, it will be subject to
audit.
Most of the
staff in the municipalities tends to be ill-disciplined. Reports of open
sabotaging by some officials in not giving correct and accurate information has
compounded the situation.
The lack of
leadership remained a challenge as well. There were no consequences if
irregular expenditure was incurred. Some fourteen (14) percent of staff in the
previous financial year was involved with tender/ doing business with council,
that figure has increased to over sixty four (64) percent for the current
financial year.
Not one
municipality in the province has effective controls in place.
As reported by
the Auditor-General when he addressed the Committee in Parliament early this
year, the audit outcomes have generally stagnated. He noted that the
In support of an
ultimate audit outcome of unqualified audit opinions with no findings on
predetermined objectives or compliance with laws and regulations, the AGSAs
leadership in the provinces embarked on an intensified programme to enhance its
visibility with the objective of improving the effectiveness of the audit
process and engaging with all role players that could influence clean
administration. To this end, the audit teams paid regular visits during the
audits and meetings were held with those charged with governance on a quarterly
basis, highlighting deficiencies in controls intended to address findings
raised in the previous years audit and management reports.
To further
support the improvement of clean administration and reporting on predetermined
objectives by all auditees, the AGSA will continue with the following
initiatives:
·
To
discuss key controls to be required for credible reporting on predetermined
objectives during the key control visits with the heads of auditees and the
executive.
·
Raising
awareness among auditees of the correlation between predetermined objectives
and effective and efficient service delivery.
·
Raising
awareness among audit committees of the role they can play in relation to
predetermined objectives reporting.
·
Discussion
of key audit findings relevant to predetermined objectives and highlighting of
areas for improvement during meetings and workshops held by auditees and the
National Treasury with regard to strategic planning , monitoring and
evaluation.
·
The
AGSA leadership will continue to enhance its visibility and provide proactive
insights into the root causes on the status of internal controls.
3.2
3.2.1 Summary of Findings
The audit
outcomes for the Tlokwe City Council have remained unchanged as qualified for
the last two (2) financial years after receiving a disclaimer of audit opinion
in the 2008-09 financial years.
Some of the
findings by the Auditor-General on the predetermined objectives were the
following:
·
Measures
taken to improve performance were not explained in the report on predetermined
objectives. Adequate explanations of measures taken to improve performance were
not provided in the performance report, as required in terms of section
46(1)(c) of the Municipal Systems Act (MSA) of South Africa, 2000 (Act No. 32
of 2000) (MSA). In total eighty six (86) percent of the reported targets where
improvement was required were not explained.
Section
46(1
)(
c) of MSA requires that a municipality must
prepare for each financial year an annual report consisting of a performance
report reflecting the municipalitys performance and any service providers
performance during that financial year.
·
Reported
objectives/indicators/targets were not consistent when compared with the
planned objectives/indicators/targets.
·
Reported performance against predetermined
objectives, indicators and targets is not consistent with the approved
Integrated Development Plan (IDP).
·
A clear and logical link does not exist
between reported development objectives, indicators and targets.
·
Planned
and reported indicators were not well defined. For the selected objectives
(Basic service delivery, Social priorities and Economic priorities) twenty five
(25) percent of the planned and reported indicators were not clear, with an
unambiguous definition to allow for data to be collected consistently.
·
Planned
and reported indicators were not verifiable.
·
Planned and reported indicators were not
verifiable with the selected objectives of basic service delivery such as
social priorities and economic priorities as the auditor could not validate the
processes and systems that produce the indicator.
·
Measures taken to improve performance were
not supported by adequate and reliable corroborating evidence.
·
The
validity, accuracy and completeness of reported performance against targets
could not be confirmed as no supporting source information was provided. For
the selected objectives (Basic service delivery, Social priorities and Economic
priorities), the validity, accuracy and completeness of hundred (100) percent
of the reported targets could not be established as sufficient appropriate
audit evidence and relevant source documentation could not be provided.
Supply Chain Management
Irregular
expenditure:
Human Resources Management
Consultants were
used to compile the financial statements due to the lack of skills in the
finance section.
The performance
reporting unit was understaffed with a Performance Measured Systems (PMS)
manager only recently appointed, those vacancies and the lack of skills within
the finance and performance reporting departments were critical for the
municipality to address the audit findings.
Information Technology Environment
The general
control environment had shortcomings relating to security management, user
access controls, IT service continuity and drafting and implementing of
policies.
Financial Sustainability
Electricity and
distribution losses: Distribution losses amounting to twenty point four million
Rand (R20.4 m) was incurred on electricity compared to two hundred and fifty
eight million Rand (R258m) purchased from Eskom. The reasons for these losses
were electricity theft and tampering and faulty meters.
Distribution
losses amounting to nine million Rand (R9m) was incurred on water compared to
seventy million Rand (R70m) purchased. The reasons for these losses were aging
infrastructure, burst pipes and faulty meters.
Unauthorised
expenditure: Unauthorised expenditure of twenty two million Rand (R22m) was
incurred due to overspending of the budget on employee cost, grants and
subsidies
paid,
impairment losses and depreciation.
Fruitless and
wasteful expenditure: Fruitless and wasteful expenditure of three hundred and
fourteen thousand Rand (R314, 000) was incurred, mainly due to interest paid on
late payment of amounts due.
The ratio of
employee cost to total expenditure: Employee cost amounted to thirty one (31)
percent of total expenditure.
Cost paid to
consultants: The total cost paid to consultants for compiling financial
statements amounted to three point four million Rand (R3.4m) clean audit
opinion.
Governance Structures
Proper
governance structures were not in place and not functioning effectively as
ongoing monitoring and supervision by internal audit was not undertaken to
enable an assessment of the effectiveness of internal control over financial
and performance reporting. No audit committee was in place during the year.
(The municipality has since appointed an audit committee and their
effectiveness would be evaluated during the next audit).
3.2.2
Challenges
The
Auditor-General suggested that leadership and management of the municipality
focused on the following for the coming financial year:
·
Monitoring
the process of ensuring a complete asset register, unbundling of assets,
valuation of assets and assessing the useful lives and residual value of
assets.
·
Addressing
audit findings on compliance issues, especially on SCM. This should include the
training of SCM officials, updating the SCM policy, investigating all irregular
expenditure and instituting disciplinary actions against officials responsible
for irregular expenditure.
·
Improving
the debtors collections rate and reducing water and electricity distribution
losses.
·
Monitoring
the effectiveness of the audit committee.
3.2.3
Commitments
as agreed with Mayor
The following
were commitments that the Mayor of the municipality agreed to with the
Auditor-General:
·
To
take disciplinary steps against officials that does not perform their
responsibilities as set out in their performance agreements and job
descriptions.
·
To
implement a monthly compliance checklist to ensure that all the prescribed
legislations are adhered to.
·
To
ensure that the financial statements are appropriately reviewed prior to
submission to the Auditor-General thereby ensuring credible financial
statements.
·
To
fill vacancies with competent staff.
·
To
establish and communicate the municipal specific policies and procedures for
financial issues, especially SCM.
·
Disciplinary
steps should be taken against officials not complying with these policies.
·
To
compile an action plan for inclusion in the annual report, and to ensure that
the action plan forms part of the performance agreements of officials.
·
To
ensure that officials report monthly on the measures listed in the action plan.
·
To
report monthly on the implementation of controls over financial IT systems.
·
To
perform a risk assessment that is relevant to reporting on performance
information, compliance and financial information.
·
To
implement a risk management strategy to address these risks.
·
To
table, consider and implement recommendations from the internal auditors.
·
To
liaise on a frequent basis with members of the audit committee.
·
To
table, consider and implement recommendations of the audit committee.
3.2.4
Dashboard
Report
The officials
from the Auditor-General informed the Delegation that Tlokwe municipality was
not among the municipalities in the province where officials were doing
business with the council.
The Dashboard
Report (covering drivers of internal control) indicated in the assessment that
the municipality made progress in certain categories but in most required
intervention by the leadership, in particular regarding governance.
3.2.5
Response
by Mayor
The Mayor,
assisted by his officials, agreed that the municipality had serious challenges,
but pointed out that it was difficult to attract skilled people to fill
important vacant positions due to the low salaries afforded by the
municipality.
There were
strategic vacant positions like a risk manager, HR manager and IT manager that
the municipality experienced difficulty in filling.
The Chief
Financial Officer (CFO) explained the difficulty the municipality had with the
implementation of GRAP and the need therefore to appoint consultants to assist.
The Municipal
Manager informed the Delegation that the Audit Committee (AC) was operational
and that an Action Plan had been compiled and submitted to the AC.
The municipality
was also reviewing its Supply Chain Management policy and have an asset
register in place.
Declaration
forms were submitted to all staff and were kept in the office of the Speaker.
The municipality
was also being assisted by the
4.
Conclusion
The Chairperson
expressed the Committees empathy with the municipality in particular regarding
service delivery protest. He pointed out that protesters were not concerned
with which arm of government was responsible for their plight all they wanted
was that they be provided with service. Municipalities, being in the front
line, therefore experienced the brunt of those protests. He concluded by
assuring the municipality that: We are in this together.
5. Dr Kenneth Kaunda District municipality (Orkney)
5.1 Summary of Findings
The Auditor-General
(AG) reported that the audit outcomes for the Dr. Kenneth Kaunda District
Municipality have remained unchanged as qualified opinion for the last three
(3) financial years. During 2008/9, several balances were qualified, including
matters pertaining to Property, Plant and Equipment, Payables, Expenditure,
Employee Cost and Irregular Expenditure.
Most of the
matters raised during 2008/9 were resolved in the audit report for the 2009/10
financial year except for the completeness of Irregular Expenditure.
The internal
accounting system could not verify that all irregular expenditure was accounted
for.
During 2010/11
financial year, the comparative amount relating to irregular expenditure was
qualified due to the fact that all the contracts were not investigated in order
to ensure that irregular expenditure relating to the prior period was
disclosed.
There was a
significant decrease of qualification areas and the AG anticipates that a
positive audit outcome, relating to the above qualification would also be
resolved during the forthcoming audit.
Predetermined Objectives (PDO)
The following
findings on predetermined objectives (PDO) were raised with the municipality:
·
Targets
not reached in the annual performance report, does not reflect the measures
implemented to improve performance;
·
The
reported objectives, indicators and targets were not consistent with the
approved annual performance plan;
·
Planned
and reported targets were not measurable and were not well defined, therefore
it was not possible to verify the reported indicators;
·
The
reported performance compared to the indicators, was not accurate and complete
when compared to the source documents.
Supply Chain Management
Irregular
expenditure: The municipality had a history of irregular expenditure. Irregular
expenditure amounting to over twenty seven million Rand (R27m) was occurred
during the 2010/11 financial period and another thirty three million Rand
(R33m) during the previous year. This was due to directors and principals of
entities trading with the municipality, whom failed to declare that they were
in service of the state. Furthermore, awards were made to suppliers without
applying the preference points system as required by the Preferential
Procurement Policy Framework Act.
Human Resources Management
The municipal
manager was suspended during the previous financial period and subsequently
dismissed. The acting municipal manager did not sign an employment contract and
annual performance agreement.
Information Technology Environment
The following
were IT challenges:
·
The
lack of an approved and standardised configuration increased the risk of
systems being insecurely configured and makes the accounting system vulnerable.
·
The
current firewall was ineffective in preventing unauthorised access to the
application systems and network components.
·
Security
patches addressed important security issues in between service packs.
·
The
aforementioned security parches were however not installed, which leaves the
systems vulnerable to be exploited and to gain unauthorised access.
·
Antivirus
software was out-dated. There was a risk that a virus may impact the system
performance and availability.
·
There
was not a sound and formally approved security policy in place therefore, users
do not have any rules and procedures to follow in order to minimise the risk of
errors, fraud and the loss of data confidentiality, integrity and availability.
Financial Sustainability
Electricity and
distribution losses: The distribution of water and electricity functionality
rests with the local municipality and not on district level.
Debt impairment
and debts written off: The district municipality does not have service debtors.
Unauthorised
expenditure: No Unauthorised expenditure was disclosed or reported.
Cost paid to
consultants: The district municipality has internal capacity to compile the
financial statements.
Outstanding
audit fees: The district municipality does not have outstanding audit fees.
The ratio of
employee cost to total expenditure: Employee cost amounting to over forty nine
million Rand (R49 million), represents thirty four (34) percent of total
expenditure.
Governance Structures
The internal
audit functions were not directed by an approved risk strategy, thus the
accounting officer did not ensure that a risk assessment was performed. The
governance structure was not sufficient to address repeated findings relating
to pre-determined objective and compliance with laws and regulations. The
Municipal Public Accounts Committee (MPAC) was appointed and dealt with the
annual report for 2011.
Challenges
Challenges that
leadership and management should focus on for the coming financial year
includes:
·
Appointment
of a Municipal Manager and the filling of key management positions.
·
Implementation
of a risk management strategy.
·
Addressing
audit findings on compliance issues, especially on SCM. The aforementioned
should include the record management of the SCM division, investigation of all
irregular expenditure and instituting of disciplinary actions against officials
responsible for irregular expenditure.
·
Implementation
of controls to adhere to the relevant laws and regulations.
5.1.1
Commitments
as agreed to with Mayor
The following
were commitments that were agreed to with the Mayor:
·
To
reduce the number of key management vacancies.
·
To
fill vacancies with competent staff.
·
To
investigate all irregular expenditure
5.1.2
Dashboard
Report
The Dashboard
Report, the AG officials noted, indicated improvement in certain areas, for
example the municipality designed and implemented formal controls over IT
systems thereby ensuring the reliability of the systems and the availability,
accuracy and protection of information.
The municipality
also established the MPAC and the Internal Audit Committee which will assist
with identifying internal control deficiencies and recommend corrective action
effectively. But the municipality regressed in other areas.
The Council
failed in exercising oversight responsibility regarding financial and
performance reporting and compliance and related internal controls.
The Municipality
failed to implement appropriate risk management activities to ensure that
regular risk assessments are conducted and that a risk strategy to address the
risks was developed and monitored.
5.1.3
Response
by Mayor
The Mayor, in
response, mentioned that small improvements had been made by the municipality,
in spite of all the challenges it was confronted with.
The municipality
received disclaimers previously but has turned that around to unqualified audit
opinions at present.
Some of the
issues raised by the AG, the Mayor contended, had been cleared. The
municipality was experiencing difficulty in filling the vacant MM position, and
has, as a result, someone acting in that capacity.
The same applied
to the HR Manager position and the CFO position. Most directors of departments
are also in acting positions. Plans were at an advance stage to try and fill
all those critical vacant positions.
The MPAC have
been tasked to investigate irregular expenditure and to recommend action. Some
staff members implicated in irregular spending has been dismissed and
councillors have been requested to sign the Declaration Register.
Most of the
officials doing business with the municipality were from outside the
municipality and province. Programmes to capacitate councillors including
training courses have been put in place.
The Chairperson
of the MPAC spoke about the support the committee receives from the Speaker and
the Mayor which contribute in making their tasks easier.
6. Conclusion
The Delegation
commended the municipality on the progress they have made in meeting the
challenges faced by the municipality.
7. City of
7.1 Summary of Findings
The audit
outcomes for the City of
Findings on Predetermined Objectives
The only finding
on PDO was that the integrated development plan (IDP) did not include key
performance indicators and performance targets. The IDP, however, did contain
these targets and indicators on which the annual performance plan was based
upon.
Section
46(1
)(
c) of MSA requires that a municipality must
prepare for each financial year an annual report consisting of a performance
report reflecting the municipalitys performance and any service providers
performance during that financial year.
Supply Chain Management
Irregular
expenditure: The amount of R54 million was spent as an irregular expenditure in
2011 and R7.9 million of irregular expenditure was incurred in 2010
contravening SCM legislation.
All these
irregular expenditures were not disclosed in the financial statements.
They were identified by auditors during the
audit period.
The incomplete
identification of SCM irregular expenditure was as a result of incorrect
interpretation of SCM legislation, lack of understanding of the definition of
irregular expenditure and a lack of understanding the SCM policy.
Limitations on
audit: Sufficient and appropriate audit evidence could not be provided for 41
contracts of the 46 selected contract samples awarded to the value of R133.5
million in 2011 and the value of R105.4 million in 2010.
These contracts were not awarded in
accordance with the requirements of the SCM legislation.
Section 112 of
the MFMA regulates that the supply chain management policy to comply with
prescribed framework of a municipality must be fair, equable, transparent,
competitive and cost-effective.
The
range of supply chain management processes that municipalities and municipal
entities may use includes tenders, quotations, auctions and other types of
competitive bidding.
Persons in the
service of auditee: The value of R5.6 million was awarded to persons in the
service of the
Persons in the
service of other state institutions: The contracts of the value of R725
thousand were awarded to persons in the service of other state institutions as
members.
Performance of
other remunerative work by employees:
Twenty
four (24) employees of the municipality were identified as having a business
interest in suppliers of the municipality that received awards of at least over
six hundred and eighty one thousand Rand (R681 000). None of these employees
had approval to perform remunerative work outside their employment.
Contracts,
contract management and payments: Goods and services were supplied by the
provider and payment made to the provider without a written signed contract.
The performance
of contractors was not monitored on a monthly basis.
Human Resources Management
The municipal
manager was suspended from August 2010 and dismissed in June 2011. A new
municipal manager was appointed during February 2012. The CFO position was
vacant for current and corresponding financial year. The finance section had a
twenty seven (2) percent vacancy rate as only one hundred and eighty three (183)
of the two hundred and fifty two (252) positions were filled.
Consultants were
used to compile the financial statements due to the lack of skills in the
finance section. The vacancies and the lack of skills within the finance
department are regarded as critical as management comments received on audit
findings were only forty (40) per cent of the findings and the majority of the
comments did not address the issue at hand.
Financial Sustainability
Electricity and
distribution losses: Distribution losses amounting to thirty seven million Rand
(R37 million) was incurred on electricity compared to two hundred and seventy
five million Rand (R275 million) purchased from Eskom. This loss calculates to
twelve (12) percent. The reasons for these losses were electricity theft and
tampering and faulty meters. Distribution losses amounting to thirty two
million Rand (R32 million) was incurred on water compared to one hundred and
thirty million Rand (R130 million) purchased from Midvaal Water Company. This
loss calculates to twenty five (25) percent. The reasons for these losses were
aging infrastructure, burst pipes and faulty meters.
Debt impairment
and debt written off: The municipality wrote off bad debt amounting to three
hundred and ninety million Rand (R390 million) during the year which represents
thirty eight (38) percent of the debtors book. Management were unable to proof
that any steps were taken to recover any of the bad debts written off. Included
in the bad debt written off were accounts amounting to eight hundred thousand
Rand (R800 000) that belongs to councillors and officials of the municipality.
Impairment of
receivables for the current years amounts to five hundred and thirty million
Rand (R530m) which represents eighty two (82) percent the total debtors book.
This impairment was done notwithstanding the appointment of two companies as
debt collection agents. (A councillor has a vested interested in one of these
companies). Sufficient and appropriate evidence to support the work done by
these agents in collecting debts, for which they received an amount of eight
million Rand (R8m) as commission, could not be submitted by the municipality.
Unauthorised
expenditure: Unauthorised expenditure amounting to one hundred and fifty four
million Rand (R154m) was incurred due to spending in excess of the approved
budget.
Cost paid to
consultants: The total cost paid to consultants for compiling financial
statements amounted to over six hundred and fifty six thousand Rand (R656 000).
The ratio of
employee cost to total expenditure: Employee cost amounted to twenty six (26)
percent of total expenditure.
Going concern
details: Although there was no going concern problems reported in the audit
report, the AG would like to bring to attention the municipalitys
deteriorating financial position. The ratio of the municipalitys current
assets to current liabilities decreased from two hundred and seventy three
(273) percent in 2009 to fifty nine (59) percent in 2010 and to thirty four
(34) percent in 2011. Short term deposits decreased with seventy (70) percent
from seventy three million Rand (R73 million) to twenty two million Rand (R22 million)
in the 2011 financial year. Should these trends continue, the municipalitys
going concern position would be at
risk.
Governance
Structures
In the 2010-11
audit report the AG concluded that the council failed to implement good
governance principles within the municipality. However, the municipality has
since appointed an audit committee and their effectiveness would be evaluated
during the next audit. Of particular concern was the fact that the
recommendations made by the oversight committee on the 2009/10 audit report
were not implemented. In this regard, the vacant position of CFO was still not
filled and investigations on the irregular expenditure of prior years (2009/10
and 2010/11) were not instituted.The MPAC was established and dealt with the
annual report for 2011.
Challenges
Challenges that
the municipal leadership and management should focus on for the coming
financial year includes:
·
Appointment
of a CFO and the filling of key management positions.
·
Bridging
the skills gab in the finance department to enable proper daily and monthly
reconciliations on assets, revenue, debtors and creditors.
·
Implementing
a strategy to prevent future going-concern issues.
·
Implementation
of a risk management strategy.
·
Capacitating
the internal audit unit.
·
Monitoring
the effectiveness of the audit committee.
·
Starting
a process of ensuring a complete asset register, unbundling of assets,
valuation of assets and assessing the useful lives and residual value of
assets.
·
Addressing
audit findings on compliance issues, especially on SCM. This should include the
training of SCM officials, updating the SCM policy, investigating all irregular
expenditure and instituting disciplinary actions against officials responsible
for irregular expenditure.
·
Improving
the debtors collections rate and reducing water and electricity distribution
losses.
7.1.1
Commitments
as agreed with Mayor
The following
were appointments agreed to with the Mayor:
·
To
establish and implement a code of conduct that governs officials and their
behaviour.
·
To
take disciplinary steps against officials who does not perform their
responsibilities as set out in their performance agreements and job
descriptions.
·
To
implement a monthly compliance checklist to ensure that all the prescribed
legislations are adhered to.
·
To
ensure that the financial statements are appropriately reviewed prior to
submission to the Auditor-General thereby ensuring credible financial
statements.
·
To
reduce the number of key management vacancies.
·
To
fill vacancies with competent staff.
·
To
establish and communicate entity specific policies and procedures for financial
issues such as SCM, travel, etc.
·
Disciplinary
steps would be taken against officials not complying with these policies.
·
To
compile an action plan and ensure that the action plan forms part of the
performance agreements of officials.
·
To
ensure that officials reports monthly on the measures listed in the action
plan.
·
To
ensure that the financial system was improved to enable the finance section to
compile financial statements that is GRAP compliant.
·
To
ensure that monthly reconciliation are performed for assets, revenue, creditors
and debtors.
·
To ensure
that registers are compiled and updated on a monthly basis for contingencies,
leased property, leases, accruals, retentions, conditional grants, investments.
·
To
report monthly on the implementation of controls over financial IT systems.
·
To
perform a risk assessment that was relevant to reporting on performance
information.
·
To
implement a risk management strategy to address these risks.
·
To
report monthly on the implementation of the risk management strategy.
·
To
inspect, make recommendations to and approve the internal audit plan.
·
To
follow up monthly on the progress of internal audits in progress.
·
To
implement recommendations from the internal auditors.
·
To
attend audit committee meetings.
·
To
liaise on a frequent basis with members of the audit committee.
·
Implement
recommendations of audit committee.
·
Make
recommendations to the audit committee.
7.1.2
Dashboard
Report
The Dashboard
Report, indicated in the assessment of the municipality, that it performed
poorly during the last financial year and that strong intervention was
required. On leadership, the report pointed to absence of effective leadership
and the lack of exercising oversight responsibility regarding financial and
performance reporting.
The leadership
also scored poorly by not implementing effective HR management that would have
ensured that adequate and sufficiently skilled resources were in place and that
performance was monitored.
The
municipality, according to the Dashboard Report, failed to implement proper
record keeping in a timely manner to ensure that complete, relevant and
accurate information is accessible and available to support financial and
performance reporting.
The municipality
failed to implement appropriate risk management activities to ensure that
regular assessments, including consideration of IT risks and fraud prevention,
were conducted and that a risk strategy to address the risks were developed and
monitored.
7.1.3
Response
by Mayor
The Mayor, in
his response, acknowledged the challenges confronting the municipality, and
assured the Delegation that the intention was to turn the situation around. He
mentioned that National Treasury had been approached to assist, and a financial
adviser was seconded in this regard. The Chairperson of the MPAC noted that the
committee agreed to the timeframes proposed by the Auditor-General. He advised
that MPAC submitted its annual report 2010/2011 to council and the AG, and that
the report responded to all the concerns raised by the AG with clear
time-frames. The dependency on consultants by the municipality would, for now,
still remain a concern. The identification of municipal assets continues as a
challenge with most of the assets not registered with the municipality.
The CFO position
has been vacant for the past three (3) years and the municipality were
fortunate to appoint someone in that post recently. The municipality have been
functioning without a Municipal Manager (MM) for over two (2) years and also
only recently appointed a person to fill the post. Disciplinary action was
taken against the previous MM which led to his suspension and eventual
dismissal. The municipality has made it compulsory that all senior staff within
the finance department attend training and courses. The contract with the
consultant has not been renewed. The collecting of revenue remains a challenge
for the municipality, but the contract with the debt collecting company has
ended and would also not be renewed.
The closing of
mines in the area compounded the situation and had devastating consequences for
the people and the municipality as a whole and left many destitute as a result.
But, in spite of these and other challenges the communities faced, has the
payment for service improved from forty (40) percent to seventy (70) percent
within the last two (2) years.
The Mayor
conceded that it would be impossible for the municipality to attain clean audit
outcome by 2014. The audit outcomes have, unfortunately, always been negative
and would continue as such for a number of years still. The municipality was
confronted with a legacy problem where previous leadership ignored submitting
quarterly financial reports.
The absence of
an asset register was disturbing but the municipality remains determined to
correct the situation.
The municipality
has a code of conduct in place for councillors with many who owe large amounts
to the municipality, ranging from twenty thousand Rand (R20 000) upwards. Some
have started repaying but the process was slow and could improve. Most
councillors comply with signing the declaration forms but many provide
misinformation and were being investigated. The report on the investigation was
nearly complete and would be provided to council for consideration and action.
Councillors deployed to sit on the Mid-vaal water board would not be
remunerated as the new policy on remuneration stipulate that deployed
councillors could not be paid.
The Chairperson
of MPAC noted that the previous challenge of leadership had been overcome by
the municipality. Document management system has been implemented and the
provincial department of Cooperative Governance and Traditional Affairs (CoGTA)
was assisting the municipality.
8. Conclusion
The Delegation
expressed empathy with the municipality and encouraged the leadership and
management to work together and try to turn the situation around. The
municipality faced huge challenges but with determination would be able to
overcome all of them. The Chairperson reminded the municipal leadership of the
role they played in arresting the problems of the inhabitants regarding service
delivery and concluded his remarks with what he said at the other
municipalities visited by the Committee We are in this together.
9.
9.1 Summary of Findings
The audit
outcome for
Predetermined Objectives
The following
findings on PDO were raised by the AG to the municipality:
·
No
actual achievement data were reported in the report on predetermined objectives
on sixty seven (67) percent of planned indicators and targets in the ID.
·
For
the selected objectives, one hundred (100) percent of the planned and reported
targets were not specific in clearly identifying the nature and the required
level of performance.
·
For
the selected objectives, one hundred (100) percent of the planned and reported
indicators were not clear, as unambiguous data definitions were not available
to allow for data to be collected consistently and be easy to understand and
use.
·
For
the selected objectives, valid performance management processes and systems
that produce actual performance against the planned indicators did not exist
for one hundred (100) percent of the indicators.
·
For
the selected objectives the validity, accuracy and completeness of one hundred
(100) percent of the reported indicators and targets could not be established
as sufficient appropriate audit evidence could not be provided.
Supply Chain Management
Limitation of
scope: Sufficient appropriate audit evidence could not be provided for all contracts
awarded and that all selected quotations accepted were made in accordance with
the requirements of the SCM legislation. No reasonable assurance was obtained
that the expenditure incurred on these awards was not irregular. Restrictions
were also placed on the auditors to assess specific matters. The limitations
experienced were as a result of missing documentations and inadequate document
management systems and documentation seized by law enforcement agencies. As a
result of these limitations, the findings reported in the rest of this section,
might not reflect the true extent of irregularities and SCM weakness at the
entity.
Awards to
persons in service of the state: Contrary to SCM regulation forty four (44)
awards totalling over five million Rand (R5m) were made to fourteen (14)
suppliers in which the persons in the service of other state institutions had a
business or private interest. Sufficient and appropriate audit evidence could
not be provided to determine whether these providers declared that he/she was
in the service of the state as required by SCM regulation 13 (c).
Human Resources Management
Four (4) key
vacant positions were noted at the municipality, namely the Municipal Manager,
CFO, Chief Operating Officer and Director of Community Services.
Consultants were
used to prepare the annual financial statements and to support the audit team
with the submission of information for audit purposes.
Information Technology Environment
The general
control environment had significant shortcomings relating to IT governance.
Financial Sustainability
Electricity and
distribution losses: Distribution losses on electricity and water was requested
but not availed for audit purposes. Through discussions with the prior audit
team it was noted that a reasonable estimation would be a fifty (50) percent
loss on water distribution.
Debt impairment
and debts written off: Debt impairment incurred during the year amounted to
five hundred and ninety two million Rand (R592 million), seventy four (74)
percent of total debt was provided for at the year end
Incentive scheme
to improve debt collection was in place as discount was offered if the
outstanding amount was settled in full.
Consumer debtors
increased with one hundred and twenty two million Rand (R122 million) from six
hundred and seventy seven million Rand (R677 million) to seven hundred and
ninety nine million Rand (R799 million) year on year.
Unallocated
deposits for the year amount to over six hundred million Rand (R600 million).
Unauthorised
expenditure: The unauthorised expenditure was not disclosed as the revised
budget was done by an administrator.
Cost paid to
consultants: An amount of over one million Rand (R1m) was paid to Ditsibi
consultants for the preparations of the Annual Financial Statements with
reconciliations, response to queries from the audit team and compiling of an
audit action plan.
Outstanding
audit fees: Audit fees for the past three years, amounting to over four million
Rand (R4 million), was still outstanding. The municipality recently started
paying some of the outstanding fees.
The ratio of
employee cost to total expenditure: Twenty three point seven (23.7) percent of
total expenditure constitutes employee cost. This is within the norm of twenty
five (25) percent.
Going concerns: Going
concern was not assessed as a concern as the equitable share was approved and
payment thereof had already been received during the 2012 financial year.
Governance Structures
In the 2010-11
audit report, the AG have concluded, that the council failed to implement good
governance principles within the municipality. However, the municipality has
since appointed an audit committee and their effectiveness would be evaluated
during the next audit. Investigations on the irregular expenditure of prior
years (2009/10 and 2010/11) were not yet instituted.
The MPAC was
appointed and dealt with the annual report for 2011. The oversight report on
the annual report was adopted by Council on 9 March 2012.
Challenges
Challenges that
leadership and management should focus on for the coming financial year
include:
·
Supply
chain management.
·
Improving
the debtors collection rate, identifying, reporting on and reducing water and
electricity distribution losses accurately.
·
Addressing
audit findings on all qualifications items.
·
Filling
vacant positions and addressing the skills and experience shortage in the
municipality, especially in the finance section.
·
Document
management, resolving the lack of availability of documents for audit purposes.
9.1.2
Commitments
as agreed with Mayor
The following
commitments were agreed to with the Mayor:
·
Audit
committee chairperson should meet with the Mayor on monthly basis to discuss
the key control document.
·
Internal
auditor should be involved in assessing effectiveness and adequacy of key
control of municipality.
·
Monthly
reporting on unauthorised, irregular and fruitless and wasteful expenditure and
deviations identified to council.
·
Monthly
financial statements should be accompanied by all supporting schedules and
reconciliations and tabled to the audit committee and to the mayor.
·
Internal
processes needs to be put in place to eliminate and identify findings as per
regulation 44 of SCM. Awareness would also be created amongst the
municipalitys staff to encourage compliance with the SCM regulation.
9.1.3
Dashboard
Report
The Dashboard
Report indicated regression by the municipality regarding certain drivers and
therefore the need for intervention was required. Effective leadership based on
a culture of honesty, ethical business practices and good governance,
protecting and enhancing the best interest of the entity was absent. The
municipality leadership failed to establish an IT governance framework that
would support and enable the business, delivers value and improves performance.
The municipality
also failed to design and implement formal controls over IT systems that would
have ensured the reliability of the systems and availability, accuracy and
protection of information.
The municipality
also scored poorly with governance. It failed to ensure that there was an
adequately resourced and functioning internal audit unit that identifies
internal control deficiencies and recommends corrective action
effectively.
9.1.4
Response
by Mayor
The Mayor,
assisted by senior management officials, responded by pointing out that the
municipality implemented a turn-around strategy in the finance department and
that the success of the strategy was being monitored.
Some of the
measures highlighted by the AG in his report have already been implemented by
council. This would include the implementation of a Performance Management
System and the annual review of the IDP document.
The municipality
did establish an audit committee but proper engagement with the committee
remains a challenge.
The chairperson
of the MPAC remarked that legacy issues has been a problem for the municipality
and that progress in finding financial experts to fill vacant positions has not
been easy.
The municipality
also experienced challenges of rate collecting fees with many community members
refusing to pay for service rendered. The interim CFO informed the Delegation
that the municipality recently established a commission of enquiry to
investigate the Integrated Development Plan (IDP) loan to councillors, made by
the previous council. The investigation was ongoing and one councillor has been
suspended so far.
The municipality
was busy with the un-bundling of its assets as proposed by the Auditor-General.
The drafting of
financial statements by consultants, would continue for now as there was a
serious lack of capacity and staff within the finance department.
Water to rural
areas, was transported by the usage of containers previously, but this has been
changed to meter installation instead, thereby creating much needed revenue.
The water pipeline was also going to be change to steel to prevent bursting
which happened every second day.
The Mayor
expressed concern with the relationship between the council and the provincial
CoGTA and advised that high level political intervention was needed to address
the problem.
Council met with
the Deputy Minister of CoGTA regarding the commission of enquiry instituted to
investigate the IDP loan to councillors and officials. As reported earlier the
investigation is on-going.
10.
Conclusion
Members of the
Delegation commended the municipality on the positive direction it was going
and the commitment shown. The level of transparency and honesty openness by the
Mayor and management was appreciated.
Going concerns
details
The
Mayor
mentioned that improvements have been made to the issues raised in the last
report of the AuditorGeneral. This included the establishment of the Internal
Audit Committee and providing training for staff members. Assistance has also
been sought from the Provincial Co-operative Governance and Traditional Affairs
Committee (GoGTA), to second staff. Projects budgeted for have been
implemented.
11. Ventersdorp local Municipality
11.1 Summary of Findings
The audit
outcome for the Ventersdorp local Municipality has remained unchanged as a
disclaimer for the last three (3) financial years.
Findings on Predetermined Objectives
The following
findings on PDO were raised by the AG to the municipality:
·
The
PDO was not reported using the National Treasury guidelines;
·
Targets
that were not met in the annual performance report do not reflect measures
taken to improve performance;
·
The
reported objectives, indicators and targets are not consistent with the
approved annual performance plan;
·
There
is no clear and logical link between the objectives, outcomes, outputs,
indicators and performance targets;
·
Reliability
of information: The reported performance did not occur and does not pertain to
the entity. The amounts, numbers and other data relating to reported actual
performance have not been recorded and reported appropriately.
·
All
actual results and events that should have been recorded have not been included
in the reported performance information.
·
Sufficient
appropriate evidence in relation to any of the selected objectives could not be
obtained therefore a disclaimer was issued on the PDO.
Supply Chain Management
Irregular
expenditure: R5 782 820 of irregular expenditure was incurred in the period as
a result of the contravention of SCM legislation. All these irregular
expenditure was identified during the audit process. The incomplete
identification of SCM irregular expenditure was as a result of incorrect
interpretation, lack of understanding of the definition of irregular
expenditure and a lack of understanding the SCM policy.
Limitations on
audit: Sufficient appropriate audit evidence could not be provided that 3
contracts awarded to the value of R9 670 089 were made in accordance with the
requirements of the SCM legislation.
Persons in the
service of other state institutions: Awards amounting to R3 500 982 were made
to companies with persons in the service of other state institutions as
members.
Contracts,
contract management and payments: Goods and services were supplied by the
provider and payment made to the provider without a written signed contract.
The performance
of contractors was not monitored on a monthly basis.
Human Resources Management
The finance
department is functioning without a permanent CFO, and as a result consultants
had to be used for the preparation of financial statements.
Information Technology Environment
At the
The following
findings were raised by the Information System Auditors:
·
The
Service Level Agreements entered into by the municipality with BCX, True North
West Technologies and Vesta Technical Services were inadequate in that there
were no clauses which held the service providers accountable for unsatisfactory
services rendered;
·
Weak
password controls;
·
Lack
of audit trail;
·
Lack of
periodic reviews of access to the municipality information system;
·
Database
security related policies are not in place;
·
Lack
of approved network security policies;
·
Lack
of an approved User account management policy;
·
No
formally designed security controls in place;
·
An
Information Security Officer has not been appointed;
·
No
formally designed user access controls;
·
Inadequate
change management controls;
·
Non-compliance
with controls designed by IT management to adequately mitigate key financial
risks;
·
Service
level agreements inadequately managed;
·
Inadequate
Service Level agreements were in place.
Financial Sustainability
Electricity and
distribution losses: Distribution losses were not calculated, investigated and
monitored by the municipality.
Debt impairment
and debts written off: Debt impairment incurred during the year amounted to R24
million, 69% of total debt was provided for at the year end.
The municipality, in an effort to improve the
debt collections had employed the services of a debt Collector
(HRES)
,
however there were still contract issues to be sorted out
with the service provider.
Unauthorised
expenditure: The municipality incurred additional expenditure of R5 783 820
which was not formally authorised by the Council. 93% of the unauthorised
expenditure was attributable to implementation of poor budgeting process by the
municipality which was a direct impact of lack of skills and competency in the
Financial Management unit of the municipality.
Cost paid to
consultants: R1 580 929
was
paid to Frans Rootman
& Associates CC for preparation of financial statements.
Outstanding
audit fees: The total outstanding fees as at 31 January 2012 was R7 791 640.51,
99% of the total outstanding was beyond the legislative normal payment terms of
30 days from invoice date
The ratio of
employee cost to total expenditure: The ratio of employee cost to total
expenditure was within the acceptable norm of 25%.
Going concern
details: The municipality inability to the service providers of its basic
services
such as Eskom, Botshelo Water
etc casts significant doubt about the ability of the municipality to continue
as a going concern in the foreseeable future.
Governance Structures
The Governance
structure at the municipality needs urgent intervention. The audit committee
complied with legislated requirements however more regular interactions with
management is recommended and the audit committee should also review the key
control process and commitments made by management. Internal audit was not
effective at the municipality and as a result findings were raised on
financial, audit of performance information and compliance with laws and
regulations. Management should ensure that there was an internal audit plan and
risk assessment.
The
Mayor of Ventersdorp Local Municipality is also holding office as Speaker.
Section 36(5) of the Municipal Structures Act
117 of 1998 regulates that a Councillor may not hold office as a Speaker and
Mayor or Executive Mayor at the same time.
However, the Act also provides that with the exception of a municipality
with a plenary executive system and a municipality with a plenary executive
system combined with a ward participatory system in Category B municipalities
a Councillor may hold office as Speaker and Mayor or Executive Mayor at the
same time.
Challenges
Challenges that
leadership and management should focus on for the coming financial year
includes:
·
Appointment
of a CFO and the filling of key management positions.
·
Bridging
the skills gap in the finance department to enable proper daily and monthly
reconciliations on assets, revenue, debtors and creditors.
·
Implementing
a strategy to turnaround the going-concern issues.
·
Implementation
of a risk management strategy.
·
Capacitating
the internal audit unit.
·
Monitoring
the effectiveness of the audit committee.
·
Starting
a process of ensuring a complete asset register, unbundling of assets,
valuation of assets and assessing the useful lives and residual value of
assets.
·
Addressing
audit findings on compliance issues, especially on SCM.
This should include the training of SCM
officials, updating the SCM policy, investigating all irregular expenditure and
instituting disciplinary actions against officials responsible for irregular
expenditure.
·
Improving
the debtors collections rate and reducing water and electricity distribution
losses.
11.1.2
Commitments
as agreed with Mayor
The following
were commitments agreed to with the Mayor:
·
That
the audit committee chairperson should meet with the Mayor and Council at least
on quarterly basis to discuss the key control document.
·
The
audit committee to have the MMC- Finance as a permanent member.
·
Audit
committee to have a presentation to the new Council about the role of the audit
committee as an advisory function of the Council.
·
Internal
auditor should be involved in assessing effectiveness and adequacy of key
control of municipality.
·
Monthly
reporting on unauthorised, irregular and fruitless and wasteful expenditure and
deviations identified to Council.
11.1.3
Dashboard
Report
The Dashboard
Report indicated that the municipality had serious challenges that required
intervention. The assessment pointed to problems in leadership, financial and
performance management and in governance. The Report showed that the
municipality, among other leadership shortcomings, failed to provide effective
leadership based on a culture of honesty, ethical business practices and good
governance, protecting and enhancing the best interest of the entity. It failed
to exercise oversight responsibility regarding financial and performance
reporting and compliance and related internal controls. The municipality failed
to implement proper record keeping in a timely manner to ensure that complete
relevant and accurate information was accessible and available to support
financial and performance reporting. In addition, the municipality did not
implement controls over daily and monthly processing and reconciling of
transactions.
Nor did it implement
appropriate risk management activities to ensure that regular risk assessments,
including consideration of IT risks and fraud prevention, were conducted and
that a risk strategy to address the risks was developed and monitored.
The municipality
failed to ensure that the audit committee promotes accountability and service delivery
through evaluating and monitoring responses to risks and providing oversight
over the effectiveness of the internal control environment including financial
and performance reporting and compliance with laws and regulations
11.1.4
Response
from Mayor
The Mayor,
assisted by municipal officials, responded by pointing out that considerate
improvements had been made by the municipality, including the following:
·
Most
of the challenges mentioned in the audit report of the AG had been addressed
and implemented. The MPAC has been established and a Performance Management
System policy proposal has been submitted to Council for adoption.
·
The
establishment of an audit committee remains a challenge, but the municipality
was working on putting one in place soon.
·
The
municipality has no CFO at the moment and expect to have the position filled by
end July 2012. Political interference by councillors in the appointment of the
CFO contributed to the long delay in filling the position.
·
There
has been an acting MM for the past 5 years, but the municipality was able to
appoint someone on a permanent basis recently.
·
The
vacant Performance Manager position would also be filled soon.
·
The
Mayor reminded the Delegation that the municipality came from a past that left
it with tremendous challenges that would take decades to correct. The
turn-around strategy of the municipality was in place and was being monitored.
·
There
was credible evidence at hand that some councillors were also involved with
electricity theft thereby contributing to the huge revenue loss experienced by
the municipality regarding electricity. Those same councillors were also
preventing the appointment of the company that would service the paid
electricity meters.
·
The
company, as a result, has taken the municipality to court for breach of
agreement. The case was ongoing. Initial reports indicated that over 90% of
electricity meters had been breached and almost 98% of water meters were old
and not functional.
·
The MM
spoke about the assistance the municipality received from the Dr K Kaunda
district municipality towards the functions of the internal audit committee.
12.
Conclusion
The Delegation commended
the Mayor and officials for their honesty and transparency in revealing the
serious problems within the municipality. Members of the Delegation advised to
the need for high level political intervention to try and create some sense of
stability within the council.
13.
13.1 Summary of Findings
The 2010-11 audit outcomes for the metro was unchanged from the previous
year i.e.
financially
unqualified with findings on pre-determined objectives and/or compliance with
laws and regulations.
Leadership
The following
were the areas of improvement from prior year / maintained good practice:
·
The leadership
of the metro and its municipal entities was effective and was based on a
culture of honesty, ethical business practices and good governance, protecting
and enhancing the best interest of the entity.
·
The
group has also implemented effective HR management to ensure that performance
was effectively monitored.
·
The
leadership of the metro and its entities has also developed and implemented
action plans to address internal control deficiencies arising from both internal
and external audit findings.
Drivers of key controls that requires improvement
Certain
corrective actions to address internal control deficiencies pertaining to
supply chain management policies, processes and controls as well as IT
governance and controls were still in progress and needs to be closely
monitored by senior management with feedback given to audit committee and the
Municipal Public Accounts Committee (MPAC).
Financial and performance management
Areas of
improvement from prior year / maintained good practice as follows:
·
The
metro has improved its controls over daily and monthly processing and
reconciliation of transactions.
·
There
has also been an improvement in document management which has resulted is
complete, relevant and accurate information being accessible to support
financial and performance reporting.
·
This
has resulted in there being no material misstatements that require correction
to the financial statements that were identified during the audit process.
·
Also,
there were no material findings arising from the audit of pre-determined
objectives. This reflects an improvement in audit outcomes from the prior year.
Drivers of key controls that requires improvement
The monitoring
controls within the supply chain management division to ensure that all
Municipal SCM regulations and related legislation are being adhered to,
requires improvement. Progress made in this regard needs to be closely
monitored by senior management with feedback given to audit committee and the
Municipal Public Accounts Committee (MPAC).
The assessment
of IT system controls for the 2010-11 year revealed that a number of control
deficiencies including the inadequate implementation of certain IT policies and
procedures still exist and therefore requires improvement and monitoring by
senior management.
Management of
uShaka need to be more vigilant in the submission and approval of financial
statements to ensure that the financial statements submitted do not have any
material misstatements.
Governance
Areas of improvement from prior year have maintained good practice.
The metro has an
effective audit committee that promotes accountability and service delivery
through evaluating and monitoring responses to risk and providing oversight
over the effectiveness of the internal control environment.
Drivers of key controls that requires improvement
The following
were drivers of key controls that require improvement:
·
Improvement
is required in the risk assessment process as the risks raised at a strategic
level are not clearly cascaded to the operational risk register for follow up
action and monitoring. Furthermore, there was inadequate IT risk identification
due to the IT governance framework still in the process of being finalized.
·
Leadership
to intensify their efforts to finalize the appointment of the position of Head
of Internal Audit, a position that has been vacant for period exceeding
eighteen months.
·
Transversal
material misstatements corrected.
Metro and consolidation
There were no
material corrections to the financial statements that were identified from the
audit process for the metros and consolidated financial statements. This
reflects an improvement from the prior year.
However, there
was an adjustment relating to depreciation being incorrectly calculated on land
in the financials of Ushaka.
Findings on reporting of predetermined objectives
There were no
significant findings arising from the audit on the report of pre-determined
objectives. This reflects an improvement from the prior year audit outcome.
Compliance with laws and regulations
Municipal Supply
Chain Management Regulations (Municipal SCM Regulations) resulting in irregular
expenditure:
·
About 346
awards amounting to R123 902 661 were given to persons who were in the service
of the state and employees of the municipality.
·
Four
(4) awards amounting to R2
,9
million were given to
persons who were in the service of the state by uShaka.
·
Management
of the municipality and the two entities were not proactive during the year
under review to prevent irregular expenditure, however management have now
focused in strengthening the control environment as documented below.
·
Supply
Chain Management legislative requirements were not implemented or not adhered
to not resulting in irregular expenditure.
·
Thirty-four
(34) contracts amounting to R711 million were amended and extended without the
reasons for the proposed amendments being tabled in Council and the local
community being given reasonable notice of the intention to amend the contract
and having been invited to submit representations.
Information systems audit
The AGSA
assessment of IT system controls for the 2010/11 financial year revealed that a
number of control deficiencies over security management, user access control,
IT service continuity and program change management. Furthermore, IT governance
framework not yet fully developed and implemented. The governance framework was
being development and implemented in stages.
Irregular
expenditure: Due to the nature and magnitude of the irregular expenditure
incurred, senior management established an internal control monitoring unit
that has been tasked with the responsibility to review the adequacy of policies
and procedures relating to supply chain management. Furthermore, during the
year under review the SCM unit reviewed the adequacy of their policies,
procedures and internal controls to prevent and detect non-compliance with the
Municipal SCM regulations.
Arising from
these initiatives was the introduction of the following new policies and processes
to improve the internal controls over contract and procurement management:
·
Audit
control checklist which was implemented on 1 July 2011. This checklist covers
the compliance aspect of Municipal SCM regulations and applicable sections of
the MFMA and is to be completed and reviewed by the Bid Evaluation Committee
(BEC) and Bid Adjudication Committee (BAC) before an award is made.
·
Service
Provider Performance Management Policy and a Blacklisting Policy which guides
the municipality to evaluate bidders past performance and the process to
follow to deal with non-performance.
·
These
polices will be implemented in the 2011/12 financial year.
·
Change
in the composition of members of the BEC with effect from 01 July 2011.
·
Business
re-engineering of the Supply Chain Management unit is currently being
undertaken.
·
The
introduction of an E-Procurement system in the 2011/12 which will improve
controls to detect the splitting or orders under R200 000 as well as cover
quoting.
Investigations
The progress on all internal investigations
conducted by the Office of the ombudsperson is monitored by the City manager
and the Audit Committee
.
13.1.2
Commitments
made by leadership
For the previous
and current financial year under audit, the AGSA has engaged in discussions
with political leadership, senior management and the audit committee. During
some of these interactions the quarterly dashboard report was tabled and the
progress made with respect to these commitments was tracked. These interactions
and engagements along with the interim audit at the municipality have borne
fruit in the improved outcome that we see for both the municipality and its
entities.
13.1.3
Dashboard
Report
The Dashboard
Report indicated that with the exception of challenges regarding IT governance
and systems, the municipality seems to have most drivers of internal controls
in place. The assessment points to good leadership, good financial and
performance management and good governance.
The Delegation
commended the municipality for doing excellent work. Concern was raised, though
on the reported irregular expenditure investigation and the seemingly inability
by the AGSA in detecting the practice earlier.
The AG in his
Report on the Consolidated Financial Statement to the KwaZulu-Natal Provincial
Legislature and the Council on
·
Irregular
expenditure amounting to R1.329 billion was incurred mainly as a result of
contracts awarded to suppliers, which was in contravention of the Local Government
Municipal Supply Chain Management Regulations (GNR 868 of 30 May 2005)
(Municipal SCM Regulations).
·
An
amount of R2.056 billion relating to the current and prior year was condoned by
council during the year under review.
Compliance with laws and regulations
Awards were made
to service providers who were persons in the service of the municipality or
other state institutions, which is contrary to Municipal SCM Regulation 44.
The AGSA, in
response, pointed out that management of the municipality initiated (80%) the
investigation after internal monitoring. AGSA provided training to the
municipality, including to MPAC. MPAC has taken action on the conflict of
interest reports. AGSA advised that they can only investigate if there was a
request for such, or when it was in the public interest to do so.
13.1.4
Response
from Mayor
The Mayor,
assisted by officials, noted that the municipality received unqualified audit
outcomes for the last 10 years. He pointed out that the Manase investigation
regarding irregular expenditure was initiated by the municipality. Ten (10)
councillors have been implicated and 25 officials are being investigated for
alleged procurement irregularities and non-compliance with Municipal SCM
Regulations. Disciplinary action has been instituted against 39 employees and
the services of 6 employees have been terminated. Most irregular expenditure
activities occurred in the housing department.
The municipality
has a code of conduct in place for both councillors and officials. Implicated
officials would be processed different from councillors. The investigation
process was on-going but the MEC for CoGTA, who also initiated a forensic
investigation, gave a time frame of conclusion of the investigation as end of
the current year.
The Mayor
continued by pointing out that the municipality proceeded with implementing
corrective measures to prevent such occurrences taking place in future. With
due regard to basic service delivery, all contracts awarded to employees,
councillors or employees of the state would be terminated upon the finalisation
of the investigation. The suppliers shall be blacklisted and added to the
register of restricted suppliers. The Metro was the first municipality,
according to the MM, in the country to report activities of irregular
expenditure to National Treasury. The Anti-Corruption Unit of the SAPS has been
approached regarding the investigation and was leading the process.
There were still
challenges to overcome in the IT sector, but this was being addressed. Reconciliations
of financial transactions were done on a daily basis and were strictly
monitored. The Metro has capacity where officials and staff were concerned and
used consultants minimally. There was only one senior staff position vacant,
all the other vacancies were at a lower level.
The Mayor
concluded by noting that the municipality does not owe the Auditor-General
audit fees.
14.
Conclusion
The Delegation
commended the municipality on its performance and noted that the leadership of
the Metro was very effective. The municipality was exemplary good practices and
proper procedures and systems were in place.
15.
Recommendations
The Committee recommends
the following:
·
The
Auditor-General should immediately during the audit period bring to the attention
of the Committee the list of Municipalities that resist to render all
reasonable assistance to the AG or the authorised auditor performing the audit
to enable the AG or authorised auditor to complete the audit within the
applicable timeframes as required by the Public Audit Act. Section 19(1) of the
Public Audit Act requires that the auditees must accede free of charge a
logical support required for the proper carrying out of the audit and access to
office equipment).
·
The Auditor-General
should promptly notify the Committee if a municipality defaults on the payment
of audit fees.
·
The Auditor-General
should charge interest on any municipal audit account not paid within 30 days
of the date of the account at the rate prescribed in terms of the Prescribed
Rate of Interest Act No. 55 of 1975 which provides for calculation of interest
on a debt.
15.1 Conclusion and further recommendations
The Committee
further recommends that:
·
the
South African Local Government Association (SALGA) and the Cooperative Governance
and Traditional Affairs (CoGTA) department should assist the Municipalities in
ensuring that the administrative systems and the information necessary to
prepare budgets (e.g. IDPs) were in place;
·
Municipal
accounting officers should ensure that revenue and expenditure were properly
recorded and monitored to ease audit process;
·
Municipalities
should ensure that strengthening corporate governance were a key managerial
responsibility to sustainably augment corporate value as one of the missions
entrusted to management by the citizens to promote clean governance and achieve
clean audit in 2014;
·
Municipalities
should separate oversight from operational execution in a way that promotes
delegation of authority while clarifying operational responsibility thereby
realizing a more transparent decision-making process;
·
Respect
for autonomy should be affirmed by the Council and the independence of the
administration be maintained;
·
The
Municipal Public Accounts Committees should convene to deliberate on important
municipal audit issues guided by the basic strategies approved by the Council
which ensure that top managers were fully aware of the operational status of
the municipality;
·
All
municipalities should establish audit committees and internal audit units as required
by the MFMA and capacitate them with respective skills to enhance the Municipal
auditing systems;
·
The
internal audit unit, procurement and finance section should ensure gathering of
information and maintain conducive environment to the auditing process;
·
The
internal audit units of the municipalities should receive management reports
and general reports on the status of task execution, requesting explanation as
necessary and viewing significant approval forms and other documents to enable
the internal audit unit to take a proactive auditing stance, focussing in
particular on legal compliance and the efficiency of the municipal operations;
·
The
municipalities should evaluate their auditing environment to ensure that it has
strong audit processes and controls are more conducive to internal and external
auditing, especially those of the continuous monitoring systems in place.
Report to be
considered.
Documents
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