ATC121204: Report of the Standing Committee on the Auditor-General on the Auditor-General of South Africa (Agsa) Consolidated Audit Outcomes of the Local Government Report for the 2010/11 Financial Year, dated 20 November 2012.
REPORT OF THE
COMMITTEE ON THE AUDITOR-GENERAL ON THE AUDITOR-GENERAL OF
The Committee on the Auditor-General, having considered the Auditor-General of South Africa (AGSA) Consolidated Audit Outcomes of the Local Government Report for the 2010-2011 financial year , report as follows:
Local government comprises eight metros, 46 district
municipalities, and 229 local municipalities totalling to 283 municipalities
and 60 municipal entities.
The number of
municipal entities has increased from 57 to 60 since 2009/10 financial year due
to the establishment of four new municipal entities in the following
three in the
The Committee on the Auditor-General (Committee) is
established by section 10(3) of the Public Audit Act 25 of 2004 (PAA) which
stipulates that the National Assembly (NA) must provide for a mechanism to
maintain oversight over the Auditor-General (AG) in terms of section
55(2)(b)(ii) of the Constitution.
i)(ii) of the PAA 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.
However, if the systems of financial
management, governance, supply chain management, and human resource capacity
are inadequately implemented it may impact negatively on the effectiveness of
public audit service.
The general issues
raised on the consolidated audit outcomes of the municipalities and the
municipal entities relate to the following systems:
Issues pertaining supply chain management
The audit findings arise from the audit of supply chain
management (SCM) as follows:
Sufficient appropriate audit evidence on
compliance with the requirements of the SCM legislation could not be provided
or 15 percent of
for contract awards.
This limited the
planned audit scope of awards as there were no alternative procedures that
could be performed to obtain reasonable assurance of expenditure incurred in
respect of these contract awards.
reason for the limitation was inadequate record keeping and document management
of these municipalities;
Contracts were awarded to employees and
councillors or other state officials contravening regulation 44 of the SCM
which prohibits the awards of contracts to persons or entities owned or managed
by them if they are in the service of the municipality or the service of any
other state institution.
incurred in this regard is considered irregular expenditure amounting to R5.87
The legislated requirements
with regard to declaration of interest were not adhered to.
The excuse advanced for the failure to comply
with disclosure of interest is that municipalities do not have access to
information on persons employed in other state institutions hence they only
rely on the declarations provided by the suppliers;
Contracts were also awarded to close family
members of employees and councillors.
Regulation 45 of the SCM regulates that the awards of more than R2000
must be disclosed in the financial statements of the
for the sake of transparency.
family member is defined as a spouse, child or parent of a person in the
service of the state.
expenditure of awards made to close family members of persons in service of the
amount to R227 million;
Uncompetitive or unfair procurement
processes resulted in the required three price quotations not obtained while
deviations were not approved or justified.
The preference points system was not applied or not correctly
Awards were made to suppliers without proof
of good standing from the South African Revenue Service (SARS).
The declarations of interest were not
always submitted by the providers; as a result the
did not have sufficient information to identify conflicts of interest and
As part of the
bidding and procurement process, providers are required to declare any
connections they have with persons in service of the
or other state institutions;
Bids were advertised for a shorter period,
not adjudicated and evaluated by a properly constituted adjudication and
Measures applied in monitoring the
performance of contractors were not sufficient to ensure that contractors
delivered in accordance with the contract as the municipality did not have a
system in place to record all the payments and monitor the budget of all the
contracts they had entered into.
Findings on internal control
Shortcomings on internal controls limit the local
government in achieving clean audits relating to reporting on predetermined
service delivery objectives and compliance with laws and regulations.
The non-compliance may result from weak
The culture of risk
management is generally very low due to ineffective internal controls.
The issue of ineffective internal controls is due to
the non-functional leadership, poor financial, poor performance management and
lack of internal controls resulted in material misstatements in financial and
performance reports and in findings on non-compliance with laws and
Public finance management
The public finance management system shows hold-ups
regarding policy implementation and compliance, especially with regard to
of the Municipal Finance Management Act 56 of 2003
(MFMA), financial management, and expenditure management.
The AG in his presentation highlighted the
following key findings:
A total of 74 municipalities or 20 percent
were still unable to meet the legal requirement for timely submission of
municipalities or 14 percent did not submit their performance reports
2010/11 only 5 percent of the municipalities obtained the financially
unqualified with no findings audit opinion, 40 percent of the
received financially unqualified with findings,
and 55 percent obtained financially qualified, adverse or disclaimed audit
Non-current assets are a major area in which
the financial statements of 95 or 32 percent of
that were qualified.
results from the residual values and useful lives of non-current assets that
were not reviewed and adjusted in the financial statements of the
in accordance with GRAP 17.
Audit reports indicate that asset management
in most municipalities is a challenge where some assets are not even recorded
in the asset register;
Sufficient appropriate evidence to
substantiate recorded liabilities was not available and reconciliations of the
supporting ledgers to the financial statements were not performed;
VAT principles were applied incorrectly and
there were material unexplained differences between the VAT transactions
accounted for and the information furnished to the South African Revenue
Service by 93
or 31 percent of the
Financial statement related assistance was
provided by consultants to 234 or 68 percent of the
The cost incurred by
on consultancies is estimated to have exceeded R237 million in 2010/11;
Seventy eight or 26 percent of
were qualified in the area of revenue in which
did not have adequate systems to ensure
that all revenue was recorded.
electricity and water readings were not recorded for all applicable properties
and the sufficient appropriate evidence to support recorded revenue was not
terms of revenue collection municipalities do not have the same capacity as
some municipalities are of medium and low capacity;
The significant finding on consistency was
that the reported information of 46 percent of
was not consistent with planned objectives, indicators and targets.
The planned performance targets of 32 percent
were not specific, 21 percent not measurable
and 26 percent not time bound;
Municipalities generally are not timely
paying the audit fees to AGSA, though the AGSA does not receive allocation from
the national budget it is funded by the audit fees.
Section 5(1) of the PAA prescribes that the
AG may, at a fee, and without compromising the role of the AG as an independent
auditor, provide audit related service to all municipalities and all municipal
Human resource management
Section 68 of the Municipal Systems A 32 of 2000 (MSA)
provides that a municipality must develop its human resource capacity to a
level that enables it to perform its functions and exercise its powers in an
economical, effective, efficient and accountable way, and for this purpose must
comply with the Skills Development Act 81 of 1998 and the Skills Development
Levies Act, 28 of 1999.
are the weakest areas of human resource management of a large number of the
The biggest challenge for local government
is to attract and retain qualified competent personnel across all areas of
There are about 34
percent of management positions vacancies and this end up in acting positions
in local government;
Local government is generally less favoured
as a potential employer by skilled professionals as a result of the poor image
of local government.
The compensation is
often lower than in the private sector, while the remoteness and poor working
conditions, especially in rural municipalities, are obstacles in attracting
these professionals which are needed to turn local government around;
A number of initiatives have been
introduced at national and provincial level to fund the appointment of
financial personnel and to promote and implement a graduate internship
programme, but they are not yet producing the desired results;
The vacancies at the level of municipal
manager and senior management have the biggest impact on the audit
Officials are directed to act
in these positions until the vacancies are filled, but at 21 percent of the
it was noted that acting periods were longer than
the accepted benchmark of six months.
When the person act in a position tend to not take the full
functions and powers of
the post, with a lower commitment to the deliverables as a result of the
temporary nature of the position;
Inadequate performance management of
accounting officers and employees and a lack of consequences due to poor
performance is at the root of many of the failures of local government and was
identified in most of the provinces.
Information Technology management
The AG reported that the lack of capacity to manage
financial and performance information and compliance with laws and regulations
is further eroded by shortcomings in human resource management in a large
and the lack of information
Technology (IT) governance frameworks in some
The following IT control weaknesses were
identified during audit:
the majority of municipalities are still in the
process of designing key IT controls to ensure effective and efficient IT
management within the municipalities;
although some of the municipalities have adequately
designed key controls, they are still experiencing difficulties in implementing
these IT controls effectively;
effectiveness of controls
slight improvement was noted in user account management in the adequately
designed controls that were implemented therefore the management should
continue to monitor such implementation to ensure that the controls operate
effectively throughout the year;
There is no IT governance framework to
address the lack of IT risk management and strategic alignment of IT with
business and structures to actively monitor service performance by internal and
There are no service level agreement
between the municipalities and the vendors supporting their financial systems;
Formal access requests have not been used
to manage user accounts and backup and retention procedures have not been
formally documented and approved by management;
IT is still not generally recognised by
management as a strategic priority.
is evident by the lack of management commitment on IT matters, as some
municipalities did not provide management comments on findings raised in the
The IT system is not
adequately funded by the majority of the municipalities.
Issues pertaining to governance
Governance matters such as the role of managerial
leaders and ethics pose threat to clean audit and good governance.
This results from the inefficiency and
ineffective oversight by leadership of the executive that could impact negatively
on the audit outcomes of the
Governance matters serve as a cornerstone for
an effective and efficient way in delivering quality service to the
The governance issues are
indicated as follows:
The lack of oversight by the municipal
leadership and the provincial Corporative Governance and Traditional Affairs is
one of the general findings in the audit outcome reports.
The AG indicated that experience has taught
them that when the countrys political leadership sets the right tone and acts
on AGs audit findings and recommendations, the results tend to be positive
hence the emphasis on the key objective of visibility of leadership in the AGs
Some municipalities do not have the
adequately resourced and functioning internal audit units which identify
internal control deficiencies and recommend corrective action effectively.
Internal audit units existed at 91 percent of
but the annual internal audit coverage plans
tended to assign to a low priority to confirm the integrity of performance
information and auditing compliance by their organisations with applicable laws
Generally there is a lack of reviewed
financial statements submitted for audit and assurance that measures have been
implemented to correct the previous years audit findings and also monitoring
the action plans to correct audit findings by internal audit units and audit
The internal audit and audit
committees focus in particular on confirming the credibility of information and
ratings in quarterly dashboard reports.
The MFMA provides clear guidance on the administrative
roles and responsibilities of accounting officers and the oversight role of
The MFMA also recognises
the municipal council as the highest authority in the municipality and
strengthens the power of the council by vesting it with significant powers of
approval and oversight.
importance of the approval and oversight role of councillors, the MFMA
separates the policy-making responsibilities of these role players from the
implementation role of the municipal officials.
However, section 117 of the MFMA prescribes that councillors are
therefore not allowed to be members of a municipal bid committee or any other
committee evaluating or approving bids, quotations, contracts or other bids nor
attend any such meeting as an observer.
The AG in his report warned that 70 percent of the
officials in key positions of the municipalities did not have the minimum
competencies and skills required to perform the jobs.
He indicated that the lack of capacity in the
municipalities is at the root of the weakness in service delivery and the
skills gap is most marked in the financial discipline.
The Committee on Auditor-General makes the following
The managerial leaders in the
municipalities should be supportive to interrelationship of financial systems,
including risk management and internal controls;
There should be a balance between evolving
public finance management system and public service skills base, as a balance
between transformation and skills base is crucial to support effective
The accounting officer in the municipality
should ensure that the municipality has the audit action plan which facilitates
and ease the audit process;
The municipalities should make provisions
in their budgets for the development and implementation of training programmes;
The accounting officer of the municipality
should ensure that supply chain practitioners within the municipality and
municipal entities are properly trained and may do this by developing a
comprehensive training programme for supply chain practitioners.
When the municipalities and municipal
entities are implementing their procurement policy they should be guided by the
Chapter 11 Part 1 of the MFMA;
Municipal Supply Chain Regulations issued
in terms of the MFMA;
Municipal Supply Chain Model Policy issued
by the National Treasury to be adopted by the municipality and municipal
Guide on Supply Chain Management for
Accounting Officers of Municipalities and Municipal entities to assist the
accounting officers in compiling their internal processes and procedures
National Treasury standard and generic bid
document to promote and enhance supply chain management uniformity.
The integrated supply chain management system
for municipalities and municipal entities contributes significantly towards the
improvement of financial management in the broader public sector.
Report to be considered
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