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 SOUTH AFRICA (AGSA) CONSOLIDATED AUDIT OUTCOMES OF THE LOCAL GOVERNMENT REPORT FOR THE 2010/11 FINANCIAL YEAR, DATED 20 NOVEMBER 2012.

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:

1. Introduction

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 provinces: three in the Eastern Cape , and one in Limpopo and the closure of one municipal entity in the Western Cape . Out of 283 municipalities, 243 municipalities submitted financial statements by 31 August 2011 and out of 60 municipal entities 57 submitted financial statements in the same period. Audits of the consolidated financial statements were completed in 30 September 2011 within the legislated time frame of three months from receipt by the AGSA.

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. Section 2(c )( 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:

2. 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 by 44 auditees or 15 percent of auditees 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. The 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. The expenditure incurred in this regard is considered irregular expenditure amounting to R5.87 million. 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 auditee for the sake of transparency. A close family member is defined as a spouse, child or parent of a person in the service of the state. The irregular expenditure of awards made to close family members of persons in service of the auditee 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 applied;

· 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 auditees did not have sufficient information to identify conflicts of interest and prohibited awards. As part of the bidding and procurement process, providers are required to declare any connections they have with persons in service of the auditee or other state institutions;

· Bids were advertised for a shorter period, not adjudicated and evaluated by a properly constituted adjudication and evaluation committees;

· 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.

3. 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 internal controls. 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 governance structures. Therefore, the lack of internal controls resulted in material misstatements in financial and performance reports and in findings on non-compliance with laws and regulations.

4. Public finance management

The public finance management system shows hold-ups regarding policy implementation and compliance, especially with regard to auditees 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 financial statements. Fifty-three municipalities or 14 percent did not submit their performance reports ; .

· In 2010/11 only 5 percent of the municipalities obtained the financially unqualified with no findings audit opinion, 40 percent of the auditees received financially unqualified with findings, and 55 percent obtained financially qualified, adverse or disclaimed audit opinion;

· Non-current assets are a major area in which the financial statements of 95 or 32 percent of auditees that were qualified. The qualification results from the residual values and useful lives of non-current assets that were not reviewed and adjusted in the financial statements of the auditees 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 auditees or 31 percent of the auditees ;

· Financial statement related assistance was provided by consultants to 234 or 68 percent of the auditees . The cost incurred by auditees on consultancies is estimated to have exceeded R237 million in 2010/11;

· Seventy eight or 26 percent of auditees were qualified in the area of revenue in which some auditees did not have adequate systems to ensure that all revenue was recorded. The electricity and water readings were not recorded for all applicable properties and the sufficient appropriate evidence to support recorded revenue was not available;

· In 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 auditees was not consistent with planned objectives, indicators and targets. The planned performance targets of 32 percent auditees 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 entities.

5. 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. The following are the weakest areas of human resource management of a large number of the municipalities:

· The biggest challenge for local government is to attract and retain qualified competent personnel across all areas of administration. 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 outcomes. Officials are directed to act in these positions until the vacancies are filled, but at 21 percent of the auditees 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 responsibility, 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.

6. 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 number of auditees and the lack of information Technology (IT) governance frameworks in some auditees . The following IT control weaknesses were identified during audit:

· Design of controls – the majority of municipalities are still in the process of designing key IT controls to ensure effective and efficient IT management within the municipalities;

· Implementation of controls – although some of the municipalities have adequately designed key controls, they are still experiencing difficulties in implementing these IT controls effectively;

· Operating effectiveness of controls – a 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 external providers;

· 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. This is evident by the lack of management commitment on IT matters, as some municipalities did not provide management comments on findings raised in the previous year. The IT system is not adequately funded by the majority of the municipalities.

7. 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 auditees . Governance matters serve as a cornerstone for an effective and efficient way in delivering quality service to the community. 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 country’s political leadership sets the right tone and acts on AG’s audit findings and recommendations, the results tend to be positive hence the emphasis on the key objective of visibility of leadership in the AG’s strategic plan;

· 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 auditees 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 and regulations;

· Generally there is a lack of reviewed financial statements submitted for audit and assurance that measures have been implemented to correct the previous year’s audit findings and also monitoring the action plans to correct audit findings by internal audit units and audit committees. The internal audit and audit committees focus in particular on confirming the credibility of information and ratings in quarterly dashboard reports.

8. Conclusion

The MFMA provides clear guidance on the administrative roles and responsibilities of accounting officers and the oversight role of councillors. 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. Given the 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.

9. Recommendations

The Committee on Auditor-General makes the following recommendations:

· 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 governance;

· 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 following documents:

o Chapter 11 Part 1 of the MFMA;

o Municipal Supply Chain Regulations issued in terms of the MFMA;

o Municipal Supply Chain Model Policy issued by the National Treasury to be adopted by the municipality and municipal entity;

o 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 (operational manual);

o 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