audit outcomes of local government 2 september 2014 mfma 2012-13

Audit outcomes oflocal government 2 September 2014

MFMA 2012-13

Our reputation promise/mission

The Auditor-General of South Africa (AGSA) has a constitutional mandate and, as the Supreme Audit

Institution (SAI) of South Africa, exists to strengthen our country’s democracy by enabling oversight, accountability and governance in the public sector through auditing, thereby building

public confidence.

Auditees with a qualified or an unqualified with findings opinion are struggling to…•Produce financial statements without material misstatements. They rely on the auditors to detect errors and omissions, so they can correct them. This was the case in 110 auditees (35%) who had unqualified opinions

84 auditees (25%) could not effect the required corrections and received qualified opinions

•Align their performance reports to the predetermined objectives they committed to in their IDP•Set clear performance indicators and targets to measure their performance against their predetermined objectives•Report reliably on whether they achieved their targets•Determine which legislation they should comply with and implement the required policies, procedures and controls to ensure they comply

2012-13MFMA

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Auditees with clean audits were able to…•Produce financial statements free from material misstatements•Measure and report on their performance in accordance with the predetermined objectives in their IDP in a manner which is useful and reliable•Comply with key legislation•Also referred to as “unqualified with no findings”

Auditees with adverse and disclaimer opinion are…•Unable to provide sufficient supporting documentation for amounts appearing in financial statements and the achievements they report in their annual performance reports•Not complying with key legislation

2012-13MFMA

Unqualified with no findings

Unqualified with findings

Qualified with findings

Adverse or disclaimer with findings

4

Movements of the 319 auditees reported on

Improved Unchanged Regressed New Outstanding

Unqualified with no

findings = 3017 13

Unqualified with findings =

13819 4 112 1 2 1

Qualified with findings = 84 23 45 2 13 1 2

Adverse or disclaimer with

findings = 6758 1 8 13

6363 1616332525228228

Improved from opinion indicated by arrow Regressed from opinion indicated by arrow

Of the 16 outstanding audits, three audits remain outstanding from the 2011-12 financial year.

5

Slight improvement in audit outcomes

Adverse/Disclaimed with findings

Outstanding audits




Quality of submitted financial statements

Information technology controls Financial health

Supply chain management

Quality of performance reports

Human resource management

Six risk areas should receive attention

No findings Findings Material findings

Drivers of internal control should be improved

LEADERSHIPFINANCIAL AND PERFORMANCE MANAGEMENT

GOVERNANCE

Good Concerning Intervention required

Root causes should be addressed

Key positions vacant or key officials lacking appropriate competencies

A root cause at of the auditees (2011-12: 76%)69%

Lack of consequences for poor performance and transgressions


Slow response by the political leadership to address the root causes of poor audit outcomes


Improved Unchanged

Level of assurance provided by key role players should be improved

Provides assurance Provides some assurance Provides limited/no assurance Not established

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First level of assurance Second level of assurance Third level of assurance

The current audit outcomes are the result of the attention given to the six key risk areas, the drivers of the key controls and the root causes as well as the level of assurance that was provided by the key role players.

Population

HouseholdsAverage

household sizeAverage dwelling type per no. of households

Average household income

Basic services

of the households have access to electricity

Education Labour

Population status Age Male/Female

20011996 2011

of the households have access to piped water

of the households have access to toilet facilities95%

Higher education

GR12 No schooling

Employed Unemployed

Electricity No electricity

In house Communal No access

Flush/Chemical Pit/Bucket No access

0-14 15-64 65+ Male Female2001

1996

2011

2001

1996

2011

2001

1996

2011

The statistics depicted above do not reflect persons with only partial primary or secondary schooling. The graphic therefore does not add up to 100%.

Formal dwelling Traditional dwelling Informal dwelling

SOUTH AFRICAThe statistics reflected in these graphics were sourced from the

2011 Census (STATS SA) and do not constitute information collated and/or audited by AGSA. The colours of the legends used for these

census graphics do not have the same meaning as those used in the rest of this report.

91%

85%

20011996 201120011996 2011

20011996 2011 20011996 2011 2001 2011

20011996 2011 20011996 2011

2012-13MFMA

1

7

What is the status and progress of the audit outcomes of local government?

1

2012-13MFMA





Audits outstanding

Slight improvement in audit outcomes over past five years

8335

auditees320

auditees324

auditees330

auditees332

auditees

Audit outcomes in provinces2012-13MFMA

Limpopo

Mpumalanga

KwaZulu-Natal

Gauteng

NorthWest

Free StateNorthern Cape

Eastern Cape

Western Cape

9





Audits outstanding

Improved

Regressed

Stagnant or little progress

10

Eastern Cape

Performance status

•Some improvement in outcomes•Sustainability remains a concern, due to inadequate internal controls•Irregular expenditure highest in the country (R 3.3 bn), with R 2 bn being the Metros•Unauthorised expenditure (overspending on budgets) remains high (R 2 bn), with R 1.2 bn at King Sabata Dalindyebo Local Municipality (lack of supporting documentations)

Attention should be paid to:

•Basic financial and performance management discipline•Culture of tolerance for inadequate execution of controls •Development of skills for administration and oversight

The following municipalities need special intervention:

Alfred Nzo District, OR Tambo District, Emalahleni, Great Kei, Intsika Yethu, Inxuba Yethemba, King Sabata Dalindyebo, Kou Kamma, Kouga, Ngqushwa

2012-13MFMA

11

Free State

Performance status

•Day-to-day internal controls not improving•High reliance on consultants and external audit process•100% with material non-compliance, including high irregular expenditure (R 1 bn)•Unauthorised expenditure remains high at R 2 bn


•Appoint skilled individuals and provide for stability•Consequences for poor performance/transgressions


Matjhabeng, Nala, Naledi, Ngwathe

2012-13MFMA

12

Gauteng

Performance status

•Improvement in outcomes not supported by robust internal controls•Transgressions against legislation remain high, especially in procurement processes


•Consequences for transgressions•Stability in administrative leadership

2012-13MFMA

13

KwaZulu-Natal

Performance status

•Improved audit outcomes not supported by improved internal controls•Leadership and governance elements of key controls deteriorated•Non-compliance remains high, especially on procurement


•Continuous focus on strengthening internal controls•Compliance with supply chain regulations•Leadership to set the right tone and effect appropriate consequences


uMkhanyakude District, uThukela District, Abaqulusi, eDumbe, Newcastle

2012-13MFMA

14

Limpopo

Performance status

•Regression in outcomes, with high number of late submissions•Poor basic internal controls •Lack of skills and culture of no consequences


•Skills (administration and oversight)•Basic internal control disciplines•Consequence management, with leadership setting the tone


Ba-Phalaborwa, Ephraim Mogale, Mogalakwena, Molemole

2012-13MFMA

15

Mpumalanga

Performance status

•Regression in outcomes•High levels of non-compliance with procurement regulations•Lack of consequences for transgressions•Poor internal controls


•Compliance with SCM legislation and consequences for transgressions•Setting the right leadership tone•Skills in administration and oversight•Basic internal control disciplines


Bushbuckridge, Emalahleni, Thaba Chweu

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16

Northern Cape

Performance status

•Slight improvement not supported by robust key controls•2 (out of 26) auditees submitted AFS with no material misstatements•Non-compliance with procurement regulations remains high (93% auditees)


•Implementing basic financial disciplines and controls•Compliance with SCM legislation•Skills (administration and oversight)•Setting the right tone and implementing consequence management


!Kheis, Ga-Segonyana, Joe Morolong, Kai !Garib, Kgatelopele, Magareng, Mier, Phokwane, Renosterberg, Siyathemba, Thembelihle, Tsantsabane

2012-13MFMA

17

North West

Performance status

•Increased submissions for audit, driven by political leadership•Poor quality of AFS due to lack of basic controls•100% with material non-compliance, especially SCM•High levels of irregular expenditure at R 2.8 bn


•Implementing basic financial disciplines and controls•Compliance with SCM legislation•Setting the right leadership tone•Skills and stability in administration


Ngaka Modiri Molema, Ditsobotla, Madibeng, Tswaing, Ventersdorp

2012-13MFMA

18

Western Cape

Performance status

•Improved audit outcomes, driven by leadership commitment•Sustainability concerns as basic controls need attention•Compliance findings improved but still high (62%), especially SCM


•Basic financial management disciplines•Implementation of best practice across all districts and municipalities


Kannaland, Oudtshoorn

2012-13MFMA

KwaZulu-Natal (1)•Umtshezi

Limpopo (1)•Waterberg District

Progressed to clean [17]

Eastern Cape (1)• Mandela Bay Development

Agency

Gauteng (1)• Sedibeng District

KwaZulu-Natal (7)• Msinga• Ntambanana• Okhahlamba• Ubuhlebezwe• uMhlathuze• uMzimkhulu• Uthungulu District

Northern Cape (1)• ZF Mgcawu District

Western Cape (7)• Breede Valley• Cape Town International

Convention Centre• City of Cape Town Metro• Knysna• Overstrand• Theewaterskloof• Witzenberg

2012-13MFMAClean audits Regressed from

clean audit to unqualified with

findings

Regressed from clean audit to

financially qualified

Movements in clean audits

19

KwaZulu-Natal (1)•ICC, Durban (Pty) Ltd

Retained [13]

Gauteng (2)• Johannesburg Fresh Produce

Market• Johannesburg Social Housing

Company

KwaZulu-Natal (4)• Durban Marine Theme Park

(Pty) Ltd• Safe City Pietermaritzburg• uThungulu Financing

Partnership• uThungulu House

Development Trust

Mpumalanga (1)• Ehlanzeni District

Western Cape (6)• George• Langeberg• Mossel Bay• Steve Tshwete• Swartland• West Coast District

Clean audits

20

Property, infrastructure and equipment

•66 auditees could not physically verify or determine the ownership or value of assets as a result of incorrect and incomplete asset registers and inadequate or missing supporting documentation.

•At 50 auditees, the value of some assets was not reviewed annually or calculation was incorrectly performed, resulting in assets being included in the AFS at unrealistic values.

Irregular expenditure

•Could not determine completeness of irregular expenditure disclosed in AFS due to inadequate processes to account for irregular expenditure

Receivables

•Could not determine whether debtors are shown at correct values as a result of inadequate systems, processes and supporting documentation to account for the completeness of the debtors and whether what they owe can be recovered.

Most common areas of qualifications on financial statements

Urgent attention should be implementing the basic controls of daily and monthly processing and reconciling of transactions as well as proper record keeping and

document control

2012-13MFMA

Improved

Regressed


• Significant non-compliance with legislation by 88 of the auditees

• Slight improvement over 2011-12

90%

Status of compliance with legislation

21

With no findings

With findings

2012-13MFMA

2012-13MFMAThese areas must receive attention:

Findings on non-compliance with legislation

22

Improved

Regressed


Management of strategic planning and performance

2012-13MFMA

Auditees incurred unauthorised expenditure

23

Identified by the auditees

Identified during the audit

Reduction in unauthorised expenditure

At 78 auditees (42%) the unauthorised expenditure of the previous year was not investigated by the municipal manager and

council to determine if any person was liable for the expenditure.

R9 195 million[170 (53%) auditees]



• Overspending of budget/ main sections in the budget is the cause of 96,7% of the unauthorised expenditure

• Reasons for overspending include poorly prepared budgets, inadequate budget control and lack of monitoring and oversight

• Municipal budgets also include non-cash items, such as impairments and provision. Part of the unauthorised expenditure was as a result of incorrect estimation of these items

Nature

2012-13MFMA

Auditees incurred irregular expenditure

24



R9 740 million(21 304

instances)

R8 170 million(21 067

instances)

Procurement that could not be audited as documentation was missing (not included in total)

Increase in irregular expenditure

• Non-compliance with SCM legislation is the cause of 98% of the irregular expenditure

• At 92 auditees (34%) the irregular expenditure of the previous year was not investigated by the municipal manager and council to determine if any person was liable for the expenditure.




2012-13MFMA

Auditees incurred fruitless and wasteful expenditure

25



Nature

Actual fruitless and wasteful expenditure

Estimated incurred to prevent further irregular/ loss/ fruitless

and wasteful expenditure

R 815millionR 815

million

R651 million(80%)

140 auditees

(64%)

R164 million(20%)

83 auditees

(38%)

Increase in fruitless and wasteful expenditure

At 77 auditees (38%) the fruitless and wasteful expenditure of the previous year was not

investigated by the municipal manager and council to determine if any person was liable for

the expenditure.

R815 million[220 (69%) auditees]



Quality of annual performance reports

26

With no findings

With findings

• The annual performance reports of only of auditees

were useful and reliable

• Improvement over 2011-12

34%2012-13MFMA

2012-13MFMA

2

27

What are the risk areas that should be focused on?

2

2012-13MFMA

Supply chain management

Quality of performance reports

Human resource management


Information technology controls

Financial health

Risk areas to receive attention

28

With no findings

With findings

With material findings

Improved

Regressed


2012-13MFMA

Findings on supply chain management

29

With findings


Improved

Regressed


Limitation on planned scope of audit of awards

Awards to employees and councillors or other officials of the state

Awards to close family members of employees and councillors

Uncompetitive or unfair procurement processes

Inadequate contract management

Internal control deficiencies

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Supply chain management controls should be improved

The most common internal control weaknesses identified were:•Inadequate controls to ensure employees and councilors declare their own interest and those of their close family

•No plans are in place for addressing past audit findings on SCM or adherence to the plan was not monitored regularly

•No/inadequate record keeping

•SCM officials were not adequately trained

•No/inadequate actions are taken to address the SCM risks

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Vacancies and instability in key positions and minimum competencies not achieved yet

Vacancies at year-end

Stability (average number of months in position)

Minimum competencies

Vacant for less than 6 months

Vacant for 6 months or more

Not meeting minimum competencies

Minimum competencies not assessed or limitation

Improved

Regressed


2012-13MFMA

Auditees were assisted by consultants

32





No finding on performance information

With findings on performance information

Financial reporting

77% of auditees were assisted by consultants to the amount of R695m

Preparation of performance information

19% of auditees were assisted by consultants to the amount of R39m

Reasons for outcomes in spite of using consultants

Reasons for material findings in spite of using consultants

Lack of records and documents Other auditee ineffectiveness Consultant appointed too

late Poor project management Consultant did not deliver

247247

6060

Audit outcomes

Quality of annual performance reporting

2012-13MFMA

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Findings on the management of consultants at 250 auditees

No transfer of skills at 62%

•Contracts did not include any conditions or objective in terms of the transfer of skills from the consultants to the employees

•Where the transfer of skills was a requirement we could not obtain evidence that skills were transferred

•The measures to monitor the transfer of skills were not always implemented

Poor performance management and monitoring at 52%

•The measures to monitor the performance of the consultants were either not defined and/or implemented

•Where contract performance measures and methods were monitored, the monitoring proved to be inadequate as it failed to detect under-performance of the consultants.

•At some auditees consultants were paid without signed contracts

Inadequate planning and appointment processes at 48%

•Consultants were appointed without conducting a needs assessment or the needs assessment performed was inadequate.

•The procurement processes followed to appoint consultants did not always comply with the legislated SCM processes.

Outcome if NOT corrected

Outcome after corrections

of auditees avoided qualified audit opinions because they corrected significant AFS errors or omissions during the audit process

35%


Financially unqualified

Financially qualified

34

2012-13MFMA

2012-13MFMA

IT controls embedded and functioning effectively

IT controls to be implemented

IT controls to be designed

IT governance – the foundation

for effective IT

Security management

User access management

IT service continuity

Status of IT Controls

35

• The improvement in IT governance is due to the approval of the Corporate Governance of Information and Communication Technology (CGICT) by cabinet which is applicable to local government. The Western Cape was the only province where eight municipalities already had IT controls embedded and functioning effectively before the approval of the CGICT by cabinet.

• Improvement was noted in security management and IT service continuity, while user access management showed little progress from 2011-12 to 2012-2013.

• The majority of municipalities and municipal entities did not have adequately designed IT controls for security management (60%), user access management (68%) and IT service continuity (62%).

Improved

Regressed


2012-13MFMA

Financial health

36

With no findings

With findings


Improved

Regressed


More than 10% of debt irrecoverable

Underspending of the capital budget by more than 10%

Underspending of conditional grants by more than 10%

Debtor-collection period more than 90 days

Creditor-payment period more than 90 days

A deficit for the year was realised

Overspending of the operating budget by more than 10%

A net current liability position was realised

The year-end bank balance was in overdraft

2012-13MFMA

3

37

What assurances did the key role players provide and what vital actions and interactions should take place?

3

2012-13MFMA

• Some improvements over 2011-12 as “intervention required” reduced

Leadership Financial and performance management

Governance Good

Concerning

Intervention required

38

Improved

Regressed


The drivers of internal control should improve

2012-13MFMA

Slow response by political leadership in addressing the root causes of poor audit outcomesA root cause at 77% of the auditees (2011-12: 80%)

Lack of consequences for poor performance and transgressionsA root cause at 71% of the auditees (2011-12: 75%)

Key positions vacant or key officials lacking appropriate competenciesA root cause at 69% of the auditees (2011-12: 76%)

…and the root causes should be addressed

39

2012-13MFMA

Seni

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First level of assuranceManagement/leadership

Provides assurance

Provides some assurance

Provides limited/no assurance

… by the management and leadership

40

Improved assurance

Decreased assurance

Little progress on assurance

Actions to increase level of assurance

•Senior managers should implement basic financial and performance management controls – proper record keeping, controls over processing and reconciling of transactions, regular and accurate reporting, monitoring of compliance with legislation and IT system controls.•Municipal managers should support a strong control environment by providing effective leadership and oversight, implementing effective HR management, policies, procedures, an IT governance framework and appropriate risk management activities, supporting and responding to internal audit and audit committees.•Mayors should provide oversight and monitoring as required by the MSA and MFMA and be actively involved in key governance matters and managing the performance of municipal managers. They should obtain regular and credible assurances on the status of internal controls, the reliability of the financial and performance reports submitted to council and the implementation of actions to improve audit outcomes.

2012-13MFMA

Inte

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Second level of assuranceInternal independent

assurance and oversightProvides assurance



Not established

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Improved assurance

Decreased assurance


Actions to increase level of assurance•Internal audit and audit committees should encourage submission of regular financial and performance reports, monitor implementation of action plans, review quarterly reports and the financial statements before submission for audit, monitor actions taken in the case of known transgressions and assign appropriate resources to address the six key risk areas.•National coordinating and monitoring institutions should…

Support the training and development of councillors and the effectiveness of councils

Improve the monitoring and oversight over local government and address transgressions and poor performance

Continue with capacity building and municipal improvement programmes in a coordinated and focused manner

Provide further standard operating procedures, checklists and processes to enable municipalities to implement controls and comply with legislation

… by the internal independent assurance and oversight

2012-13MFMA

Third level of assuranceExternal independent

assurance and oversight

Provides assurance



Not established

42

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Improved assurance

Decreased assurance


Mun

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Actions to increase level of assurance

Municipal councils should improve their monitoring and oversight role by:•Strengthen the MPACs and audit committees, and support the important role these committees play.•Insist, through their speakers, on receiving regular and credible information on the status of the finances and activities of their municipalities.•Monitor the implementation of recommendations by the audit committee and internal audit units with a view to remedial action.•Deal with transgressions, financial misconduct, fraud and other misconduct or poor performance in a consistent and decisive manner. •Take timeous action in instances of identified weaknesses or failure by management and officials to perform statutory duties.•Seek out opportunities to continuously develop and improve the knowledge and skills they need to perform their duties and insist on support from national and provincial government in this regard.

… by the external independent assurance and oversight

2012-13MFMA

43

District municipalities need to…

• Coordinate development and delivery

• Play a supporting role in financial management

• Set the example in accountability and reporting

• Share best practices and assist these to become embedded in local municipalities

• Ensure that daily financial and performance management are embedded

• Improve internal control, governance and accountability of local government

audit outcomes of local government 2 september 2014 mfma 2012-13

Documents

poor performance

findings opinion

audit outcomesquality

financial year

transgressionsa root

disclaimer opinion areunable

key officials

key legislation2012